GLOBAL MARKET BRIEFINGS
doing business with
KAZAKHSTAN
A GUIDE TO INVESTMENT OPPORTUNITIES & BUSINESS PRACTICE
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Contents Foreword Danial Akhmetov, Prime Minister, Republic of Kazakhstan
xi
Foreword Erlan Idrissov, Ambassador of the Republic of Kazakhstan
xii
Foreword Mike O’Brien MP, Minister for Trade, Investment and Foreign Affairs
xiii
Foreword Peter Levine, Chairman, PLLG International Lawyers
xiv
List of Contributors Map 1: Kazakhstan and its neighbours Map 2: Kazakhstan (administrative) Map 3: Astana Map 4: Almaty and the surrounding area Introduction Douglas Townsend, ITIC
xv xxix xxxii xxxiii xxxiv xxxv
Part One: Background to the Market 1.1 1.2 1.3 1.4 1.5 1.6 1.7
A Country Profile Steve Fast, Harvard University Economic Overview Ward Jones, KPMG Foreign Investments: The Legal Framework Zhaniya B Ussen, Partner, Assistance, LLC Law Firm The Banking System and Capital Markets HSBC Bank Kazakhstan Investment Funds and Venture Capital Andromeda Financial Services EBRD and Kazakhstan: The Second Decade Dan Berg, EBRD Kazakhstan’s Foreign Investment Climate American Chamber of Commerce in Kazakhstan
3 10 14 23 28 34 41
Part Two: Market Potential 2.1 2.2 2.3 2.4 2.5
2.6
2.7
2.8
2.9 2.10
2.11 2.12 2.13 2.14 2.15
2.16
2.17
Oil and Gas of Kazakhstan Oil & Gas Vertical Analytical Desk Oil and Gas Regulation in Kazakhstan Denton Wilde Sapte, Almaty The Mining and Metallurgy Sector The World Bank Kazakhstan Utilities BISNIS The Cement Industry Vsevolod V Markov and Arlan Yerzhanov, Michael Wilson & Partners Ltd Food and Beverages: Outlook, Issues and Trends in Kazakhstan Jay Nathan Food and Beverages Case Study: Almaty Restaurants as an Arena for Future Growth Russell Hughes Ragsdale Telecommunications Services David M Josselyn and Jeff Andrusevich, IT & Telecoms Working Group, The American Chamber of Commerce Regulation of the Telecommunications Sector in Kazakhstan Alexander V Barsukov, McGuireWoods Kazakhstan LLP Kazakhstan IT Sector: Onrush of Technology and Lag in the Law Kuhn Corporation, Moscow, Russia & Kuhn Consulting, Almaty, Kazakhstan The Paper Industry Seimar Investment Company Healthcare Services BISNIS The Medical Equipment Market BISNIS The Agro-Industrial Complex of Kazakhstan Seimar Investment Company The Kazakhstan Insurance Market: Emergence and Development Aon Kazakhstan Almaty Office Market Overview Michael Rehm, PhD, Consulting Services Director, Scot Holland Estates Software Copyright Protection in the Republic of Kazakhstan Yuri A Bolotov and Saule D Kulzhambekova, Michael Wilson & Partners Ltd
57 74 81 103 109
116
126
133
140 147
158 164 173 179 188
194
201
2.18 Tourism and Travel Folke von Knobloch, CEO, Central Asia Tourism Corporation
208
Part Three: Getting Established: The Taxation and Legal Environment 3.1
The Legal Framework for International Business Aigoul Kenjebayeva, Anthony Cioni and Abai Shaikenov, Salans 3.2 Corporate Forms of Doing Business Denton Wilde Sapte, Almaty 3.3 Corporate Tax and VAT Ward Jones, KPMG 3.4 Personal Income Tax and Other Taxes Ward Jones, KPMG 3.5 Development of the Audit Practice in Kazakhstan Yermek Kudabaev, Audit Manager, Ernst & Young Kazakhstan 3.6 Kazakhstan and International Accounting Standards Darmen Jakishev, Senior Manager, Ernst & Young Kazakhstan 3.7 Regulation of the Banking Sector Alexander V Barsukov, McGuireWoods, Kazakhstan LLP 3.8 Regulation of the Securities Market in the Republic of Kazakhstan Bracewell & Patterson LLP 3.9 Protection of Investment in Kazakhstan Denton Wilde Sapte, Almaty 3.10 Legal Incentives for Foreign Investors James E Hogan and Anthony Cioni, Salans 3.11 Competition Law and Anti-Monopoly Regulation James E Hogan and Yuliya Mitrofanskaya, Salans
217
225 232 238 245
251
257 264
271 279 286
Part Four: Business Development: Operating an Enterprise 4.1 4.2
4.3 4.4
Property Rights and Land Ownership Issues Assistance, LLC Law Firm Dispute Resolution Asel Tokusheva and Dinara Jarmukhanova, McGuireWoods Kazakhstan LLP The Status of Commercial Arbitration in Kazakhstan Richard Remias, Bracewell & Patterson LLP Intellectual Property I: Copyright Assistance, LLC Law Firm
297 306
313 320
4.5 4.6 4.7 4.8
Intellectual Property II: Patents and Trademarks Assistance, LLC Law Firm Employment of Foreign Citizens in Kazakhstan Denton Wilde Sapte, Almaty Kazakhstan’s Labour Law Macleod Dixon LLP Cultural Distinctions between Kazakhstani and Western Business Practice Patrick M Hussey, US-Kazakhstan Business Association, Washington, DC
327 337 345 355
Part Five: Appendices Appendix 1 Case Study: Scot Holland Estates Appendix 2 Practical Procedures for Obtaining a Visa for Kazakhstan Appendix 3 Contributor Contact Details Appendix 4 Useful Web sites Index Index of Advertisers
367 370 373 381 383 391
Foreword This year the Republic of Kazakhstan is celebrating the 12th year of its independence. During this period (not so long from a historical perspective), colossal changes have taken place in the country. The political and socio-economic foundations of the state have undergone a deeply rooted transformation.The governance of Kazakhstan was directed towards well-grounded initial steps of transforming the former Soviet republic into an open democratic society and a free market economy. During 2000–2002, the socio-economic position of Kazakhstan has been characterized by speedy economic development, unrivalled investment growth in fixed capital, strengthening of the financial potential, the decline of unemployment and an increase in the real income of the population. The process of economic development of our country is clearly demonstrated by the following figures. In 2001 the growth in GDP reached a record level of 13.5 per cent, while in 2002 it was 9.5 per cent. Real growth in GDP during the last four years reached 40 per cent. At the same time practically all spheres and sectors of the economy have experienced stable growth. The country has seen the steady formation of a modern banking and financial system, while infrastructure in the energy, transport and communications sectors is developing actively. It should also be mentioned that both the European Union and the USA have accorded Kazakhstan with the status of a market economy. It is specifically these factors that have themselves become a source of guarantee for foreign entrepreneurs, who are currently investing heavily in Kazakhstan’s market-place. During the last 10 years foreign direct investment into our economy has totalled US $21 billion. The Government of the Republic of Kazakhstan at present firmly puts before itself the task of continued development of the country’s economic potential, and its integration into the institutional space of the global economic community. This publication represents a well-placed opportunity for the international (business) community to wholeheartedly familiarize itself with our country, her achievements, and our strategic objectives in politics and economics. I hope that this book will assist readers to open themselves up to much of what is new and attractive within the developing aspects of our youthful and future-oriented state. Danial Akhmetov Prime Minister, Republic of Kazakhstan
Foreword It is my great pleasure and honour to welcome the new edition of Doing Business with Kazakhstan, prepared by Kogan Page with the support of the British Department of Trade and Industry The twelve years since independence have been crucial to the development of our nation state and its sovereignty. There have been enormous hardships as well as remarkable achievements in all areas of life, but Kazakhstan has not faltered, bringing its society and economy through radical transition by progressive democratic and market reform. The country has long been known for its enormous mineral wealth, but today Kazakhstan is known also as one of the fastest growing of economies and emerging markets. Indeed, if I were asked to describe today’s Kazakhstan in one or two words, I should characterize it as a place of ‘stable change’. Already its social and political stability, commitment to further reform along with its vast natural resources, make it one of the most attractive places in the world for capital investment. Yet it is widely recognized also as the centre of growth and development in the region: virtually every day brings more positive changes. Therefore this publication of Doing Business with Kazakhstan is both apposite and timely. The earlier edition, published in 2000, was published just as Kazakhstan reached the lowest point in the development of its post-Soviet economy. The last four years show a steady growth in the economy, and the Kazakh Government is committed to policies that will continue to support and enhance this growth. Because of the speed of development, I have no doubt that this edition also will be quickly outdated by events! But maybe this is not all bad news. Because the constant and rapid development of Kazakhstan is an open invitation, not just to Kogan Page and other publishers to produce material that keeps pace with Kazakhstan’s progress, but also to foreign business lenders and investors to play a part in the burgeoning economy of this young country. Erlan Idrissov Ambassador of the Republic of Kazakhstan
Foreword Since independence in 1991, the environment for business in Kazakhstan has improved considerably. There is now widely held optimism about the prospects for future collaboration and the development of trade between the UK and Kazakhstan. This is especially true in the oil and gas sector where there is a growing recognition that Kazakhstan is important to UK companies involved in energy security, engineering contracting and supply chains. I want to see more UK and Kazakh companies do business and share the UK’s experience to develop the sector fully. I would also like to see the UK become Kazakhstan’s European partner of choice – we are well placed to do this based on our companies’ experience in the North Sea and other leading international locations. We have taken steps to share our experience about developing business and boosting the investment climate with the Kazakh Government. One of the key elements of our strategy is the creation of a UK Trade & Investment Office in Atyrau. This office will allow us to develop a closer understanding of how to do business in Kazakhstan, obtain timely information on Kazakh projects, and improve our knowledge of local content requirements and potential local partners. This edition of Doing Business with Kazakhstan is timely and I am confident that it will provide invaluable practical advice to investors and traders alike. Mike O’Brien MP Minister for Trade, Investment and Foreign Affairs
Foreword I am delighted, as Chairman of PLLG International Lawyers, to be given this opportunity, as a founding sponsor of this book, to welcome the publication of this latest edition of Doing Business with Kazakhstan. The release of the book is extremely timely, coming soon after the milestone inauguration of the British-Kazakh Society, whose honorary patrons are HRH Prince Andrew, the Duke of York, and President Nursultan Nazarbayev of the Republic of Kazakhstan, and of which I have the honour to be Co-Chairman with Lord Fraser of Carmyllie. The fact that the Society has such honorary patrons is a clear indication of the importance attached to developing relationships with the Republic, which the Society is dedicated to promote. I know, not only from my above roles but also as Honorary Consul to the Republic of Kazakhstan in England, that there is a material increase in interest in all matters concerning doing business with Kazakhstan. The country is rich in heritage, culture, intelligence and, of course, commercial potential. Anyone with a serious interest in international business should be looking at developing links with Kazakhstan. Whilst personal contacts and the advice of in-country experts is vital, before progressing it is important to have a grasp of how business is done in Kazakhstan. Kogan Page has risen to the occasion and yet again produced an excellent and invaluable guide that I and PLLG endorse as a significant step in advancing the interests of both the Republic of Kazakhstan and all those who wish to do business there. Peter Levine Chairman, PLLG International Lawyers Honorary Consul, Republic of Kazakhstan in England Co-Chairman, the British-Kazakh Society
List of Contributors The American Chamber of Commerce in Kazakhstan is an active business organization representing 140 member companies including US, multinational, and local businesses working in Kazakhstan. The Chamber facilitates the exchange of information and resources about the business environment in Kazakhstan and publishes a bimonthly analytical magazine, Investors’ Voice. In addition to the activities of four Working Groups (Tax, Investment, IT & Telecommunications, and Human Resources), the Chamber hosts business luncheons with influential guest speakers, monthly business socials, conferences and breakfast seminars. The Chamber’s Executive Director, Diana Brett, has lived and worked in CIS countries for over ten years with more than five years of experience in Kazakhstan. Andromeda Financial Services is an investment banking and strategic consulting firm located in Almaty, Kazakhstan. Andromeda provides investment advisory services both to foreign investors seeking to invest in Kazakhstan and to local companies seeking to attract investments. Andromeda also provides strategic development services to local companies. Its focus is on medium-sized investments in the oil and gas support sector and the consumer services sector. Steve Fast is a graduate of Harvard University (AM 1996) and has worked as a finance manager and finance director in Kazakhstan for seven years. He is currently a principal of Andromeda Financial Services. Aon Corporation is headquartered in Chicago and is a Fortune 500 company that is a world leader in risk management, retail, reinsurance and wholesale brokerage, claims management, specialty services, and human capital consulting services. A key advantage is our broad view of the insurance industry. With an employee base of 53,000 people working in 550 offices in more than 120 countries, we can anticipate how changes in one sector can impact another, empowering us to integrate our services while leveraging our expertise across hundreds of disciplines around the world. Aon Kazakhstan as Joint Venture and Kazakhstan’s legal entity started its operations on 1 January 2000. Aon Kazakhstan covers operations of Aon in other central Asian countries (Uzbekistan, Turkmenistan, Tajikistan, Kyrgyzstan) as well as
Kazakhstan. Aon Kazakhstan has a wealth of expertise in the field of energy and natural resources. Assistance, LLC Law Firm is the oldest private law firm in Kazakhstan, established in Almaty in 1988. It has a large network of affiliated and correspondent offices in the United States, the UK, Turkey and throughout the Commonwealth of Independent States (CIS). It is a multinational business-oriented practice specializing in providing legal assistance to individuals and companies doing business and investments in Kazakhstan and other CIS countries. Professional staff of Assistance, LLC Law Firm – attorneys, patent agents and consultants – comprises high-skilled professionals holding academic degrees of doctors and masters of sciences, business and law and significant professional experience. The firm employs attorneys admitted in various jurisdictions, including the Republic of Kazakhstan, the Russian Federation and the State of New York (USA), and practising in nearly all areas of law, including international, corporate, banking and finance, natural resources, telecommunications, labour law, intellectual property and taxation. These attorneys are also experienced in handling various domestic and international corporate and investment transactions, commercial arbitration and litigation, tax appeals, and project financing. As the legal and business environment has become increasingly complex and specialized, the firm has established a full-service sophisticated practice designed to effectively meet the clients’ needs. Clients of Assistance, LLC Law Firm vary from small to large companies engaged in the financial services, exploration and mining of hydrocarbons and precious metals, servicing of gas and oil companies, construction and operation of power stations, IT and telecommunications, trade, construction, real estate, medical and healthcare services, pharmaceuticals, freight forwarding, catering, manufacturing of goods and food products, etc. Approximately 90 per cent of the firm’s clientele comprise international corporations doing business and investments in Kazakhstan. Zhaniya B Ussen is a partner and director of Foreign Investments Practice of Assistance, LLC Law Firm. She has a JD from the Moscow State University School of Law, the leading institution in legal studies in all post-Soviet areas, and Master of Laws degree with honours from the Northwestern University School of Law in the United States. Following graduation from the Northwestern, she was admitted to practise as an Attorney and Counsellor-at-Law in the courts of the State of New York and became the first Kazakhstani lawyer to achieve this distinction. She spent in excess of ten years working as an attorney in Almaty, Moscow and New York and has been heavily involved in various commercial transactions in CIS with the focus on foreign investments to Kazakhstan.
BISNIS is the US Government’s primary market information centre for US companies exploring business opportunities in Russia and other newly independent states. BISNIS provides US companies with the latest market reports and tips on developments, export and investment leads, and strategies for doing business in the NIS. Since opening in 1992, BISNIS has facilitated more than US $3.2 billion worth of US exports and overseas investments. BISNIS has 18 offices in Eurasia and is based at the Department of Commerce in Washington. Bracewell & Patterson LLP is a full service law firm based in Houston, Texas, United States. The firm was founded in 1945, and currently has over 350 lawyers. The firm’s practice has expanded into practice areas that are national and international in scope. Since first establishing its presence in the Republic of Kazakhstan in 1994, the Central Asia practice of Bracewell & Patterson has leveraged the firm’s extensive experience in energy and corporate finance to help its clients capture significant opportunities in the region. Bracewell & Patterson represents major international companies and banks in Kazakhstan, concentrating on matters related to oil and gas exploration and development, energy and infrastructure finance, dispute resolution in local courts, tax litigation, corporate law and securities and other financial transactions. The attorneys of the Bracewell & Patterson offices in Almaty and Astana are fluent in Russian and English. Other languages spoken include Kazakh, French, German and Turkish. To maximize Bracewell & Patterson’s 60 years of legal experience, the firm’s Kazakhstan lawyers collaborate with attorneys in the Washington, DC, and Houston offices. The firm’s initial focus in the region was on providing legal counsel and advice to the Government of the Republic of Kazakhstan and international financial organizations such as the World Bank for Reconstruction and Development and the United States Agency for International Development. In this capacity, it developed a series of market-oriented economic laws concerning corporate governance, banking, securities, oil and gas and financing for the emerging Kazakhstani and Kyrgyz economies. These projects enabled its lawyers to interact and develop access with various levels of government personnel. Its attorneys have lengthy experience in the civil and common law systems of the Commonwealth of Independent States, and including other republics of the Central Asian region such as Uzbekistan and Turkmenistan. Their areas of experience in the Republic of Kazakhstan include secured lending transactions in Kazakhstan oil and gas; international arbitration; structuring of foreign inward investments; banking; securities offerings; litigation in Kazakhstan courts; liquidation/bankruptcy; leasing; acquisitions and mergers; and tax dispute settlement. Richard Remias is an associate attorney with the offices of Bracewell & Patterson LLP in Almaty, Kazakhstan.
The Central Asia Tourism Corporation, Almaty, is a leading travel agency in Kazakhstan, established in 1993 with branches in ten cities in Kazakhstan and one in Tajikistan. It represents all airlines operating in Kazakhstan and is general agent for SWISS International. It has special sections for tours and for visa. Folke von Knobloch is the CEO of Central Asia Tourism Corporation. Denton Wilde Sapte, Almaty is the largest international law firm in Central Asia and a leader in representing clients in the natural resource and finance sectors through its offices in Almaty, Kazakhstan, and Tashkent, Uzbekistan, with experience dating back to 1992. Denton Wilde Sapte’s clients include major oil companies, independents, mining companies, service companies, multilateral financial institutions, export credit agencies, international banks and corporate and commercial enterprises involved in a wide range of investments, industrial, financial and service activities. In Central Asia, Denton Wilde Sapte is particularly well known in the areas of energy, finance, privatization, corporate, aviation and international litigation and arbitration. Denton Wilde Sapte has extensive experience in advising on the development and financing of projects in all sectors, including projects relating to oil and gas, electricity, water, mining, roads, rail, ports, airports and telecommunications. In addition to Central Asia republics, Denton Wilde Sapte has experience advising clients in other Caspian basin countries including Azerbaijan and Iran. Furthermore, they have offices in countries with strategic importance for transportation and sale of oil, trade and commerce with Central Asia, such as Russia, Turkey and China. The EBRD article was prepared by Daniel Berg, Principal Banker in the Almaty Resident Office of the EBRD. He has worked for EBRD for seven years in numerous capacities in both London and Almaty. In Almaty he has led projects in the Financial Sector, Industry and Infrastructure. Information for this article was compiled from documents of the EBRD’s Office of the Chief Economist, with significant input provided by Ms Rika Ishii and Mr Martin Raiser. The EBRD provide investment to private and public sector projects in 27 countries across Central and Eastern Europe and the former Soviet Union. In Kazakhstan, the Bank has invested more than EUR 900 million, and expects to add approximately EUR 200–300 million in new signings each year, while also providing policy advice to help improve the climate for investment. Kazakhstan is an expanding and fast changing environment, rich in natural resources. Only a few months after its independence, in June of 1992, Ernst & Young was the first professional services firm to
establish a presence in the region. Today, with offices in Almaty, Astana and Atyrau, the company can implement a broad array of solutions in audit, tax, corporate finance, transactions, online security, enterprise risk management, the valuation of intangibles, and other critical business-performance issues. Their goal is to offer an integrated service, enabling multinational clients to adapt quickly to the specifics of an emerging market and easing the transition of their local clients to a market economy. They work in an innovative environment that enables us to help their clients anticipate, define, and solve the issues that are important to their success. They have the knowledge and technology resources, skills and experience to offer clients the services they need. And they have developed a network of strategic alliances to help us deliver solutions even more quickly, anywhere in the world. In Ernst & Young staff are committed to restoring the public’s trust in professional services firms and the quality of financial reporting. Their 106,000 people in more than 140 countries around the globe pursue the highest levels of integrity and professionalism, and provide clients with solutions that work. The company’s strategic focus in Kazakhstan is no different. With over 120 highly qualified professionals, it is able to create value by combining international experience with an in-depth knowledge of the local market. The market recognizes it as the leading firm, not just measured in size, but more importantly, in terms of service capability and quality. HSBC Bank Kazakhstan is a wholly-owned subsidiary of the HSBC Group, one of the world’s leading financial service institutions headquartered in London, with over 9,500 offices in 79 countries. HSBC Bank Kazakhstan opened in Almaty on 11 January 1999 with a charter capital of 1 billion tenge, which has since doubled. HSBC Bank Kazakhstan offers its customers in Kazakhstan the same standard of service excellence provided to the customers of the HSBC Group around the world, including the following range of service activities: corporate banking services, personal banking services and financial services. KPMG Janat is the Kazakhstan member firm of KPMG, a global network of professional service firms. KPMG Janat, founded in 1996, is one of the largest professional service firms in Kazakhstan. The company’s office is in Almaty. The staff has English, Turkish, French and Russian language capabilities. KPMG Janat provides a wide range of professional services, primarily in financial reporting, tax and legal areas. KPMG Janat audits financial statements in accordance with Kazakhstan Accounting Standards, International Financial Reporting Standards, and UK or US Generally Accepted Accounting Principles. The company also conducts financial due diligence projects and risk
management engagements and provides other types of assurance services. Its tax practice focuses on helping its clients stay compliant with the requirements of Kazakh tax laws while reducing their tax exposure. KPMG Janat provides advice in areas of corporate taxation, VAT, customs, personal taxation and international taxation. They also represent their clients before the tax authorities, help them lodge appeals and tax relief claims with the state authorities, perform tax risk reviews, develop tax accounting policies and help design tax-efficient transactions. They provide a complete range of legal services to support investment projects, consulting on customs regimes and tax concessions, currency regulations, licensing and certifications, sale and registration of real estate, securities and anti-trust legislation. They also provide legal analysis of agreements, contracts and other documents related to business in Kazakhstan; assist with drafting legal documents; help obtain various licences, certificates and permits; register companies to do business in Kazakhstan; and guide them through the process of liquidation when necessary. Kuhn Corporation is a combination of several successful Russian companies that have been providing various types of consulting services in different regions of Russia and the ex-Soviet Republics. Kuhn Corporation provides a wide range of high-quality services that yields quick results. The cooperation of Kuhn Corporation with ‘Expert and Partners’ provided steady results, high-quality services and a long-run collaboration with the clients during the whole period of realization of projects and subsequent activity of the clients. A number of individuals engaged in Economy, Law and Psychology, who had been working in the sphere of Business Education since 1988, formed the company ‘Expert’ in 1992. During this period the main targets of the company were: consulting and small business management; economic, legal and managing support of large, Soviettype companies during the formation of a new market economy in Russia; and realization of government projects. Among the clients there were manufacturing enterprises engaged in production for the military, insurance companies and small business entities. In 1993 ‘Expert’ became a member of the Economy and Management Consultancy Association. According to a survey conducted in 1994, ‘Expert’ was named one of the 15 best consulting companies in Moscow. In 2000 the management decided to reorganize the activity of the company according to the present situation of the market and clients’ requirements. The company was registered as ‘Expert and Partners’, the main directions of activity and range of services of which were modified according to the professional high-quality standards of services and information. In 2001, several IT experts joined the company and contributed their article on the IT sector for this publication.
With over 220 legal professionals working in Calgary, Toronto, Moscow, Rio de Janeiro, Caracas, Almaty and Atyrau, Macleod Dixon has one of the largest international practices. The firm has been providing comprehensive legal services to a wide variety of domestic and international clients since 1912. Macleod Dixon LLP has been providing legal services in the CIS since 1988, and in 1990 became one of the first international law firms to be accredited in the former Soviet Union. In 1994, it became one of the first law firms to be accredited by the Government of the Republic of Kazakhstan, which led to the opening of its office in Almaty, Kazakhstan, in 1995. In 2001 the Atyrau office was opened to serve the needs of clients in the Caspian Region. Macleod Dixon is a full-service law firm with legal expertise in a wide range of fields including domestic and international energy and natural resources, corporate and commercial, environmental, trade, public, regulatory and administrative law, international finance, international taxation and intellectual property/technology transfer issues. Macleod Dixon has one of the most experienced oil and gas practices in the CIS. The firm’s oil and gas group is its largest practice group and Macleod Dixon lawyers have worked extensively in all areas of the oil and gas business within the CIS (www.macleoddixon.com). McGuireWoods Kazakhstan LLP is a subsidiary of McGuireWoods LLP, a 725-lawyer firm headquartered in Richmond, VA, that also has offices in such cities as Brussels, Chicago, New York and Washington, D.C. It opened its office in Almaty in 1993, initially to represent Kazakhstani state agencies in privatizations and joint ventures with western firms, and in commercial work with government-controlled corporations. McGuireWoods has a vast experience in Kazakhstan representing Kazakhstani and foreign private companies. During representation of such clients McGuireWoods gained strong practical experience in most areas of Kazakhstani legislation and policy. Since August of 1993 McGuireWoods has also provided legal advice to the Government of Kazakhstan on natural resources development. The firm has successfully completed negotiations on more than twenty complex transactions on behalf of the Government and provided significant assistance in the conduct of tenders for hard minerals, precious metals and gemstones. This representation includes advice regarding legislative, administrative and private contractual matters and also consulting services on taxation structures. For the last seven years the firm has also represented the Government and private clients in international arbitrations in London, Paris, Stockholm and Washington, DC. McGuireWoods Kazakhstan LLP is staffed with local lawyers and legal assistants who are fluent in Russian and English. The Managing Partner of McGuireWoods Kazakhstan LLP is the Brussels-based partner Mr John W Barnum.
Alexander Barsukov, the Managing Attorney of McGuireWoods Kazakhstan LLP and a Resident Partner, is a graduate of the Kazakh National State University Department of Law, in Almaty, Kazakhstan (1993) and was admitted to practice in Kazakhstan in 1993. He participated in drafting various major Kazakhstani laws. Mr Barsukov has had extensive and diverse professional legal experience and has expertise in such areas of law as banking and finance, general corporate and commercial, mergers and acquisitions, privatization, taxes, telecommunications, anti-trust law, trade and foreign investment, and employment law. Asel N Tokusheva, Associate of McGuireWoods Kazakhstan LLP, graduated from the Almaty State University, Department of International Law in Almaty, Kazakhstan (1998). She was admitted to practice in 1998 and became a member of the Astana bar in 2000. Ms Tokusheva focuses her practice on regional litigation and international arbitration, corporate and contract law, and civil legal procedure and Civil Code. Dinara Jarmukhanova, Associate of McGuireWoods Kazakhstan LLP, is a graduate of the Duke University School of Law, Durham, North Carolina (LL.M., 2001) and of the Kazakh State Law Academy, Department of International Law and Public Service, Almaty, Kazakhstan (2000). She passed the New York bar exam in 2001 and was admitted to practice in Kazakhstan in 2000. Ms Jarmukhanova handles international commercial arbitration, foreign investment disputes and the issues of local and international corporate and commercial law. Professor Jay Nathan teaches in the department of management, St John’s University, New York City. He earned his PhD degree from the University of Cincinnati in 1980 in the field of industrial management with a minor in international business. Recently, he taught corporate strategy, international business, and cases in management at Kazakhstan Institute of Management, Economics and Strategic Research under the President of the Republic of Kazakhstan. The research articles already published in Kazakhstan and Central Asia which he has written include: ‘Value Misconceptions in the Former Soviet Central Asia that Continue to the Present’, ‘Quality Cultures in Higher Education in Central Asia’, and ‘The Paradoxes of Nation-States in this Day of Globalization’. In addition to his teaching experience of well over 25 years, he has worked for and consulted with various US companies that include responsibilities for strategic planning, forecasting, total quality management (TQM), and corporate planning for international markets. Dr Nathan is a Fulbright professor to Kazakhstan for the 2002–03 academic years. Prior to his third Fulbright Senior Scholar Award, he was a Fulbright graduate teaching professor in business administration for 1998–99 in Poland, and spent 1991–92 academic years in Thailand. He has also lectured under various interna-
tional sponsorships in Japan, Brazil, New Zealand, England, France, Germany, Sweden, Australia, Malaysia, Italy, South Africa and Lithuania. His recent publications include: Zulu Management; Kazakhstan: Act Local, Think Global; and Value Concepts in Former Soviet Central Asia. He is elected to Sigma Iota Epsilon and member of the Academy of Management, International Academy of Business, Decision Sciences Institute, and American Society for Quality Control. Michael Wilson & Partners Ltd is a full service law firm headquartered in Almaty covering Kazakhstan, the Central Asian Region and the Caucasus. MWP is not just a law firm but takes pride in partnering with its clients in relation to their business opportunities, challenges and threats and, in doing so, providing creative, timely and practical solutions specifically tailored to meet its clients’ requirements, deadlines and budgets. Areas of practice: privatization, power industry (generation, transmission and distribution), mining and natural resources, foreign investments and joint ventures, corporate, corporate finance and securities, banking, finance and project finance, telecommunications, tax, intellectual property, labour and employment matters, engineering and construction, real estate, transportation, shipping and aviation, arbitration and litigation. The Oil & Gas Vertical is the major Russian specialist oils and gas journal, the winner of the Big Golden Medal of the all-Russian journalist ‘PEGAS (Petroleum, Energy, Gas)’ Contests for the title of the Best Russian specialized publication. The journal has been published since 1996. It is published twice per month and has a circulation of 20,000. The journal covers all the aspects of the oil and gas sector of Russia and Former Soviet Republics (recovery, refinery, transportation of oil and gas, new high technologies and equipment, financing, investment). It is aimed at top- and middle-level managers of companies. PLLG, founded in 1992, has within a short period of time established itself as a leading International Law Group with offices spanning Europe and Asia, and it has a global reach and capability. In addition to offices in London and Leeds in the UK, PLLG has offices in Kazakhstan, Russia and the Ukraine and works as a globally integrated Law Group. PLLG is a full-service law company with expert locally qualified lawyers in each jurisdiction in which it operates. The Chairman, Peter Levine, is also Honorary Consul in England for the Republic of Kazakhstan as well as Co-Chairman of The British-Kazakh Society, whose Honorary Patrons are HRH the Duke of York and HE the President of Kazakhstan. Russell H Ragsdale is the directing partner in the Kazakh firm R J Consult. It was registered in 2003 and actively promotes expansion
and modernization in catering, hotels, restaurants, bars, and manufactured food production. The firm handles market research, feasibility studies, business plans, and assists in securing financing, food product line design and expansion. It is a conduit for pairing up international companies with suitable local partners and employees, and deals with hotel/bar/restaurant start-ups. R J Consult is currently looking into opening a culinary institute, a chain of small hotels, and a restaurant. Russell Ragsdale has lived in Kazakhstan since 1992. He was the first international executive chef in Almaty, heading the kitchen of the Bastau Restaurant of the privatized Dostyk Hotel. He has opened or reopened nine restaurants in the Republic to date. He served on the interim Board of Directors of the American Chamber of Commerce in Kazakhstan and continues to be active in that organization. He has published over 70 articles and was a popular columnist for several years in the Almaty Herald. He speaks conversational Russian. The international law firm Salans is a full-service multinational law practice of over 450 fee-earners, with offices in Paris, New York, London, Warsaw, Moscow, St Petersburg, Kiev, Almaty, Atyrau and Baku. For more than three decades, partners in the firm have provided legal advice in Eastern and Central Europe and the CIS. Salans has advised on natural resources, foreign investment and finance in Kazakhstan since 1990, opening its Almaty office in 1994 and its Atyrau office in 2001. The firm represents clients throughout the world in connection with a broad range of commercial matters. At the same time, each office of the firm offers a full spectrum of in-depth legal services for matters of local law. The long history of Salans’s involvement in the region coupled with the professional experience, educational qualifications and linguistic abilities of its lawyers provide an unparalleled technical capability to advise clients in Kazakhstan. The principal contact partners for the Caspian practice of Salans are James E. Hogan, in Paris, Aigoul Kenjebayeva, in Almaty, Jane Tarassova, in Moscow, Glenn Kolleeny, in St Petersburg, and Alum Bati, in Baku. Scot Holland Estates (SHE) is a UK real-estate firm that has been active in Kazakhstan since 1994. The company’s core service is residential and commercial brokerage for foreign clients. SHE has successfully represented many prominent multinational corporations and governmental organizations in their search for optimal office space and suitable accommodation. In 2001, the firm launched its consulting services division and now offers property valuation, market research, office planning, and many other real estate consulting capabilities.
Seimar Investment Company. The OJSC Seimar, founded in 1991, is the most dynamically developing investment company in Kazakhstan. The OJSC Seimar has had a positive experience in restoring agro-industrial enterprises. Its skilled and experienced technical and management personnel are engaged in provision, storage and processing of grain and rice; egg and poultry meat production; paper and cardboard manufacturing; and in active work in investing different industrial projects of the Republic of Kazakhstan. At present, more than 10,000 employees work in Seimar. Today, the company’s annual turnover constitutes more than US $200 million. The OJSC Seimar is positioned as an investment company, producing business-projects, not products. One of the most progressive innovations at the background of Kazakhstan economy was an introduction of such a form of business conduct as franchising. On the basis of franchising, Seimar is planning to fulfil a US $120 million project in the Moscow region, where analogues of Almaty Kus will appear. Approximately by 2008–09, Seimar is intending to become the largest poultry company in East Europe and enter the New York and Frankfurt stock exchanges. Douglas Townsend is a UK-based business consultant specializing in trade and investment with markets in the CIS and CEE countries. He was formerly Australian Ambassador (Kazakhstan, Hungary, Switzerland, Senegal and Côte d’Ivoire), Australian Investment Commissioner Europe, and Australian disarmament negotiator. Currently Mr Townsend is Senior Adviser to the International Tax and Investment Center, Washington (also Almaty, Astana, Baku, Kiev, Moscow, London); Secretary to the Caspian Minerals Tax Committee, Houston (also London & Moscow); and Director of the Azerbaijan and Kazakhstan Minerals Training Academies, Baku and Astana. Douglas Townsend is a member of the Anglo-Azeri Society, the British-Kazakh Society, the British Association for Central and Eastern Europe and the Royal Institute of International Affairs. Contact:
[email protected]; Tel: +44 7768 091901. The US-Kazakhstan Business Association (USKBA) was formed to promote the involvement of the US private sector in trade and investment in Kazakhstan. The USKBA is an independent, non-profit corporation that works to promote US economic and commercial cooperation with Kazakhstan by fostering a business and investment climate in which US and Kazakhstani companies operating in Kazakhstan can flourish. It was incorporated in the State of Delaware on 31 March 1999, and is based in Washington, DC. Patrick M Hussey has lived and studied in Almaty, Kazakhstan. He has studied intensive Russian at St Petersburg State University and worked in the Governor’s Office in St Petersburg, Russia. More
recently, he has been an active participant in periodic meetings between senior level US business executives and their Kazakhstani counterparts from both public and private sectors. Mr Hussey holds a bachelor’s degree in International Politics from Georgetown University with a minor in Russian Area Studies.
Map 1 Kazakhstan and its neighbours
Railways
Roads
National capital
International boundary
Map 2 Kazakhstan (administrative)
Map 3 Astana
Map 4 Almaty and the surrounding area
Introduction Douglas Townsend, ITIC
Writing in an earlier edition of this publication in 2000, I observed that times then were tough for Kazakhstan, but that ‘in the medium term’ economic prospects were encouraging, subject to certain conditions. Having reached that ‘medium term’, it is apparent from the current macroeconomic conditions that Kazakhstan has responded strikingly well over the last three years, owing largely to the effects of the substantial structural reforms of the 1990s and Astana’s continued prudent macroeconomic management. Economic reform, it seems, has become ineradicable (witness Kazakhstan’s symbolic ‘graduation’ from IMF tutelage with the recent closure of the Fund’s resident representation there). Kazakhstan is sustaining a significant economic upswing, as evidenced by the select figures quoted below. With the expansion of the petroleum sector and favourable commodities prices, economic growth has averaged over 10 per cent annually in the period 2000–03. Net FDI inflows, largely to the oil sector, have averaged since 2000 over USD 2 billion per year (almost 10 per cent of GDP, with FDI now comprising some 60 per cent of GDP). Official reserves have risen to over USD 4 billion (or some four months of projected 2003 imports) and balances in the National Oil Fund are approaching USD 3 billion. Public external debt has dropped to around 14 per cent of GDP. Moreover, the overall non-oil economy has also grown strongly, at about 8 per cent on average in 2000–02. This encouraging if incomplete diversification (evident not least from the expanded scope of this book, as compared with its 2000 predecessor) is a tribute both to government policy and Kazakh entrepreneurship. Overall employment has grown since 2000 and real wages have risen, while annual inflation has been contained at around 6–7 per cent. Market confidence has improved, reflected in Moody’s upgrade of Kazakhstan’s credit rating in September 2002 to minimum investment grade. Kazakhstan has become well-integrated into major global and regional markets particularly for hydrocarbons, metals and grains. Significant regional integration in Eurasia/Central Asia remains
however elusive, despite a decade of intergovernmental initiatives culminating in the latest (030919) Single Economic Space Agreement between Belarus, Kazakhstan, Russia and Ukraine. This incomplete cooperation, reflected for example in certain trade tariff peaks and ad hoc restrictions as well as disagreements over fundamental resources such as water and energy, may be alleviated in the medium term by general WTO membership, a high priority for Astana. In the meantime, regular consultation between the regional partners encourages a significant degree of policy harmonization and administrative cooperation in some policy areas, for example taxation and customs. While a S&P further credit rating upgrade is being negotiated and could be anticipated on the basis of the striking macroeconomic performance, there remains considerable scope to grapple with the imperfect state of the microeconomy. Here institutional constraints such as an unclear separation of powers and pervasive bureaucracy, together with entrenched vested interests in important economic sectors including utilities, contribute to an uncertain investment climate outside the oil and financial sectors. Small and medium-size domestic and foreign investors in particular continue to find that ‘size can matter’. Moreover, while Kazakhstan has improved its ranking on the UNDP Human Development Index table, according to World Bank standards one-in-four (granted: a significant improvement over last decade’s onein-three) still lives below the poverty line. Rural areas, still home to half of the population, are particularly affected. Thus, unevenlydistributed oil wealth has yet to benefit significantly all the regions and the majority of the population. If it is to do so any time soon, the Kazakh authorities are being urged by the IMF/WB to strengthen their institutional capacity for rendering social assistance and, with help from the international community, to develop and execute more ambitious public sector investment programmes not least in the infrastructure, health and education sectors wherein UK business has much to offer. There is consensus that the key challenge facing Kazakhstan’s policymakers is the continued effective management of rapidly rising oil production and revenues, balancing diverse parameters such as avoidance of ‘Dutch Disease’ and currency volatility, ensuring intergenerational savings while hastening alleviation of widespread poverty. The swelling National Oil Fund will play a critical role in this endeavour. (Note, in connection with calls for greater transparency in and complete information about the Fund’s operations, Kazakhstan signed on in June 2003 to the ‘EITI Initiative’ of the British Government.) The consensus also calls for a reinvigoration of reform to improve the investment climate and foster sustained broad-based growth outside the energy sector, themes which are imperfectly reflected this year in new investment and tax legislation, new state
investment institutions and new government programmes such as the Industrial Innovation Program 2003–2015 announced in September. Thus, the proposed reductions in the rates of VAT, individual income tax and social tax are steps in the right direction, but considerable scope remains for improving tax and customs administration and for encouraging competition. Moreover, a major question mark hovers over the taxation of the petroleum sector, with serious implications for investment attraction for new ventures. There is also caution lest oil wealth and new state investment institutions combine to stimulate a programme of developing ‘local industrial champions’ not necessarily founded in comparative economic advantage. Business will therefore be looking for a continued focus on systemic improvements to benefit the overall investment climate and accelerate diversification. Achieving convergence between the positive conclusions to be drawn from the macroeconomic performance and investor perceptions of ‘country risk’ arising from experiences of the microeconomy should be a priority objective for government. Achieving it will require precise confidence-building measures to boost positive perceptions among foreign and domestic investors and in sectors beyond oil and gas. Continuation of the promotion of SMEs, including the terms of their access to commercial bank credits, is a key indicator for economic diversification and job creation. Accelerated development in telecommunications and the ICT sector, eg by establishing links between Internet infrastructure and data-intensive applications with priority sectors (oil and gas, mining, agriculture), also would confirm that reform is first priority. Cooperation with the private sector, domestic and foreign, would be essential for achieving the potential of such development. Kazakhstan, as evidenced by the detailed May 2003 programme for the development of the North Caspian hydrocarbons resources, has strong ambitions to move quickly up the ‘value-added curve’ in oil and gas, from E&P to processing, refining and transport, raising local human and physical infrastructure to global standards along the way. Moreover, while ‘leveraging’ oil and gas sector development as the primary engine for strengthening generally ICT sector training and sophistication, there will be ‘spin-offs’ for other critical sectors such as mining and metallurgy and agriculture. In respect of the last, the Government’s landmark (if controversial) reforms this year provide an opportunity for unlocking the immense if unfulfilled potential of Kazakh agriculture. UK business has plenty of experience to bring to these development processes. This publication is our second attempt at compiling a significant volume on the topic of Doing Business with Kazakhstan and the book is designed for all parties contemplating this vast Central Asian
country as a market in which to do business. It is primarily divided into four parts. In Part I of the book, we provide the reader with a general background to the country’s business environment, including an introduction to Kazakhstan’s recent economic performance, the foreign investment climate and legal framework for investments, banking, finance, investment funds and venture capital. We have also included special interest articles surveying 10 years of Kazakhstan’s relations with the European Bank for Reconstruction and Development (EBRD), as well as an article on the costs of administrative delays associated with market entry, specially prepared by the Foreign Investment Advisory Service (FIAS) of the World Bank. Other authors to note for this section include HSBC Bank, The American Chamber of Commerce in Kazakhstan, Assistance LLC law firm, KPMG and Steve Fast of Andromeda Financial Services and Harvard University. In Part II, we take an in depth look at Kazakhstan’s economy from a sectoral perspective. Not surprisingly, we commence our overview by focusing on the country’s mainstay oil and gas industry, as well as the mining and metallurgical sectors. However, the expansive discussions in this section also cover fast growing industries such as telecoms, IT and food & beverages; as well as mainstay sectors such as agroindustries, healthcare and certain manufacturing industries such as paper and cement. We also give attention to industries previously seldom discussed in Kazakhstan’s business context, including tourism, insurance and the office market. Our authors for Part II represent a diverse array of specialists, ranging from some of the largest global corporations (Aon Corporation) and government departments (BISNIS of the US Department of Commerce), to well established law firms (Denton Wilde Sapte and Michael Wilson & Partners) and expanding local companies (Scot Holland Estates and the Central Asia Tourism Corporation). Part III focuses in some detail on Kazakhstan’s taxation and legal environment for domestic and international business. The section contains articles discussing tax, auditing and accounting, corporate forms of doing business, as well as regulation of the banking sector and securities market. Our authors also discuss the legal and other incentives available to foreign investors interested in Kazakhstan, the mechanisms available to protect such investments, and the topics of competition law and anti-monopoly regulation. Authors for Part III include a wide range of legal and consulting specialists, including the international law firm Salans, the law firms Denton Wilde Sapte, McGuireWoods and Bracewll & Paterson LLP, as well as KPMG and Ernst & Young. In Part IV, the final part of the book, our specialists focus on the topic of operating a business in Kazakhstan, and in their chapters cover topics including commercial property rights and land ownership, arbitration and dispute resolution between legal entities,
intellectual property and employment law. Contributors to this book include Assistance LLC, McGuireWoods, Bracewell & Paterson, Denton Wilde Sapte and Macleod Dixon. There is also a special chapter provided by the US-Kazakhstan Business Association which highlights the cultural distinctions between Kazakhstani and broader European business practice – essential reading for anybody seriously contemplating the prospect of doing business in a country like Kazakhstan.
Part One Background to the Market
1.1
A Country Profile Steve Fast, Harvard University
The Republic of Kazakhstan has only a brief history, having declared its independence on 16 December 1991, in the aftermath of the collapse of the Soviet Union. Yet the Kazakh people have a history that stretches back more than five centuries, while the history of the pastoral nomads of the Eurasian steppe, of whom the Kazakhs are but one representative, reaches back into the mists of time immemorial. Since declaring independence, Kazakhstan has vaulted onto the international stage as a rising petroleum powerhouse and as the leader in market reforms among the five Central Asian republics.
History The Kazakh people coalesced in the middle of the 15th century after the collapse of the Temurid (Tamerlane) Empire. As Temur’s descendants proved unable to stem the tide of disintegration, the Kazakh people emerged under the leadership of the khans Qirei and Janibek. As many nomadic peoples sedentarized, groups emerged who were opposed to giving up the nomadic way of life and joined the loose confederation of Kazakhs. During the late 15th and 16th centuries, the Kazakhs, under the leadership of powerful khans such as Qasim (ruled 1509–20), Aq Nazar (1538–80), and Teukel (1582–98), battled the Uzbeks for control of the Turkestan oasis (modern Tashkent and Shimkent) and the trade routes that flowed through it. As the 16th century drew to a close, the Kazakhs had been successful in this effort, although there had also been desperate times of defeat during this century when only a few tens of thousands of Kazakhs remained. By the mid-17th century, the Kazakhs faced two new challenges. First, the nomadic Jungars (Oirats) emerged from what is now western China to threaten the Kazakhs, while the Russians continued extending their control of the steppe from the north. After nearly a century of bitter warfare, the Kazakhs lost control of the rich
4
Background to the Market
Turkestan oasis to the Jungars in 1723. Under this military pressure, the Kazakh nation splintered into three juzes. In an effort to protect their summer and winter pastures, the Kazakh rulers made a largely hopeless effort to play the Russians off against the Jungars. But slowly the Russians reduced the independence of each Kazakh juz until it became a constituent of the empire. The end of the 18th and 19th centuries witnessed an increasing crisis among the Kazakh people as they lost their best pasturelands to Russian peasants, and periodic rebellions did nothing to ease the situation. The crisis among the Kazakhs peaked after 1916, when the sclerotic Russian Government drafted Kazakhs to serve in military labour battalions. The Kazakhs rebelled in response, but this action was brutally crushed. The Russian Revolution brought more suffering as Red and White forces battled for control of Central Asia. The Kazakhs formed the autonomous Alash Orda Government in 1917, but direct Soviet rule was instituted in 1920. Collectivization, during which the nomadic Kazakhs were forced to sedentarize, brought terrible hardships, as many Kazakhs killed their animals rather than surrender them to the central authorities. Between 1929 and 1934, the number of sheep and goats in Kazakhstan fell from 27.2 million to 2.3 million. People wandered the steppe, impoverished, starving, perishing. Finally, in the late 1930s, many Kazakh intellectuals and leaders lost their lives in Stalin’s terror. In the 1950s and 1960s, the Virgin Lands in northern Kazakhstan were opened to agriculture, part of Khrushchev’s effort to increase agricultural production. In five years (1953–58), Kazakhstani grain production increased from 5.4 million to 22.0 million tons. In a precursor of independence, the 1960s also saw increasing Kazakh autonomy as Dinmukhamed Qonaev became first secretary of the Kazakh SSR and the first Kazakh to sit on the Politburo. In 1989 Nursultan Nazarbaev became first secretary of the Kazakh SSR, and in 1991, as president, he led Kazakhstan onto the world stage as an independent state. Soviet power brought great improvements to Kazakhstan in the form of better health care, mass literacy, higher education, and industrialization. Kazakhs participated in the Soviet state that crushed the mighty Nazi military machine, sent the first man into space, and developed what was for a time the most powerful military force in the world. Although the standard of living dramatically improved, the cost, measured in human lives, massive cultural changes, and lost freedom, was also great.
Geography Kazakhstan is located in the centre of the Eurasian land mass, with Russia on the north, China on the east, the landlocked Caspian Sea on
A Country Profile
5
the west and on the south a tier of former Soviet Central Asian states. Kazakhstan is largely steppe which varies from lush grasslands to sparse desert scrub. This steppe has always been too infertile for sedentary agriculture, but over the ages pastoral nomads have eked out a living, and on occasion even prospered, on the continental grasslands of Eurasia. Until about the 15th century, this location made Central Asia a key transportation route and provided it with prosperity, but as international trade shifted to the seas, it slipped into economic insignificance. For millennia, water, the bodies in which it is located, and the watercourses in which it flows have impacted the steppe. The southern part of Kazakhstan is drained by the Syr Darya, the longest river in Central Asia. This flows into the landlocked and vanishing Aral Sea, which is surrounded by a zone of ecological catastrophe. Next the Irtysh River drains the northern part of the country into the Ob’ River, which eventually reaches the Arctic Ocean. Thus the wetter, northern part of the country is drained to the north, depriving drier, southern Kazakhstan of much-needed water. Another landlocked basin, in the southeast of the country and the highlands of western China, is drained by the Ile River into Lake Balqash. Finally, the Ural River flows from Russia to the Caspian Sea, dividing Kazakhstan into an Asian and European section. This makes it one of the countries to straddle Europe and Asia (along with Russia and Turkey). Sparse rainfall makes water a key commodity in Kazakhstan. There are on-going disputes with neighbouring states, especially China, Kyrghyzstan, and Uzbekistan, about the use of the waters of major rivers. Agriculture is most directly affected by the amount of rainfall, and one of the key roles (and a key source of power) of local authorities is to manage the irrigation systems. The patterns of human settlement are also affected as the already sparse population has tended to concentrate along the southeastern border and in the north-central and northeastern portions of the country. Finally, just as the caravan traders of five centuries ago depended on the oasis springs and streams, enterprises today must ensure that water is available at a reasonable price, especially in the drier regions of the country. The other geographic features of the country are mere details in comparison with the importance of water. The southeastern quarter of the country is separated from China and Kyrghyzstan by a series of towering mountain ridges. The highest peak in the country, Mount Khan-Tenggri, lies at 6,995 metres and is located on the border with Kyrghyzstan and China. The centre and south of the country are dominated by the parched Qizil Qum (Red Sands) and Betpaq Dala (Hungry Steppe), while the western part of the country declines into the Caspian Depression.
6
Background to the Market
Demography The territory of Kazakhstan has for centuries been the homeland of the Kazakhs. Although Russian travellers, explorers, and emissaries started to penetrate the region in the 16th century, it was only in the 17th century that Russia began to extend lines of forts into Kazakh territory to control the raiding of nomadic tribes from the steppe. During the early 20th century, the Russian portion of the population grew dramatically from 11 per cent in 1897 to a peak of 42 per cent in 1970. This increase was due to resettlement of peasants from European Russia, the inflow of Russian specialists and workers due to industrialization, and the opening of the Virgin Lands to agriculture in northern Kazakhstan under Khrushchev. Dozens of other nationalities joined the Russians (some of whom were deported under Stalin from their homelands), making Kazakhstan a truly multinational republic, but lowering the share of Kazakhs to 33 per cent by 1970. Since 1970, Kazakhs have steadily increased as a share of the population – the 1999 census indicates that they are now 53 per cent of the population and that Russians have fallen to 30 per cent. In the last decade, hundreds of thousands of Germans, Russians, and others have returned to their homelands. Thus from 1989 to 1999, the population of Kazakhstan fell from 16.5 million to 15.0 million. The shift towards a larger Kazakh share of the population (as well as the ‘cultural’ independence that accompanies political independence) accounts for the increased use of the Kazakh language and presence of Kazakhs among the economic and political elites. Kazakhs are traditionally Sunni Muslims, but folk practices and respect for deceased ancestors are perhaps the most meaningful religious experiences for the majority. Russians are traditionally Orthodox, but a number of them are also Baptist or Pentecostal. In general, the level of public religious observance is low and many people consider themselves atheists or agnostics – a continuing effect of the Soviet anti-religious policy.
Business culture The Kazakh culture is based on respect and propriety. The entire society is organized as a hierarchy, and each person or organization should fulfil its role within that hierarchy. Being older than others, male, a guest, knowing the Kazakh language and traditional rituals, and having a formal position of authority give a person more respect. Although the system has become more flexible under the pressure of changes during the last decade, it is still critical to understand one’s roles and responsibilities within the society in order to work successfully within it.
A Country Profile
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Business is built upon close personal relationships because business partners want to learn if they can trust each other before engaging in business. Observing cultural norms such as men shaking hands upon meeting, socializing at the banya or the restaurant, drinking tea, giving gifts, giving toasts, and inquiring about one’s family are critical components of establishing a business relationship. Discretion is also a major element of the business culture. Businessmen do not discuss their business in public or with people whom they do not trust. In the same way, disagreements are private matters – parties can be open in private with each other, but once the matter is discussed at a press conference, one has made an enemy. Even when a disagreement becomes public, it is usually papered over so that neither party loses face. Hospitality is a critical part of showing respect to guests. There are many traditions associated with being a host and a guest. A guest should be able to give an eloquent toast, to enjoy the many delicacies that will be served – some of which may be quite strange – and to show appreciation for the efforts of the host. And a host should arrange everything for a guest so that the guest has a worry-free and enjoyable experience with plenty to eat and drink, even if this proves expensive. The warm traditions of hospitality are one of the things that make business in Kazakhstan truly enjoyable. Compared with many Western countries, the attitude towards law in Kazakhstan is very different – which is not the same as saying that in Kazakhstan the law is flouted. In many Western countries, the formal system of law shows the actual way to get things done. But in Kazakhstan the formal system of law shows what one cannot do – to get things done one must know the informal, local approaches and relationships. Becoming an insider is critical to long-term success in business. While it requires time, effort, and sensitivity to learn the language, to know how to interact with people, to understand the humour, to go naked at the banya, and to eat a sheep’s eyeball, these are essential for success. And it is not necessary to be born in Kazakhstan to become an insider (which is not the case in some cultures).
Economy Government management of the economy has been highly successful in the last few years. In April 1999, there was an economic crisis as the Government, in response to the drain on its hard-currency reserves, floated the tenge against the US dollar. Unlike Russia’s, Kazakhstan’s Government did not default on its bonds, so it has the only investment grade rating in the CIS (on its domestic currency obligations). But from 1999 the Government has instituted a number of key economic reforms,
8
Background to the Market
such as a pension system modelled on the Chilean one. GDP grew at the phenomenal rate of 8–14 per cent annually over the four years since, while inflation has hovered at about 6 per cent annually. Purchasing power parity GDP was about US $7,560 per capita during 2002. The economy is relatively open, with both imports and exports running at slightly over half of GDP in 2002. The Government has been running a budget surplus since 1999, so it has been reducing tax rates gradually in recent years and plans to do so again for 2004. The Government has established a National Fund to cushion the economy against macroeconomic shocks that result from commodity price swings – in 2003 it plans to contribute 3 per cent of GDP to this fund. The Kazakhstani economy is extraordinarily well managed from a macroeconomic point of view. Yet serious challenges remain in the economy. Corruption is a most serious problem and infects all levels of society. Foreign and domestic observers complain that it is difficult to do business in Kazakhstan without becoming entangled in corruption. The rule of law is also weakly established, so courts often make decisions that are based on factors besides legal precedent. Lack of transparency in rulemaking and tenders is another serious problem. Poverty, especially in the rural and agricultural areas, and the unequal distribution of income also afflict the country – 28 per cent of the country’s population live below the official poverty line. Finally, there can be regulatory hindrances to competition, especially for companies that fall into political disfavour or compete with favoured companies. The economy of Kazakhstan is based on petroleum, with mining the second most important industry. Since independence, Kazakhstan has made it a priority to attract international capital to extract and process its mineral wealth. The Tengiz oil field, operated by Chevron, was the first major investment project to be concluded – it was signed in 1993 for US $20 billion over a period of 40 years. Since then a number of other major contracts have gone to Kazakhstan – the Karachaganak gas-condensate field, the Caspian pipeline, the East Kashagan oil field, and several others. At the end of 2002, Kazakhstan had proven reserves of 9 billion barrels of crude, ranking it 17th place in the world, with many unproven reserves and promising geological structures yet to be explored. Kazakhstan is also rich in hard-rock minerals, having reserves in many of them ranked in the top five or ten worldwide. The major minerals that Kazakhstan possesses include coal, iron, copper, zinc, lead, chromium, manganese, phosphates, titanium, aluminium, gold, silver, and others. However, the Kazakhstani mining industry is dominated by local firms due to a number of scandals that erupted in the mid-1990s over several privatization deals and mining licences. One of the largest investments has involved the purchase of the giant but virtually bankrupt Karmet steel works by the Indo-British Ispat – the company now exports to about 75 countries around the world.
A Country Profile
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Samsung (copper), Glencore (lead and zinc), AES (coal and power generation), and Access (coal) are also involved in major investment projects in the minerals industry. Several key shifts in the economy have occurred over the last decade. First, economic activity in Kazakhstan has shifted geographically – manufacturing centres such as Shimkent and Karaganda have become less important and oil towns in the west such as Atyrau, Aqtobe, and Aqtau have become more important. A sectoral shift from the Soviet focus on heavy industry to oil and gas, food processing, and professional services can also be observed. Finally, a shift from state ownership to private ownership has been important, with about twothirds of GDP now in private hands. Agriculture is a large but moribund sector of the economy. The most important crop is wheat – Kazakhstan is a major exporter of grain throughout the region. The key types of livestock are sheep and cattle. The agricultural sector operates at a low level of efficiency due to serious needs for capital investment, lack of rural education, the state ownership of all land until 2003 (when it became possible to buy land), and the system of collective agriculture that has been transformed into private ownership in name only. As Kazakhstan is landlocked, large and sparsely populated, infrastructure is especially critical. The country’s transportation corridors are limited. Most imports from the United States or Asia flow through the Baltic seaports or Vladivostok and then by rail to Kazakhstan. Despite the opening of the Caspian pipeline and swaps via Iran, large volumes of crude oil are still shipped from the country by rail to the Black Sea and to China. Trucks are the main means of internal transportation, although the sparse and poorly maintained road network limits truck transportation, and rail is also an important form of transportation. Although improving dramatically with rapid growth in the number of mobile phones, Internet usage, and digital switches, the telephone network is relatively sparse. Improvements in infrastructure will be a key indicator of future economic growth for Kazakhstan.
Conclusion Kazakhstan is a booming economy that is completing the transition to a market. The opportunities in Kazakhstan are great, but the challenges to doing business are also formidable. However, one should not overestimate the challenges, as nearly all of them are resolvable. An investor or businessman who is willing to take risks and to be flexible and creative has the necessary tools to succeed in Kazakhstan.
1.2
Economic Overview Ward Jones, KPMG
Kazakhstan, the second largest country of the former Soviet Republics in terms of territory, possesses abundant natural resources. It has huge fossil fuel reserves and plentiful supplies of other minerals and metal ores, such as coal, chrome, lead, tungsten, copper, phosphorus, uranium and zinc. It also has great agricultural potential with its vast steppe lands accommodating both livestock and grain production. Kazakhstan’s industrial sector rests on the extraction and processing of these natural resources and also on a relatively large machine-building sector specializing in construction equipment, tractors, agricultural machinery, and some defence items. Like most Soviet Republics, Kazakhstan was firmly integrated into the Soviet command economy and its military-industrial complex and faced a rough transition to a market economy. The break-up of the Soviet Union and traditional economic ties led to an immediate economic decline and a precipitous drop in living standards after 1991, with the steepest annual decline occurring in 1994. Inflation skyrocketed to 1,200 per cent. Problems with the Russian Central Bank’s management of the ruble led Kazakhstan to leave the ruble zone in 1993 and introduce its own currency, the tenge, which subsequently devalued by almost 85 per cent in the course of a year. Assisted in part by donor agencies such as the World Bank and USAID, the Government pursued macroeconomic stabilization, which by 1996 brought inflation down to reasonable levels. Strong national institutions were established; the National Bank in particular received wide respect from international financial agencies for its ability to fight inflation. The country was able to attract substantial amounts of foreign direct investment, predominantly into the natural resource and energy sectors, and by 1997 it could boast of being the largest foreign direct investment recipient per capita in the Commonwealth of Independent States. Trade and foreign investment play an important part in the development of Kazakhstan. The vast majority of Kazakhstan’s exports involve natural resources such as petrochemicals, metals, coal, and
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wheat. In turn, Kazakhstan imports goods such as petrochemicals, refined oil products, electricity, vehicles, and food products. From 1995 to 1997 the pace of the government programme of economic reform and privatization quickened, resulting in a substantial shifting of assets into the private sector. The privatization programme has had mixed success. Although widespread privatization of state assets was achieved, it failed to achieve its ambitious goal of redistributing national wealth to the citizenry. State enterprise privatization was divided into three categories: • small-scale privatization of small enterprises for sale by auction or tender; • mass privatization of medium-size enterprises, whose shares were sold to investment funds in exchange for privatization vouchers that were issued to all citizens of Kazakhstan; • case-by-case privatization of large enterprises. Small-scale privatization has proved to be the most successful, transferring thousands of small enterprises to private ownership and creating a vibrant wholesale and retail market for most commodities. However, mass privatization has proved less successful. Case-by-case privatization has also had some difficulties, with efforts continuing in this area. For a time prior to the Russian currency crisis in the summer of 1998, it looked like the economic situation had stabilized and begun to improve. Over US $7 billion had been invested in the Kazakhstan economy, primarily in the petrochemical and mineral resource sectors. Most of the growth had been unevenly distributed, however, and remained tied to a few favoured sectors, while the rest of the economy lagged behind. Kazakhstan’s economy turned downward in 1998 with a 2.5 per cent decline in GDP growth due to slumping oil prices, falling commodity prices and reduced demand from Asian consumers for Kazakhstan products as a result of the crisis in Asia. The ruble’s collapse in August 1998, and its consequences, effectively ended any hope of a speedy recovery of the Kazakhstan economy. Cumulative foreign investments, high oil prices, and conservative fiscal policies allowed Kazakhstan to achieve economic stability and growth by 2001, after weathering several years of financial crisis and reduced income from oil and agricultural commodities. A bumper harvest in the fall of 1999, well-timed tenge devaluation and soaring oil prices in 2001 fuelled growth in GDP to almost 10 per cent. GDP growth has continued at nearly double-digit rates since then, as Kazakhstan continues along the road to reform and observing the rule of law.
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Background to the Market
Between 1993 and 2002 the total value of foreign direct investment in the Kazakhstan economy was US $21.2 billion, with the largest investment coming from the United States (24.7 per cent), the UK (15.3 per cent), Switzerland (12.8 per cent), Italy (11.5 per cent) and the Netherlands (9.9 per cent)1. Oil and gas extraction leads the list of industries attracting foreign investment. According to the latest estimates, total reserves of oil and gas in Kazakhstan amount to 23 billion tons, of which more than 13 billion are accumulated in the Caspian shelf. In terms of explored reserves, the country ranks about 12th in the world. According to data issued by the National Bank for 2002, in the first half of 2002 exports exceeded imports by approximately US $800 million. Crude oil and gas condensate accounted for 53.2 per cent of the total export value, showing an 8 per cent growth in comparison with the preceding year. The new Caspian Pipeline Consortium pipeline from western Kazakhstan’s Tengiz oil field to the Black Sea increases prospects for substantially larger oil exports. At the same time, the Government of Kazakhstan attempts to ensure sufficient supplies of oil products on the domestic markets by setting export quotas for oil producers. In addition to oil and gas, Kazakhstan exports grain, primarily to Iran (38.2 per cent), Azerbaijan (10.7 per cent), Uzbekistan (7.5 per cent) and Russia (3.2 per cent). Kazakhstan’s imports come primarily from Russia, the United States, the UK, Germany, China, Italy, South Korea and Turkey. In 2002 industrial growth was registered in all regions of the Republic. The consumer price index rose by a modest 6 per cent in comparison with 2001, and the real (inflation-adjusted) average income per person increased 13 per cent during 2002. The oil and gas industry led the growth in the economy with an increase of 18 per cent. Mining (except for coal) increased 10 per cent. Earnings from mining hard fuels decreased by 18 per cent, due to the slump in worldwide commodity prices. Agriculture output remained stable. While Kazakhstan is still a commodity-driven economy, certain industries such as communications, financial services, and hospitality (hotels and restaurants) posted strong growth in 2002. Construction surged by 32.4 per cent, primarily due to the special economic zone in the capital city of Astana. Another important indicator of the domestic growth is the increase in the total value of bank deposits. In 2002 more investment than ever before was fuelled by domestic savings rather than foreign investment. In 2002 the percentage of foreign funds in gross domestic investment dropped to 32 per cent (from 41.4 per cent in 1999). 1 Official Kazakh government sources also point out that the leading sources of foreign direct investment coming into Kazakhstan between 1993–2002 were the following countries – the US (33 per cent), the UK (13.8 per cent), South Korea (7.9 per cent), Italy (7 per cent), Canada (5 per cent), Sweden (5 per cent), the Netherlands (4.8 per cent), China (3.9 per cent) and Russia (2.9 per cent).
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In 2002 the total value of foreign currency trades on the Kazakhstan Stock Exchange rose by an impressive 51 per cent, up to US $2.9 billion, and in December 2002 the currency turnover was approximately US $420 million. The over-the-counter currency market reported a 2002 turnover of approximately US $580 million. As of 31 December 2002 the exchange rate was 155.6 tenge per US dollar. The National Bank cited continued capital inflows and a strict policy of floating exchange rates as the primary reasons behind the stable currency. During the first six months of 2003 the national currency appreciated steadily against the US dollar. According to preliminary estimates, the monetary base grew by 19 per cent to 208.1 billion tenge during 2002. The main driving force behind this increase was sharp growth in the National Bank’s net international reserves, which in 2002 grew by 25.1 per cent (US $627 million) to US $3.2 billion, which is equivalent to 3.5 months of imports of goods and services. The National Bank attributed this growth to continued exports growth and large petroleum projects under development during 2002. Despite the economic successes, relations between the Government and investors have attracted significant attention in 2002 and 2003, particularly with respect to contracts for oil and gas operations. The Government claims that over the years the investment climate has improved, risks have declined, and existing contracts should be revised to balance the economic interests of the parties to the contracts. Investors parry with the argument that contract terms are sacred and should not be subject to change. At the time of this writing, the matter is not yet resolved and continues to be a source of conflict. The Ministry of Agriculture forecasts significant growth in grain sales for Kazakh producers in 2003, thanks to the increase in world grain prices. As of late June 2003 the state statistics agency was again reporting a positive trade balance. To achieve sustainable growth, the country needs to modernize its decaying infrastructure, develop higher value-added industries and the non-commodity economy, and boost intra-regional cooperation and integration. These development challenges require the continuation of a different role of the state in the economy. Over the last decade, the Kazakh economy has effectively been privatized, with over 75 per cent of GDP now produced by the private sector. Overall, the Kazakhstan economy has made significant progress since the inception of the free market economy in 1991. Yet much work is required further to strengthen these accomplishments and establish Kazakhstan as a duly recognized contributor to the global economy.
1.3
Foreign Investments: The Legal Framework Zhaniya B Ussen, Partner, Assistance, LLC Law Firm
The new law ‘On Investments’ (from now on referred to as ‘the new Law’) became effective from 22 January 2003, after almost three and a half years of intense discussion around the draft developed by the Government. Equalizing the rights of foreign and domestic investors, the new Law repealed the 1994 law ‘On Foreign Investments’ (the ‘1994 Law’) and the 1997 law ‘On State Support for Direct Investments’. The Kazakhstani legislature believes that the new Law will create a favourable investment climate.
The new Law and whom it may concern The new Law governs the relations associated with investments in Kazakhstan, defined as ‘all kinds of property (except for goods designated for personal consumption), including the leased items upon execution of a lease agreement, as well as the rights thereto, which are contributed by an investor into the charter capital of a legal entity, or the increase of fixed assets used in business activity’. Hence, ownership of an equity interest in a Kazakh company would generally constitute an investment activity. The same is true for the operation of a foreign company, or its branch, which has resulted in an increase of fixed assets; such an operation would be an investment activity for the purpose of the new Law. Fixed assets usually means fixed capital and intangible assets used for an extended period of time (over one year) to earn income. The new Law is not applicable to investments made with the use of state budget funds, nor to contributions into a non-commercial organization. However, the generally broad coverage of the new Law is substantially limited by exclusion of investment matters which are subject to other laws of Kazakhstan. Thus, investments in the gas and oil sector would be controlled by the industry-specific laws covering investment
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issues in that sector of the economy: the laws ‘On Petroleum’ and ‘On Subsoil and Subsoil Use’. Similarly, in banking and insurance industries, investments into a Kazakh bank or an insurance company (governed by the laws ‘On Banks and Banking Activity’ and ‘On Insurance Activity’ respectively) would be outside the scope of the new Law, unless the industry-specific laws are amended further to provide for applicability of the new Law. The new Law, unlike the 1994 Law, is limited to pure investment issues. It does not address the issues of company registration, taxation, land and real-estate ownership and possession, licensing, employment, and other areas that are subject to the country’s specific legislation, including the Land Code, Tax Code, the laws ‘On State Registration of Legal Entities’ and ‘On Licensing’, and labour law. Therefore, it can be said that the new Law is rather a general act on the issue of investments implying the prevailing power of an industry-specific legislation.
The new Law vs. the 1994 Law ‘On Foreign Investments’ There were many investment incentives contained in the 1994 law ‘On Foreign Investments’, including the national and most favoured nation treatments, right of profit repatriation on an after-tax basis, guarantees against adverse changes of legislation, guarantees against nationalization and expropriation, transparency, guarantees in course of inspection by state authorities, and right of dispute resolution in international arbitration. Most of the incentives are found in the new Law as well; some of them, however, have been modified and reworded to reflect the equal status of foreign and domestic investors under the new Law. In particular, the new Law guarantees to investors: • compensation of damages resulting from issuance by a state agency of acts not conforming to the laws of Kazakhstan, as well as damages resulting from illegal actions (or failure to act) by state officials; • stabilization of the terms of a contract entered between an investor and a state agency of the Republic of Kazakhstan; • free use of investment profit – under the monetary regulations this implies the right of profit repatriation; • transparency of activities of state agencies regarding investors, including free access to information on: – registration of legal entities and their by-laws; – registration of real estate transactions; – and issued licences;
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Background to the Market
• compensation of damages in event of nationalization; • compensation of the market value of confiscated property in event of requisition; • resolution of an investment dispute in accordance with international agreements and the laws of Kazakhstan in a local court, or an international arbitration chosen by an agreement of the parties; • any and all protection provided by the Constitution, other legislative acts and international agreements. The 1994 Law spelled out the investment incentives in great detail, whilst the new Law merely names the incentives and then refers for details to other acts. The new Law contains about 15 such references, the vast majority of which are spread among the clauses of Chapter 2, Articles 4–10, addressing the legal regime of investments. The 1994 Law was also famous for its Article 6 which contained a clause for stabilization of a contract against adverse changes in legislation, with the exception of changes in the laws in the areas of national security, environment, health and morality; however, in the event of changes in such laws, there was to be prompt payment to a foreign investor of adequate and sufficient compensation. The foreign investors’ guarantee of Article 6 is not found in the new Law. Instead, the new Law sets out two different stabilization clauses, neither of which mentions compensation of an investor in event of changes in the laws in the areas of national security, environment, health and morality. On the other hand, for the benefit of investors, the stabilization clause under the new Law is free from a time limitation present in the 1994 Law. Transparency under the 1994 Law included the right of all interested persons to familiarize themselves with the ‘laws and regulations, as well as court judgments relating to foreign investments’. The new Law modifies this incentive to provide investors with publication of ‘official press releases of state agencies, as well as laws and regulations relating to the rights of investors’. It must be noted that exclusion from the guarantee of ‘court judgments’ is consistent with the Republic of Kazakhstan’s exclusion under the Energy Charter Treaty, Articles 20(3) and 32(1), providing that court judgments and administrative rulings are not subject to publication in Kazakhstan (except for certain resolutions of the Supreme Court), because such judgments and rulings are not considered to be the sources of law in Kazakhstan. The concept of an ‘investment dispute’ was more liberally addressed in the 1994 Law. This allowed an international arbitration for any dispute between a foreign investor and the Republic of Kazakhstan, including in the absence of a contract between the investor and the Republic of Kazakhstan. The 1994 Law contained a presumption of the Republic of Kazakhstan’s consent to the submission of investment
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disputes to binding arbitration in accordance with the choice of the foreign investor, with an arbitration award to be final, binding and enforceable in Kazakhstan. The concept of an ‘investment dispute’ under the new Law applies equally to foreign and domestic investors, and as a default rule provides for a dispute resolution by Kazakhstani courts. Although it is not clearly spelled out in the new Law, the right of a foreign investor to submit an investment dispute to an international arbitration stems from provision of Article 9(2) of the new Law, allowing the investment dispute settlement by an international arbitration on the basis of other laws of Kazakhstan and treaties. ‘Other laws’ include the Civil Procedure Code, providing that an arbitration award rendered by an international arbitration serves a basis for the local court issuing an enforcement order. An international arbitration award is final and enforceable in Kazakhstan by virtue of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. When considering the national treatment of foreign investors, at first glance one could say it has changed from ‘no worse than national treatment’ to ‘no better than national treatment’. However, this would be true only if the numerous investment treaties ratified by the Republic of Kazakhstan were not taken into account. These treaties have become a highly important instrument in the protection of foreign investors’ rights in Kazakhstan, as described below.
The new Law vs. investment treaties The new Law expressly guarantees to foreign investors full and unconditional protection of rights and interests provided by the treaties ratified by the Republic of Kazakhstan. To date, Kazakhstan has more than 30 effective bilateral investment treaties (BITs), and is a party to a number of other international agreements applicable to foreign investments. It is important for a foreign investor to know that under the Constitution of the Republic of Kazakhstan, treaties ratified by the Republic supersede any law of the country that is not consistent with the applicable treaty. Therefore, in event of contradiction between provisions of the new Law and the effective investment treaty, the latter prevails.
Key issues of investment guarantees and protections The following sections compare how the new Law, the BITs and the Energy Charter Treaty address the following key issues important to all foreign investors:
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Background to the Market
• definition of investments; • contract stabilization against adverse changes in legislation; • guarantees against nationalization and requisition; • repatriation of investment and returns; • resolution of disputes.
Definition of investments Definition of ‘investments’ under the Energy Charter Treaty and the BITs generally include movable and immovable property and any other property rights such as mortgages, liens or pledges, stock and debentures of a company, claims to money or to any performance under contract having a financial value, intellectual property rights, goodwill and know-how, as well as business concessions conferred by law or under contract, including concessions for exploration and/or production of mineral resources and hydrocarbons. At first glance, one may say that the definition of ‘investments’ under the new Law (ie ‘all kinds of property…which are contributed by an investor into the charter capital of a legal entity, or the increase of fixed assets used in business activity’) is much narrower than in the treaties. However, the definition of ‘property’ contained in the Civil Code provides a non-exclusive lists of assets, claims and rights that constitute the ‘kinds of property’, including things, moneys (in a foreign currency and/or tenge), securities, works, services, materialized results of intellectual activity, trade names, trade marks, and other means of individualization of goods, property rights, and other assets. Therefore, one could reasonably argue that the definition of investments essentially remains the same as before.
Contract stabilization Stabilization of contract terms under Article 4(3) of the new Law applies to investors having a contract with any state agency. The new Law, however, does not expressly specify the essence of stabilization or provide a time limit for the stabilization. From the wording of the second paragraph of Article 4(3) it could be inferred that stabilization is granted against changes in the laws of Kazakhstan – not necessarily adverse changes – and such stabilization is granted for the duration of the contract. Notably, some BITs, including the US–Kazakhstan BIT, allow Kazakhstan to promulgate special formalities in connection with the establishment of investment, provided that the formalities do not impair the substance of any treaty rights. In addition to treaties, subsoil users may also benefit from the stabilization clause of the law ‘On Subsoil and Use of Subsoil’, providing for non-application of the changes in the laws of Kazakhstan adversely
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affecting the status of subsoil users to their contract with the relevant state agency entered prior to the effective date of the changes.
Guarantees against nationalization and requisition When dealing with the grounds for nationalization and requisition, the new Law makes reference to other legislative acts. Such other acts primarily include the Civil Code, which provides that nationalization can only take place in event of adoption of a special law on nationalization with payment to an investor of compensation in full amount of losses suffered by the investor as a result of nationalization. Losses would generally be measured by (i) the amount of expenditures that the investor had to make or should make; (ii) the value of assets that have been lost or damaged (real loss); and (iii) the lost profit which the investor would be likely to receive under the normal conditions of operation in absence of nationalization. Requisition of property can take place only in event of a natural disaster, accident, epidemic or other circumstances of an extraordinary nature, in which case the property of an investor can be confiscated on the basis of a state agency’s decision with payment to the investor of the market value of the property. When describing the procedure to determine the market value of the property subject to requisition, the new Law again refers the reader to other laws of Kazakhstan. In accordance with the law ‘On Appraisal Activity at the Republic of Kazakhstan’, the market value of a property would be the most probable price of the property in a competitive transaction wherein the parties act, without any coercion, on the basis of all available information about the property. The investor may reclaim the confiscated property upon termination of the circumstances that caused the requisition. In this case, the investor will be required to return the amount of compensation, subject to adjustment reflecting depreciation of the property. Provision of the new Law on requisition is similar to one contained in the laws ‘On Subsoil and Use of Subsoil’ and ‘On Petroleum’. The latter also provides that requisition of oil from oil producers shall be made on a pro-rata basis regardless of the form of their ownership. Thus, the new Law provides for nationalization and requisition that can occur with observance of major international law standards – for a public purpose; in a non-discriminatory manner; under due process of law; and upon payment of adequate compensation. In addition to these, the BITs also include the requirements of prompt and effective payment of compensation, which are not found in the new Law.
Repatriation of investment and returns The Law guarantees to investors the unrestricted use of investment profit, on an after-tax basis, in accordance with the laws of
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Background to the Market
Kazakhstan. Pursuant to the Civil Code, the investors are entitled to receive profit in the form of dividends and capital gains, as well as profit made under a contract, interest payments on a loan, and proceeds from the liquidation or sale of all or part of an investment. Under the law ‘On Monetary Regulations’, distribution by a Kazakh company of profit to a foreign investor, as well as most payments made under a contract, constitute a ‘current monetary transaction’ and are carried out without restriction. The laws do not apply any currency exchange restrictions on transactions involving non-residents. Direct and portfolio foreign investments exceeding the equivalent of US $100,000, as well as loans extended by a foreign lender to a Kazakhstani borrower with the term over 120 days and the principal amount exceeding the equivalent of US $100,000, are considered to be ‘monetary transactions associated with movement of capital’ and are subject to registration with the National Bank for monetary control purposes. The BITs and the Energy Charter Treaty generally guarantee to foreign investors the unrestricted transfer of funds in a freely usable currency; such transfers include profit, dividend, interest, capital gain, royalty payment, management fee, technical assistance or other fee, returns in kind, payments made in compensation for expropriation, payments arising out of an investment dispute, payments made under a contract, including the amortization of principal and interest payment on a loan, and proceeds from the liquidation or sale of all or part of an investment. The treaties, however, permit the Republic of Kazakhstan to maintain certain laws that could affect transfers with respect to investments. They provide that Kazakhstan may require reports of currency transfers and may impose income taxes by such means as a withholding tax on dividends. They also recognize that Kazakhstan may protect the rights of creditors to ensure the satisfaction of judgments in adjudicatory proceedings through the laws, even if such measures interfere with transfers. Such laws must be applied in an equitable, non-discriminatory and good-faith manner. Considering the two paragraphs above, one might conclude that the new Law, in combination with other laws of Kazakhstan, is basically in line with the international standards established by the treaties.
Dispute resolution It is apparent from the new Law that the Kazakh Government is more cautious now when it comes to subjecting the state to international arbitration. If the 1994 Law contained the presumption of the Government’s affirmative consent to arbitrate any dispute associated with foreign investments, and required only the corresponding consent from the foreign investor’s side, the new Law requires the affirmative consent from both the investor and the Government.
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Unfortunately, many provisions of the new Law are vague, and can be interpreted in different ways. This is particularly true for the provisions of Article 9 involving resolution of investment and noninvestment disputes. Given the ambiguity and lack of a clear mechanism for access to arbitration, foreign investors should rely upon the relevant treaty. Most of the BITs and the Energy Charter Treaty set forth several means by which disputes between a foreign investor and the Republic of Kazakhstan may be settled, including arbitration by the International Centre for the Settlement of Investment Disputes (ICSID), an ad hoc arbitration using the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). Moreover, the definition of an ‘investment dispute’ under the treaties is broader than in the new Law and, in addition to disputes arising out of an agreement between the investor and a state agency, includes disputes arising out of an investment authorization (eg issuance of state registration and a licence for certain activities) and rights granted by the treaties with respect to an investment. Also, treaties often contain the consent of Kazakhstan to submission of investment disputes to binding arbitration in accordance with the choice of the investor. Therefore, on the basis of applicable treaties, foreign investors can continue to enjoy the freedom of selecting a forum for settlement of investment disputes. Foreign court judgments and arbitration awards are subject to recognition and enforcement in Kazakhstan within three years from the date of the judgment or award, if there is a treaty in place providing for such recognition and enforcement on a reciprocal basis. Kazakhstan is party to the 1958 New York Convention providing for recognition and enforcement of an award rendered by an international arbitration that has taken place in a country that is a party to the Convention.
Investment into priority sectors of the economy The new Law stimulates investments into so-called priority sectors of the economy, which are established by the Government. These, however, do not include upstream subsoil operations and financial (banking and insurance) services, together comprising about 85 per cent of all investments in the country. Benefits available to foreign and domestic investors carrying out a project in the priority sectors of the economy, on the basis of an investment contract, include investment tax preferences granted up to
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Background to the Market
five years in respect of corporate income tax, and land and property taxes; exemption from import customs duties for imported equipment and accessories essential to the implementation of the project; and in-kind state grants.
1.4
The Banking System and Capital Markets HSBC Bank Kazakhstan
Introduction After the disbanding of the Soviet mono-banking system that existed in Kazakhstan before independence, a new system comprising the National Bank (the central bank) and five large state banks was introduced. In the dislocation that accompanied the break-up of the Soviet Union, more than 200 new banks were licensed between 1991 and 1993. Most of these were initially owned by state enterprises, but with the privatization of these enterprises, the banks were also privatized. Since April 1993, Kazakhstan’s banking system has been formally arranged as a two-tier system, with the National Bank of Kazakhstan (NBK) as its first tier. All other commercial banks are by definition second-tier banks.
Banking regulations The banking industry in Kazakhstan is regulated by the Law on the National Bank and by the Law on Banks and Banking Activity, which were adopted in 1993. In 1996 the NBK imposed new banking regulations that were designed to stabilize the banking sector and provide favourable conditions for the development of the financial market as a whole. To achieve this, the authorities introduced strict capital adequacy and liquidity norms. Consequently, more than 80 per cent of the 200 banks operating in 1995 have been closed or have merged with other banks. Further consolidation was expected, and this may finally result in less than 30 banks being in business by the end of 2004. The strict division between commercial and investment banks was eased in 1997. The most significant restrictions imposed by the banking regulations concern:
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Background to the Market
• an upper limit on foreign banking capital (the aggregate registered charter fund of banks with foreign participation may not exceed 50 per cent of the aggregate registered charter fund of all banks in Kazakhstan); • the origin of foreign investment in banking capital (a moneylaundering issue); • qualification requirements for top executives in commercial banks and financial institutions; • the standard BIS (Bank for International Settlements) prudential regulations; • limitations on investing in non-banking institutions; • securities trading. The NBK has introduced new capital adequacy requirements according to the BIS standards of 8–12 per cent risk-adjusted limits with a minimum capital of 2 billion tenge (US $13.6 million). In addition to capital adequacy, banks are required to maintain certain standards regarding asset quality, liquidity ratios, portfolio diversification, management qualification, risk management, accounting standards and protection of information. All banking activities, including accepting of deposits, maintenance of correspondent accounts, cash operations, money transfers, foreign currency operations and lending, are subject to licensing. Only the NBK has the right to grant licences for banking activity. In December 1999 the NBK established the Kazakhstan personal deposits insurance fund (KDIF), with 16 banks becoming members of the scheme. In 2003 the number of banks who were members of KDIF had risen to 21.
Local payments Retail and gross payments between banks in Kazakhstan are channelled through Interbank Payment Centre (IPC), an electronic network linking all second-tier banks. This network accounts for most of the daily interbank transfers. While IPC is a separate legal entity, it is supervised and controlled by the NBK. There is no cheque-clearing system in Kazakhstan. Cheque books issued by commercial banks are used by corporate customers only for cash withdrawal. For international transfers Kazakhstan’s banks use SWIFT (Society for Worldwide Interbank Financial Transmission) and their network of correspondent accounts.
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Capital markets Kazakhstan’s securities markets started to develop in 1991, using the old Soviet legislation. The Laws ‘On Securities Circulation and Stock Exchange in Kazakh SSR’ and ‘On Partnerships and Joint Stock Companies’ became effective on 1 October 1991. In accordance with the Law on Securities, the Ministry of Finance was the main regulator in this sector. Several different exchanges were created in the early 1990s. Three of them were still in existence by the end of 1996, namely Central Asian Securities Exchange, Kazakhstan Interbank Currency Exchange and International Kazakhstan Securities Exchange. The National Securities Commission (NSC) was established as the new regulator in 1994, in accordance with the president’s decree ‘On Measures for Creating the Capital Markets in Kazakhstan’. In July 2001 NSC ceased to exist in accordance with the President’s decree ‘On Measures to Organise the United System of Financial Market’s State Regulation’. The NBK became the sole regulator in the financial market. The new laws ‘On Joint-Stock Companies’, ‘On the Securities Market’ and ‘On State Regulation and Supervision of the Financial Market and the Financial Organisations’ were approved in 2003. This new legislation should support the growth of the capital markets with the tightening of the control in the financial markets under the separate Agency in 2004. The Agency stipulates the rules and the requirements for all market participants, including the issue and circulation of securities in the market. It also refers to the derivative market. Turnover in the Kazakhstan Stock Exchange grew by 2,278 billion tenge to 3,791 billion tenge (or by 150 per cent) in 2002. The majority of the turnover is from Repo transactions (74 per cent), while securities turnover, including Treasury, was 393.6 billion tenge, or 10.4 per cent. As of 1 January 2003, there were five companies and eight banks whose shares were ‘A’ listed in KASE, and 11 companies and one bank whose shares were ‘B’ listed. At the same date the market capitalization of listed companies was 209 billion tenge or US $1,341 million.
The NBK and the new regulatory organization According to the law, the NBK bears the entire responsibility for the operation of the monetary system, and represents Kazakhstan’s interest in its relations with central banks and the financial institutions of foreign countries. The NBK is a state-owned bank and an independent legal entity, capitalized at 20 billion tenge. The NBK regulates banking activity in Kazakhstan, issues licences for banking operations
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Background to the Market
and prudential requirements which are binding on all second-tier banks. In April 1999, the NBK and the Government adopted a free-floating exchange rate regime as the policy most likely to enhance foreign trade and protect its official reserves. The NBK will continue to follow a strict monetary policy aiming for low inflation and currency stability. Marginal monetary aggregates will be used as the main control tool. In July 2003 the Parliament approved the Law ‘On State Regulation and Supervision of the Financial Market and the Financial Organisations’. According to this law an independent authorized organization will take over the NBK responsibilities on banking supervision with effect from 1 January 2004. The new regulator will be an equivalent of the FSA in the UK.
Banks As of 1 May 2003,1 there are 36 banks operating in Kazakhstan, of which two banks are 100 per cent Government-owned (Exim Bank Kazakhstan and Development Bank of Kazakhstan) and 16 have foreign participation, including nine foreign bank subsidiaries. Total assets of the banking sector grew to 1,263.5 billion tenge (US $8.3 billion2), or a five-times increase in comparison to the June 1999 figure. At the same time, first tier capital grew to 132.7 billion tenge (US $874 million) and total own capital grew to 174.5 billion tenge (US $1.15 billion). Capital adequacy ratios stood at 0.10 (k1) and 0.17 (k2). The total banking assets to GDP ratio grew in 2002 from 25.1 per cent to 30.9 per cent, while the loans to GDP ratio grew from 15.9 per cent to 19 per cent and the deposits to GDP ratio grew from 15 per cent to 17.8 per cent. Among local banks, three dominate: Halyk Bank of Kazakhstan (Halyk), Kazkommertsbank (KKB) and BankTuranAlem (BTA). As at 1 May 2003, these represented about 63 per cent of all banking assets and about 71 per cent of individuals’ personal deposits in the country. Kazkommertsbank (KKB) is the largest in terms of assets and the leading private commercial bank in Kazakhstan. KKB has entered the list of top 1,000 banks published by The Banker in July 2003. The rankings are based on ‘Tier One capital’ as defined by BIS. This includes common stock, disclosed reserves and retained earnings. KKB was also named by Global Finance as the Best Bank in Kazakhstan in 2003. In 2003 EBRD purchased a 15 per cent stake of KKB. In April 2003 KKB placed into circulation US $500 million ten-year Eurobonds 1 2
All the statistics provided are as per 1 May 2003. US dollar/Kazakhstan tenge rate was 151.76 as per KASE average on 30 April 2003.
The Banking System and Capital Markets
27
in addition to their previous April 2002 US $150 million five-year Eurobonds in circulation. BankTuranAlem (BTA) was formed in order to reorganize and restructure the business operations of Turanbank (industrial construction) and Alem Bank (attraction of foreign investment under government guarantees). The bank is among the largest in Kazakhstan in retail banking operations. In 2003 BTA issued US $225 million seven-year Eurobonds and borrowed another US $245 million through syndicated loans. Halyk Bank of Kazakhstan (Halyk) is the successor to Sberbank (Saving Bank) of the Soviet Union. Halyk is the third largest bank in Kazakhstan measured in terms of assets. In 2003 Halyk borrowed US $150 million through syndicated loans.
The banking system and foreign capital Foreign banks in Kazakhstan may operate representative offices, subsidiaries and joint ventures. Banks with foreign participation are defined as banks in which a third or more of the shares are owned or managed by a non-resident entity. A foreign bank must maintain a representative office in Kazakhstan for one year before being entitled to open an operating subsidiary. The total charter capital of banks with foreign participation work under a 50 per cent ceiling rule, but this is not a burden, as banks with foreign participation capital represent just above 20 per cent of the charter capital of the whole banking sector. There are also some differences in regulations for local banks and for banks with foreign participation. The liberalization of Kazakhstan’s economy has resulted in an increase in the number of foreign banks. As at 1 May 2003, there were 16 banks with foreign participation, of which nine were subsidiaries of foreign banks. At the time of writing, three international banks offer banking services in Kazakhstan. ABN AMRO Bank Kazakhstan, in which the ABN AMRO Group holds 80 per cent, has operated since 1994. Citibank Kazakhstan, which is a wholly-owned subsidiary, was established in 1998. In early 1999 HSBC established a wholly-owned subsidiary in Almaty, HSBC Bank Kazakhstan.
1.5
Investment Funds and Venture Capital Andromeda Financial Services
The capital markets within Kazakhstan are still at an early stage of development, although significant strides have been made since independence. One of the key limiting factors in the growth of capital markets in Kazakhstan is that developed capital markets operate on the basis of anonymity – buyers and sellers rarely meet. Yet the Kazakh business culture that depends on close personal relationships between business partners militates against the quick development of capital markets. The investment fund and venture capital market in Kazakhstan is a good example of a capital market that, therefore, is only just developing.
Sources of financing In Kazakhstan foreign direct investment (FDI), internal resources, and bank loans are the most important sources of capital investment. Kazakhstan has received US $21.2 billion of gross FDI from 1993–2002, most of which has gone into the natural resources sector. Of the total, US $6.6 billion was invested by US companies, making the United States the largest source of FDI for Kazakhstan. Although precise statistics are not available, only a small portion of FDI has come from foreign venture capital – most has been the investment of international companies into their subsidiaries and joint ventures. The personal resources of successful businessmen and the free cash flow of Kazakhstan’s companies function as another key source of internal investment. These resources are often preferred for internal investment because all control and information stay within the trusted ownership group of a company. This group often contains members who are related to each other or have been close friends for many years. Finally, the market for bank financing has greatly expanded in Kazakhstan within the last few years. Banks have begun to make
Investment Funds and Venture Capital
29
loans for many purposes, including the purchase of personal real estate or cars, and for commercial investments. But the interest rates for commercial loans are extraordinarily high, running from 12–30 per cent annually with terms often limited to two years. Moreover, the loans require repayment of equivalent US dollar amounts, so the borrower is also bearing a significant exchange rate risk. Thus, while banks provide an important source of financing, interest rates are still high, the amounts are limited, the terms are short, and the borrower bears the exchange rate risk. Finally, many potential borrowers fear the loss of control that could result from significant borrowing from a bank that they may not trust.
Trends in venture capital Now that we have surveyed the alternative forms of financing, let us turn to the investment fund and venture capital sector in Kazakhstan. Investment funds, with a few notable exceptions, do not yet play a significant role in Kazakhstan’s capital markets. Several factors hinder the development of the venture capital market. First, the desire to maintain insider control of a company diminishes the possibilities for any outsiders to invest in that company. Because the market for senior management is illiquid, owners and senior managers are reluctant to allow any outside control for fear of losing the profits and perquisites of the only (as they fear) enterprise that they will ever control. Moreover, company management is often reluctant to disclose ownership structure, debt loads, sales volumes, and other critical information, so transparency is a serious issue for a potential strategic investor. (However, companies are becoming more transparent in their financial affairs, so this is becoming less of a problem.) The lack of understanding between an investor who insists on certain disclosures and control mechanisms, and the local partner who desires to maintain secrecy and build a relationship based on trust alone, is also a major stumbling block, although again local companies are becoming more aware of international norms in disclosure and control. The relatively illiquid stock exchange makes it more difficult for strategic investors to exit their investment. In particular, this makes it difficult for a company to raise capital via an initial public offering. Finally, a large and increasing problem facing Kazakhstan’s nascent investment market is overleverage – many companies have taken large debt loads that they may not be able to support in worse economic times. Thus, a number of factors limit the development of venture capital funds in Kazakhstan. Yet several significant trends in the economy are positive factors indicating that the venture capital market may develop in the future.
30
Background to the Market
First, the volume on the Kazakhstan Stock Exchange (KASE) has been increasing – the expected trading in non-government securities (both equity and debt) for 2003 is 280 per cent higher than the actual for 2001, and is expected to total US $883 million for 2003. Although some of these transactions are still privately arranged deals that are merely recorded on the exchange, the increasing volume does show that capital markets are playing a greater role in Kazakhstan’s economy. Another key factor favouring the increase in venture capital in the near future is that these funds provide access to know-how and international best practices. Since these items are critically needed by Kazakh firms – perhaps more critically needed than financing – venture capital can expect to play a larger role in the future development of the economy. Firms that invest in the non-financial capital of know-how and training will tend to dominate their markets, and this non-financial capital is most easily provided by a strategic investor.
Active investment funds One of the most active investors in Kazakhstan is a multilateral agency, the European Bank for Reconstruction and Development (EBRD). The EBRD’s strategic priorities are to promote infrastructure development, economic diversification through support of small- and medium-size enterprises, and local lending through increasing the capital base of the financial sector. As of 31 December 2002, the EBRD had invested, loaned, or given loan guarantees for a total of 818 million euros in Kazakhstan (although only 43 million euros of this is in the form of equity investments). A number of these investments have been focused on the banking sector, such as providing support for warehouse receipt programmes, leasing brokers, small business loan programmes, and other trade financing programmes. The EBRD has also made significant loans for the development of infrastructure and utilities, including the Aqtau port reconstruction, the national power grid, the national rail track system, airports, telecommunications, potable water, waste disposal, and others. Finally, the EBRD has been a key player in the development of two active investment funds, the Eagle Kazakhstan Fund and the American International Group’s Silk Road Fund. The Eagle Kazakhstan Fund (formerly known as the PostPrivatization Fund) was founded in 1996 to support the development of newly privatized companies. Eagle Venture Partners manages this fund as well as three similar ones in Russia. The EBRD provided 24.2 million euros of the fund’s total capitalization of 30.8 million euros. Its investments have ranged in size from US $700,000 to US $6.5 million. The other shareholders are the Belgian investment fund GIMV, the Dutch financial group Rabobank, the Russo-Dutch investment
Investment Funds and Venture Capital
31
advisors EWIC/Larive, and the French investment advisory firm Sigefi. The fund is limited to owning 55 per cent of the equity of any company. The fund has invested US $29.1 million (or 90 per cent of its capitalization) by taking equity stakes in nine companies, mainly in the food and beverages sectors as well as in paint, pharmaceuticals, and telecommunications. The fund seeks to exit its investments within 4–6 years of the initial investment. It has invested in several of Kazakhstan’s companies that are successful in their sectors, including FoodMaster (dairy and juices), the Ust’-Kamenogorsk Poultry Factory, Ducat (telecommunication), and Ak-Nar (Derbes beer). Its investees have developed significant brands and market shares in the Kazakh market. The second active fund is the Silk Road Fund, an equity investment fund with a capitalization of US $70 million that is owned by the American International Group. The fund was established to invest throughout the five Central Asian republics and Azerbaijan. It typically invests US $3–10 million in a company and seeks to take a minority stake of 20–49 per cent and focuses on the extractive industries. Its goal is to exit within 2–5 years after investment and maintain an active involvement in the companies in which it invests. The International Finance Corporation is a second multilateral agency that has been active in assisting the development of the private sector in Kazakhstan. As of April 2003, it had invested US $400 million in Kazakh companies, primarily in the form of loans and credit lines, and coordinated the syndication of another US $270 million of loans. It has provided loans and credit lines to major local and international banks (Kazkommertsbank (KKB), Turan-Alem, Eximbank, Neftebank, ABN-AMRO, and Citibank). It has provided loans and/or purchased equity in three oil and gas fields (LUKoil’s share of Karachaganak, FIOC’s Sazankurak, and Kazgermunay’s Akshabulak). Finally, a major focus has been to assist the success of the privatization of the giant Karaganda Metallurgical Combine in Temirtau, which was purchased by LNM Group’s Ispat company, with loans and equity investments to upgrade the facilities and to allow it to produce more value-added steel products. Ispat Karmet, as it is now known, has become a successful exporter to over 75 countries. A number of IFC’s clients in Kazakhstan are key players in the market. Another fund beginning its activities in Kazakhstan is the Central Asian Small Enterprise Fund (CASEF), which is sponsored by the Small Enterprise Assistance Funds (SEAF), the IFC, the Swiss Secretariat for Economic Affairs, and USAID. Although the fund is based in Tashkent, Uzbekistan, it has an Almaty office. SEAF, which was developed by CARE, manages ten other funds throughout the world with US $150 million under management. CASEF has funding
32
Background to the Market
of US $8.6 million and invests in projects ranging from US $150,000 to US $800,000 throughout Central Asia. Andromeda Financial Services, a new boutique investment bank founded by US partners with extensive experience in Kazakhstan, specializes in investment advice services both to local clients and to foreign investors entering Kazakhstan. Andromeda focuses on medium-size investments in the oil and gas support sector and the consumer services sector. Moreover, in July 2003, KKB opened an investment banking unit. Finally, the Bridge Fund and the Visor Investment Solutions LLP are Kazakhstan-managed firms providing investment banking services. The Central Asian American Enterprise Fund, formerly based in Tashkent, was an investment fund that was capitalized at US $150 million in 1994 by the US Government. It was intended to encourage the development of new private companies throughout Central Asia, and it made a number of investments, but collapsed amid an embezzlement scandal that resulted in the conviction of two US citizens in 2002. Several quasi-governmental organizations are also involved in the investment sector. The first is the Kazakhstan Investment Promotion Centre (or Kazinvest), which, as its name indicates, seeks to promote investment in Kazakhstan. Its primary focus is to assist the Government in realizing its import substitution policy, especially in the non-oil and gas sectors. Kazinvest assists local companies in developing investment proposals and attracting foreign investors, and brings delegations of foreign investors to Kazakhstan. The second quasi-governmental organization is the Kazakhstan Development Bank, a government-capitalized bank, which was founded in 2001. Although this bank was capitalized by the Government and its founders are the Ministry of Finance and the cities of Almaty and Astana, its obligations are not guaranteed by the state – its debt carries a Baa3 rating from Moody’s. Its goals are to make medium-term loans (5–10 years) and long-term loans (over 10 years) to investment projects, to facilitate export financing, and to make investments in state investment projects. The bank is allowed to invest in a broad range of sectors with a minimum investment of US $5 million in any one company. The bulk of the bank’s investments have been in agriculture. Such investments made up 54 per cent of its loan portfolio at the end of 2002. Only 20 per cent of its assets were invested as loans to Kazakh enterprises at this time. Most of the remainder were invested in marketable securities (blue-chip Kazakh stocks, Kazakh Government and corporate bonds, and repos). During 2003 the Government has begun implementing its Programme for Industrial Innovation and Development, part of its effort to develop the economy and to diversify away from petroleum
Investment Funds and Venture Capital
33
and minerals exports. As a part of this programme, the Government established two investment funds, the Industry and Investment Fund and the Innovation Fund. In August 2003, the National Fund, a government fund intended to stabilize the economy against commodity price shocks, invested about US $20 million in the Innovation Fund. The Innovation Fund’s mission is to serve as a venture capital investor and to bring new technologies and services to completion. The Industry and Investment Fund will invest in a portfolio of companies that produce high-value added products. These funds are part of a major effort by the Government of Kazakhstan to reduce its vulnerability to price swings in commodities and to produce value-added goods instead of merely exporting natural resources.
Conclusion Although the venture capital markets in Kazakhstan are still in their formative stages, they have the potential to play an increasing role in the future. The few determined investment funds that have taken significant equity or debt stakes in companies in Kazakhstan have played a key role in the development of these companies. A number of these companies control significant market shares or have high-profile brand names. The booming oil and gas sector will only make it easier for investment funds to enter Kazakhstan and to invest profitably in a number of sectors of the economy. Because many local companies need international know-how and access to best practices – non-financial investments that are more easily provided by international investors – companies in which venture capitalists invest are likely to continue to show outstanding results. The possibilities for strategic investors in Kazakhstan are only beginning to be realized.
1.6
EBRD and Kazakhstan: The Second Decade Dan Berg, EBRD
The EBRD and modern Kazakhstan are about the same age, formed in the early 1990s and into the exciting changes that took place in Central and Eastern Europe and the former Soviet Union. This chapter provides a short summary of transition in Kazakhstan in those years and assesses its possible future courses. Two key sources for this chapter are the EBRD’s Transition Report (a bi-annual report on progress towards transition prepared by the EBRD’s Office of the Chief Economist) on each of its 27 countries of operation and the Business Environment and Enterprise Performance Survey (the BEEPS, prepared jointly by the EBRD and World Bank in 1999 and 2002). More information on the EBRD, the Transition Report and the BEEPS can be found also at the Bank’s Web site, www.ebrd.com.
Kazakhstan’s investment climate on the eve of the oil boom Transition in the region began 12 years ago when Kazakhstan became independent for the first time in its history. A rough birth meant having to grapple not just with a plethora of market reforms. Unlike Central Europe, and to some degree Russia, Kazakhstan and most other CIS countries faced the challenge of building a state from scratch. Over the last 12 years great progress has been achieved. One can note roughly three development phases: • 1991 to 1994 – slow reforms took place, as Kazakhstan concentrated on internal consolidation after the demise of the Soviet Union. • 1995 to 1998 – macro-stabilization was achieved, privatization was kick-started and many important steps were taken in legal reforms and institution building.
EBRD and Kazakhstan: The Second Decade
35
• 1999 to the present – following the Russia crisis, this has been a period of more gradual transition. Important steps were taken in the financial sector, including pension reform, and new tax, customs and labour codes were passed. However, early reform efforts in privatization and infrastructure reforms were slower, and attraction of FDI other than to oil and gas was less strong. On the other hand, in this latter period, Kazakhstan began to benefit from its vast natural wealth. The large oil discoveries in the Caspian Sea can provide a major push to economic development as oil production is expected to triple over the next 15 years, bringing with it huge inflows of foreign currency. However, such wealth also creates enormous challenges for public revenue and expenditure management and economic diversification.
Reform achievements and challenges in comparative perspective In a comparative analysis, Kazakhstan today is one of the most advanced reformers in the CIS. The EBRD’s Transition Indicators (see Table 1.6.1) show that in the financial sector Kazakhstan is a regional leader, and is also far advanced in privatization and liberalization. Kazakhstan also has made important strides in energy sector reforms. However, progress has been slower in transport and telecoms. Reform of infrastructure, together with improvements in corporate governance and in the investment climate, are key challenges that remain. Mostly due to its resource base, Kazakhstan has attracted significant inflows of foreign direct investment (FDI), the highest per capita in the CIS and among the highest in the region in terms of GDP. However, investment is not diversified, with over two-thirds going into oil and gas or other natural resources. The concentration has, if anything, worsened in recent years as privatization slowed and greenfield investment is rare. Kazakhstan could attract investment in high growth areas such as food processing, retail trade, transport, telecoms, real estate and the oil services sector. However, investors still shy away from this dynamic economy because investment concerns – oversecurity of contracts, tax and administrative harassment and significant conflicts of interest in the government administration – outweigh upside potential. Besides the Bank’s Transition Indicators, the EBRD and the World Bank have also surveyed businessmen in Kazakhstan and 25 other transition economies to assess the quality of the investment climate (summary results of the 2002 BEEPS are provided in Figures 1.6.1
2.40
2.71
2.78
3.59
2.96
Central Asia
CIS excluding Central Asia
Southeast Europe
Central and Eastern Europe and the Baltic States
Average for the region
3.75
4.33
3.55
3.47
3.33
4.00
Small-scale privatization
2.29
3.07
2.05
1.95
1.66
2.00
2.96
3.11
3.06
2.95
2.60
3.00
3.70
4.33
3.83
3.52
2.66
3.33
Governance Trade and & enterprise Price foreign restructuring liberalization exchange system
2.17
2.78
1.72
2.09
1.73
2.00
Competition policy
Markets and trade
2.68
3.51
2.66
2.19
1.86
2.66
Banking reform and interest-rate liberalization
2.23
3.03
1.83
1.95
1.67
2.33
Securities markets and non-bank financial institutions
Financial institutions
2.34
3.07
2.33
2.04
1.46
2.00
Infrastructure reform
Infrastucture
Note: The accuracy of EBRD estimates is constrained by data limitations, particularly in the area of informal activity. EBRD estimates may, in some cases, differ markedly from official data. This is usually due to differences in the definition of ‘private sector’ or ‘non-state sector’. For example, in the CIS, ‘non-state sector’ includes collective farms, as well as companies in which only a minority stake has been privatized.
Note: The private sector share of GDP is calculated using available statistics from both official (government) and unofficial sources. The share includes income generated from the formal activities of registered private companies, as well as informal activities where reliable information is available. The term ‘private company’ refers to all enterprises in which private individuals or entities own the majority of shares.
3.00
Kazakhstan
Large-scale privatization
Enterprises
Table 1.6.1 Progress in transition in central and eastern Europe and the CIS
EBRD and Kazakhstan: The Second Decade
37
and 1.6.2. They also assess the size of the so-called ‘bribe tax’.). In Kazakhstan 250 firms were sampled in 1999 and 2002. The results show that overall the investment climate has improved significantly over the last three years, as it did in most other countries of the region. However, regulation and corruption continue to be frequently cited obstacles to doing business in Kazakhstan. Compared across countries, Kazakhstan receives relatively high scores on most aspects of its business climate. But perceived corruption, although somewhat better than in other states in the immediate vicinity, was still high. Table 1.6.2 Foreign direct investment (FDI) (net inflows recorded in the balance of payments) Cumulative FDI-inflows 1989–02
Cumulative FDI-inflows per capita 1989–02 (in mln US$) (US$)
FDI-inflows per capita 2001
FDI-inflows 2001 2002
(US$)
(US$)
2002
(percentage of GDP)
Eastern Europe and Baltic States
119,846
1,767
239
358
5.1
6.1
South-eastern Europe
17,739
356
79
54
4.9
3.1
Kazakhstan
13,568
938
188
148
12.6
8.8
all CIS
37,434
239
30
37
4
4
Sources: IMF, central banks and EBRD estimates. Note: For those countries (eg Azerbaijan, Estonia, Kazakhstan and Slovak Republic) where net investment into equity capital was not easily available, more recent data include reinvested earnings. Note: For most countries, figures cover only investment in equity capital and in some cases contributions-in-kind.
Reform challenges At this stage, Kazakhstan cannot afford to relax in its reform efforts if it is to catch up with the front-runners in Eastern Europe and realize its domestic expectations. The income gap relative to the average EU accession economies is still 50 per cent in terms of purchasing power parity. With the right policies and with oil development moving ahead the time frame for this could be narrowed to one generation. Such a transition requires two main advances. One is progress in economic
38
Background to the Market (%) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Kazakhstan
Russia 1999
CEE 2002
Figure 1.6.1 Measuring administrative corruption
diversification. This requires further opening the domestic market to trade and investment and reducing business obstacles, particularly those related to corruption and public governance. Kazakhstan needs both more FDI and more small and medium-sized enterprises to make its domestic market competitive and allow it to compete globally in non-resource based products. In addition further reforms of state-owned companies are required to reduce potential conflicts of interest. This is true for example with KazMunayGas (KMG) and Kazakhtelecom (KTC). As KMG’s operations range from upstream oil and gas exploration to downstream oil refining/gas processing, there are concerns over non-arm’s length transactions among its subsidiaries. Moreover, as KMG controls one of the main pipelines for oil exports, there are uncertainties over KMG’s role in the pipeline access issue, a main concern for independent oil exploration companies when the existing export capacity reaches its limit after 2006. In the telecommunications sector, alternative operators are concerned about KTC’s ability to control access to numbering and interconnection. The latter is important because significant investments in transport and telecoms are required to overcome Kazakhstan’s geographical isolation. WTO membership could help improve access to world markets.
EBRD and Kazakhstan: The Second Decade
39
EBRD and Kazakhstan – growing together The EBRD strives to provide financing and targeted technical and policy advice in key areas to promote transition in each of the countries in the region. In Kazakhstan, as a founding member of the Foreign Investors’ Council (FIC), the Bank provides policy guidance. The Government’s commitment to the FIC demonstrates its willingness to listen to its partners’ concerns. The Bank also provides targeted technical assistance, for example, in the areas of tariff reform and infrastructure. Most important is the Bank’s ability to work with domestic and international investors. The Bank has committed EUR 900 million to Kazakh projects. As one might expect from the discussion above, a large share of the Bank’s business has been linked to the banking sector. Most exciting perhaps has been the Kazakh Small Business Programme, which in five years has helped provide more than US $250 million in loans for micro- and small businesses, thus helping to diversify the economy. After banking, the EBRD has targeted infrastructure – roads, railroads, ports, airports, telecommunications – the backbone of the economy. Finally, the Bank is seeking to work with progressive manufacturers (perhaps best typified by companies such as Ispat Karmet). As Kazakhstan benefits from its natural resource wealth, EBRD will seek greater opportunities to work in some of the high-growth sectors mentioned above. The Bank will strive to finance local and foreign investors in key manufacturing sectors, even if individual Financing 4
Corruption
3
Infrastructure
2 1 0 Worst case Rule of Law
Tax Kazakhstan Russia
Judiciary
Regulations
Figure 1.6.2 Obstacles to business, 2002
CEE
40
Background to the Market
projects are small, time consuming and often complicated. The Kazakh Government recently adopted an Industrial Policy that highlights some of the same areas for attention and the Government rightly expects to devote some of its natural resource wealth to these issues. In these areas, the EBRD and Kazakhstan expect to cooperate very closely as we both grow through our second decade.
1.7
Kazakhstan’s Foreign Investment Climate American Chamber of Commerce in Kazakhstan
Reforms and progress Kazakhstan has made considerable progress towards the establishment of a market economy and an attractive climate for foreign investment since independence in 1991. Immense reserves in the natural and mineral resources sector and incentives for investors in priority sectors opened the door for over US $21 billion of foreign direct investment (FDI), primarily in oil and mineral resources, into Kazakhstan’s economy to date through early 2003. The Government of Kazakhstan has adopted several programme documents important to their relations with foreign investors. In May 2003, President Nazarbayev signed two state programmes to determine the country’s development trends through 2015. The strategy for industrial innovation development has as its major task the diversification of the economy through the development of market economy principles. Kazakhstan hopes to abide by all EU standards by 2015. The Chairman of the National Bank believes that Kazakhstan’s financial sector will fully comply by 2007. Capital inflows and commodity exports have allowed the National Bank to accumulate foreign exchange reserves and lower interest rates as inflation continues to be kept under control (6 per cent in 2002, projected to be in the 5–7 per cent range for 2003.). In 2000, the European Union recognized Kazakhstan’s economic reforms, and in 2002 the US Department of Commerce granted Kazakhstan market economy status. Over the past 11 years, and aggressively for the past four, the Government of Kazakhstan has implemented liberal and extensive economic reforms and embarked upon large-scale programmes for privatization. However, for the past three years, increasing tendencies on the part of the Government have included challenging investor contracts, legislating
42
Background to the Market
protections and preferences to local companies and operators and overly legislating procurement activities and infrastructure privatizations. Ambiguous legislation and inconsistent policy implementations have resulted in a widespread belief that Kazakhstan is not as open to foreign investment as it was in the ‘early days’ of 1992–98. Despite these concerns, investment dollars dropped only from 2001–02. Table 1.7.1 Annual gross foreign direct investment (FDI) (in US $ millions) by country of origin Country United States UK Canada Italy Switzerland China Russia Netherlands Turkey South Korea Other countries Total
2001
2002
1,460.3 600.6 490.5 488.3 360.1 211.9 211.6 211.1 58.9 67.9 383.4 4,544.6
1,007.2 622.1 164.1 469.0 521.3 64.7 214.7 401.5 64.4 44.6 499.9 4,073.5
National Bank of Kazakhstan statistics
Legislation Foreign investors in Kazakhstan are impacted by five major pieces of legislation: The Law on Investments, 2003; The Law on Government Procurement, 1997; The Tax Code, 2001; The Customs Code, 2003; and Rules on Employing Foreign Labour, 2003. These five laws are intended to provide for currency convertibility, guarantees for legislative stability, a system of transparent government procurement, a transparent process for hiring expatriate professional workers and incentives for investments in priority sectors, including infrastructure, health and tourism (underdeveloped in Kazakhstan). Inconsistent implementation of these and other key laws remains a primary obstacle to doing business and a barrier to future investments.
The Law on Investments In January 2003 President Nazarbayev signed a new Law, ‘On Investments’ (the Law). This new Law disposes of the previous laws,
Kazakhstan’s Foreign Investment Climate
43
‘On Foreign Investment’, 27 December 1994, and ‘On State Support of Direct Investment’, 28 February 1997, formerly governing foreign investment. The Law seeks to establish a single investment regime for both domestic and foreign investors. The Law provides for dispute settlement through negotiation, Kazakhstan’s judicial system, and international arbitration, but narrows the definition of investment disputes and lacks clear mechanisms for access to international arbitration. Kazakhstan’s Constitution, as well as the Law on Investments, specifies that international agreements have precedence over domestic law. The Law includes investment incentives preferring governmentdetermined priority activities providing for investment tax preferences, customs duties exemptions, and in-kind grants exclusively to Kazakhstani legal entities. Under the Law, the Government may rescind these incentives and collect back payments on duties (with fines) if the investor fails to fulfil contractual obligations. Because the application process calls for a business plan, which can be largely based on speculation, virtually all projects could be subject to incentive removal. Of note and importance to foreign investors, the Law does provide exemptions for customs duties on imported equipment if locally produced stocks are not available or do not meet international standards. Although the Law allows nationalization of investments, it does not provide clear grounds for expropriation. The Law differentiates between nationalization and requisition, providing full indemnification of the investor in the case of the former, but payment of market value only in the case of the latter. Contradictory norms hinder the legal system. In the event of a contradiction, there are definitions for which laws take precedence; yet stability clauses, granted under earlier investment laws to investors, do not necessarily protect investors from amendments or other legislative and tax changes. Kazakhstan will provide compensation for contract violations when the Government has guaranteed the contracts; in cases where the contract was merely approved by the Government, the responsibility of the Government is limited to its administrative duty to facilitate the subject investment activity.
The Law on Government Procurement – petroleum sector procurement rules Since 1997, domestic investors are favoured increasingly over foreigners in most state contracts. Amendments passed in 1999 to subsurface legislation require mining and oil companies to increase their use of domestically produced goods and local services. In 2002, regulations for the implementation of these provisions were enacted, but to date the
44
Background to the Market
Government has not taken action to implement the Decree. However, major investment projects are increasingly utilizing the goods and services of local providers and subcontractors, thus complying with the ‘local content’ requirement of their investment contracts.
The Tax Code Effective since January 2002, The Tax Code applies taxes universally and allows only a limited set of exemptions. The code is based upon an international taxation model and is considered a vast improvement over previous versions with huge progress towards establishing a transparent tax system. Effective from 1 January 2004, amendments to the tax code will include reducing VAT from 16 per cent to 15 per cent, introducing a regressive scale for social taxes with rates ranging from 20 per cent down to 7 per cent, and reducing personal income taxes by lowering the maximum rate from the current 30 per cent to 20 per cent, applicable to all who receive salaries or other income paid in Kazakhstan.
Transfer pricing/tariff policies In 2001, the Government passed transfer pricing legislation, giving tax and customs officials the go-ahead to monitor export–import transactions with the goal of stopping the understatement of earnings through export price manipulation. Foreign investors continue to raise concerns that OECD standards for determining a proper market price under transfer pricing legislation have been ignored. Differences in cost and quality are not accounted for in current practice. Transfer pricing can take place even in transactions between unrelated parties which is cause for concern. Across all industry sectors a key factor working against the investment climate is a lack of transparency in setting tariffs. Donors have provided the Government significant assistance, but despite their efforts major investors have failed to reach agreement, meaning the country loses out on both investments and much needed technical resources. The Anti-Monopoly Agency should adopt reasonable and transparent tariff policies at the earliest possible opportunity in the interests of protecting domestic and foreign investors.
Conversion and transfer policies There are few restrictions on the conversion or transference of funds associated with an investment into a freely usable currency at a legal market-clearing rate. In 1996, Kazakhstan adopted Article 8 of the
Kazakhstan’s Foreign Investment Climate
45
IMF Articles of Agreement, effectively agreeing that currency conversions and repatriation of investment profits will not be restricted. In 1999 the Government and National Bank abolished the managed exchange rate system, allowing the national currency, the tenge, to float at market rates.
Bank accounts and foreign currency Residents and non-residents may open bank accounts with no restrictions. For non-residents, money transfers in currency associated with foreign investments are not restricted. The National Bank permits non-residents to pay salaries in cash in foreign currency to both foreign and local employees. Foreign investors may freely convert and repatriate tenge earnings made inside Kazakhstan.
Performance requirements Performance requirements, excepting domestic content requirements, are negotiated as part of a contract between the investor and the Committee on Investments under the Ministry of Foreign Affairs. Usually an investor’s obligations include financial requirements, responsibility for training local specialists, and financial or other material contributions to social funds and community or regional infrastructure development (including schools, hospitals, and health facilities). These requirements are often central to investment contracts. It is not unheard of for companies to be required to rebuild factories and plants, pay back wages for workers who may not have been paid in several months, and meet imposed production targets. There are cases where contracts have been revoked because performance obligations were not met. The Committee on Investments is responsible for monitoring the fulfilment of these obligations. The Government may revoke the company’s operating licence if the Committee determines that it has not met its financial or other contractual obligations. In order to obtain the benefits and privileges of investing in Kazakhstan, an investor must provide the agency with detailed information on technical and financial details of the proposed project. With the exception of investments in oil production and mining, rules on domestic content and financing are not applied universally.
The Customs Code Kazakhstan adopted international tariff terminology as its basis but it has not been published in full resulting in customs offices in the
46
Background to the Market
regions who continue to use the old tariff schedules, causing unnecessary delays in processing and increased costs for importers. In the new code, major principles of modern customs administration have been introduced although yet in general terms, which still need to be more fully defined.
WTO accession Liberal trade policies and legislation to bring trade regimes in line with WTO standards have been in force since before 1996, when Kazakhstan submitted its Memorandum on the Foreign Trade Regime leading to the first round of consultations on WTO accession in 1997. By late 2002 Kazakhstan’s WTO Accession Working Party had met five times. Under WTO TRIPS obligations Kazakhstan does not comply. No clear protection for pre-existing works or sound recordings under copyright law exists. Kazakhstan has not ratified the 1997 World Intellectual Property Organization Copyright Treaty or the Performances and Phonograms Treaty. Kazakhstan is on USTR’s Watch List for IPR violations. Bilateral negotiations are required to comply with WTO standards. Although Kazakhstan has enacted a number of laws and changed many policies during the last few years, several changes are still required. The speed in which Kazakhstan can proceed depends on the Government’s willingness to make tough decisions.
Privatization Since 1995, the Government has privatized many large-scale companies completely and has sold majority shares in other companies to foreign investors. Privatization advanced rapidly during 1996–97 in all sectors of the economy, including oil and gas, power generation, coal, and telecommunications. In 1998, due to low oil prices, President Nazarbayev announced that the Government would suspend future privatizations in the oil and gas sector. National treatment is denied in the petroleum and subsurface sectors. In June 2002, the then Prime Minister signed a Decree with regulations to implement domestic content requirements, which were originally enacted in 1999 through amendments to the Oil Law and the Subsurface Use Law. The laws require investors to contract with Kazakhstan service providers and to purchase Kazakhstan produced equipment, goods and raw materials. The 2002 Decree required a designated government body to approve all tender documents, participate in tender committees and approve the decisions of those tender committees in order to ensure compliance with these requirements. The
Kazakhstan’s Foreign Investment Climate
47
requirements will be challenged in connection with Kazakhstan’s WTO accession negotiations since they appear to breach GATT and GATS rules as well as the Agreement on Trade Related Investment Measures. Although foreign investors have the right to participate in all privatization projects, many have concerns regarding the insulation of their potential investments from decrees and legislative changes, most of which do not grandfather existing investments. In addition to arbitrary tax inspections and corruption issues, foreign investors also complain of problems with closure on contracts, delays and irregular practices in licensing. Some foreign firms have expressed concern that government organizations fail to live up to their side of the contract, particularly with regards to payment and execution as a whole.
Dispute settlement Kazakhstan is still in the process of building its court system, which is often criticized as unsophisticated and corrupt. Until reform is complete, the performance of courts in the country will be less than optimal for foreign investors to settle their disputes. Although Kazakhstan has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995 (and other major treaties setting forums for dispute resolution), current domestic legislation constricts recourse to international arbitration and places more reliance on Kazakhstan’s judicial system for dispute resolution. Judgments by foreign courts or arbitral forums may not be accepted in domestic courts, and enforcement is very difficult. The Ministry of Justice and the Foreign Investors’ Council are drafting a law that will mandate the enforcement of arbitral awards. Until this process is complete, arbitration awards are not clearly enforceable within the territory of Kazakhstan.
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 buy and sell interests in business enterprises with no restrictions. Under the 2003 Land Code, only Kazakhstan citizens and Kazakhstan companies may own land. The law permits only state-owned entities to use land on a permanent basis. Short-term leases are allowed for a duration of not longer than five years. Long-term leases may be allowed for up to 45 years. Foreigners may rent land for agricultural purposes for up to 10 years or purchase land if via a Kazakhstan-registered JV or full subsidiary.
48
Background to the Market
Protection of property rights Secured interests in property are recognized under the Civil Code and Land Code. Mortgage lending exists but is still in an early stage of development. The National Bank created a national mortgage agency to issue bonds secured by mortgages purchased from banks. All property and lease rights for real estate should be registered with special government-owned Real Estate Centres, set up in cities and rural district centres. Kazakhstan’s Civil Code protects intellectual property although enforcement remains difficult. To date there is no adequate legal regime for IPR. Piracy of copyrighted products is widespread and enforcement measures are limited.
Licensing A 1995 Law on Licensing established the legal framework for licensing activities in Kazakhstan. In 1998 additional procedural acts were adopted to implement the requirements of the Law. Within one month of receiving all required documents from a company, the authorized agency is required to issue the necessary licence. In implementation, however, this law is inadequate because the Government has not yet approved most of the qualifying procedural requirements for the issuing of most licences. This situation creates an unpleasant predicament for some businesses and leaves them vulnerable to inspection bodies, which may threaten them with fines or even shut down their activities for failure to procure licences that are often (legally) impossible to obtain.
Capital markets and portfolio investments Within the CIS, Kazakhstan’s laudable efforts to create a sound financial system and a stable macroeconomic framework are unsurpassed. The National Bank supervises the banking system and has considerably strengthened the system over the past four years. Huge progress in the financial system has begun to allow for financial resource flows to be directed to the most promising sectors of the economy. Official policy supports credit allocation on market terms and the further development of legal, regulatory and accounting systems consistent with international standards and practices. Local banks of the second tier in Kazakhstan have been able to obtain very good ratings from international credit assessment agencies and are now required to meet Basle risk-weighted capital standards. Margins taken by local banks for credit are high. It is usually more efficient in terms of both dollars and time for investors to use retained
Kazakhstan’s Foreign Investment Climate
49
earnings or borrow from the investor’s country of origin. Kazakhstan’s six-year-old stock exchange (KASE) is not yet developed to the point of being a source of high-level finance. By mid-2003, there were only 17 companies with A-listed stock issues, 14 companies with B-listed stock issues, and 42 Over-the-Counter issuers. Thirty-five companies have placed corporate bond issues. Kazakhstan’s National Securities Commission has been operating since 1996 in compliance with the norms of the International Organization of Securities Commissioners. In 2001, the Commission was placed under the National Bank and renamed Securities Market Regulation Department. Kazakhstan has a well-developed infrastructure for equity and debt trading with a network of brokerage firms already established. In 1998, the Government introduced an accumulative pension fund system requiring the mandatory contribution of 10 per cent of the salaries of employed persons. By mid-2003, the 16 accumulation funds in Kazakhstan (15 private and 1 state owned) had US $2 million in assets, which must be invested in a limited number of instruments including A-listed securities and government bonds.
Law on joint-stock companies (JSC Law) The 1998 JSC Law provides the basis for regulation of open and closed joint-stock companies. The JSC Law regulates tender offers for stock of open JSCs by requiring the purchaser to notify the Securities Market Regulation Department and the target company of their intention to purchase 30 per cent or more of the target company and to 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 JSC Law allows charter limits on the number of shares or votes that one shareholder may have. The shareholders’ general meeting must approve of some corporate actions including mergers and acquisitions.
Double tax treaties and bilateral investment agreements Bilateral investment agreements with more than 30 countries, including the United States, UK, France, Germany, Korea, Russia, and Turkey, and 30 double taxation treaties are applicable in Kazakhstan.
50
Background to the Market
Work permit legislation Since they were introduced six years ago, work permits and the process for obtaining work place quotas remain a major concern for investors in Kazakhstan. Implementation is not yet transparent and reflects a negative attitude to foreign workers in the economy. Permits may be tied to conditions that cannot be met within reasonable business operations. The Ministry of Labour has wide discretion and a mandate to implement the work permit process. Procedural delays and other obstacles surrounding the work permit process can exacerbate this problem.
Regulations for employing foreign labour On 20 January 2003 Kazakhstan adopted new Rules for Determining the Quota, Conditions and Procedure of Issue of Permits to Employers to Engage Foreign Labour in Kazakhstan (the Rules). Compared to earlier legislation, the Rules provide a clear, detailed regulation. To receive a work permit for an employee, an employer must apply to the authorized local employment body, after completing the established set of procedures; the documents are forwarded to the Ministry of Labour for approval. The following foreign citizens and stateless persons are now exempt from the requirement to obtain a foreign labour work permit: • directors and GMs of companies with investment projects of US $50 million or more; • directors of Kazakhstan companies carrying out investment activities in priority sectors under a contract with an investment authority; • directors and GMs of banks, insurance institutions, and pension funds; • representatives of diplomatic missions and international organizations accredited in Kazakhstan; • representatives of foreign mass media, radio and television, accredited in Kazakhstan; • representatives of charity and humanitarian organizations registered in Kazakhstan; • crew of foreign sea and river vessels, aircrafts, railway and motor transport; • actors and athletes working under a contract with a relevant central executive body;
Kazakhstan’s Foreign Investment Climate
51
• individual entrepreneurs; • holders of a residence permit; • those with refugee status or who have been officially granted political asylum in the Republic.
Local labour Kazakhstan’s workforce is highly educated but the demand for specialized and technically skilled labour exceeds supply, in part due to the extensive development of Kazakhstan’s major oil fields. Experts in management and marketing do not meet demand. Foreign investors employ Kazakhstan’s specialists across a wide range of industries, although companies should be prepared to offer additional training (including training abroad) in order to qualify local specialists more fully for their company’s needs. The Labour Law and the Constitution guarantee basic workers’ rights. The Law on Professional Labour Unions (1993) provides a legal guarantee against limitations of labour. Kazakhstan joined the International Labour Organization (ILO) in 1993 and has ratified 15 ILO conventions.
Foreign trade zones/free ports The Government established special economic zones in the country’s capital, Astana, in July 2001, and on the territory of the Aktau seaport in April 2002. In these special economic zones, foreign and domestic companies are treated equally. Under the law, the Astana Special Economic Zone must be closed by July 2006; the Aktau Special Economic Zone must be closed by January 2007. The Eurasian Economic Community (EAEC) was established in 2000 as a successor to the unsuccessful Customs Union in order to harmonize customs duties and promote free trade among the partners, including Kazakhstan, Russia, Belarus, Kyrgyzstan, and Tajikistan. To date, the EAEC has not been successful in creating a free trade zone. Kazakhstan permits the importation of goods from EAEC free trade partners (as well as certain developing or least-developed countries) free of duty or at a reduced rate within the framework of the Generalized System of Preferences.
Positive reasons to invest Reasons to invest in Kazakhstan can be summarized as follows:
52
Background to the Market
• There is macroeconomic stability. • There are huge reserves of natural resources including oil and gas deposits. • Mining of chrome, copper, gold, lead, manganese, silver, and uranium is underdeveloped. • The EU Most Favoured Nation trade agreement applies. • There are few quotas and duties on exports affecting foreign investors. • There are no special requirements for engaging in trade-related activities. • Foreign firms may participate in government-financed or subsidized research and development programmes on a national treatment basis. • Except in banking, media and telecommunications sectors, there are no legal requirements that Kazakhstan nationals own shares in foreign investments. • A State Committee for Investments has been established to facilitate foreign investment. • Well-established business associations, including the American Chamber of Commerce in Kazakhstan, the Kazakhstan Petroleum Association, and the European Business Association, actively work to protect investors’ rights and provide regular forums for discussion and information exchange.
Summary Kazakhstan has many advantages for investors including an abundance of natural mineral resources, a well-educated workforce, and a strong macroeconomic environment, yet it still must compete with alternative destinations for investment dollars. Kazakhstan can neither rest on its laurels nor assume that investors in oil and other major industry sectors will accept an unnecessarily onerous investment climate. Certain practices and legislative proposals threaten to take Kazakhstan in the wrong direction at a crucial time in its prosperous development. Much time and effort is spent in dealing with reporting and state agencies. A large sector of the economy is still controlled by national companies. Attempts to modify existing foreign investors’ contracts may force investment elsewhere at a time when due to a depressed global economic environment there is increased competition for the world’s limited investment dollars. We hope that
Kazakhstan’s Foreign Investment Climate
53
Kazakhstan chooses to move forward, paving the way for future reforms, fair privatization, full integration into the global economy, and increased investments.
Large-scale investment projects operating in Kazakhstan The following are some examples of large-scale investment projects operating in Kazakhstan. Those marked * are Chamber member companies. TengizChevrOil (TCO) * TCO, a JV of ChevronTexaco* (50 per cent), ExxonMobil (25 per cent), Government of Kazakhstan (20 per cent), and LucArco (5 per cent), was created by a US $20 billion agreement signed in 1993 for a 40-year term. By 2001, partners had invested over US $2.1 billion. In 2002 TCO was producing 300,000 barrels of oil per day, and as of June 2003, began to implement a US $3.5 billion, three-year expansion project. AES Kazakhstan * In 1996, the American energy company AES bought the Ekibastuz-1 power plant. In 1997, AES purchased two hydroelectric power plants and several other coal-fired power/heating plants in UstKamenogorsk, eastern Kazakhstan. In 1999, AES gained control of two regional electric distribution companies for 15 years. Agip Kazakhstan North Caspian Operating Company In 1993, the Offshore Kazakhstan International Operating Company (OKIOC), representing nine petroleum companies (BP-Amoco, Statoil, Agip, British Gas*, Mobil, Royal Dutch Shell, Inpex, Philips and Total), began exploring oil and gas reserves in the northern Caspian Sea. A PSA was signed in 1997 for the offshore Kashagan structure. In 2001, OKIOC was renamed to Agip Kazakhstan North Caspian Operating Company (Agip KCO). In 2001, BP-Amoco and Statoil sold their shares to TotalFinaElf. In June 2002, Agip KCO announced estimated extractable oil reserves at 7–9 billion barrels. Under the PSA, Agip KCO was to start commercial production in 2005; this has been delayed until 2006–07. Bogatyr Access Komir (BAK) * In 1996, US company Access Industries bought the Bogatyr coal mine and 66 per cent of the Stepnoy coal mine, in the giant Ekibastuz mining complex, for over US $40 million. Access has committed to invest US $550 million in upgrades over five years.
54
Background to the Market
Karachaganak Consortium * Agip, British Gas and Gazprom signed an agreement in 1992 with the Government of Kazakhstan for development of the Karachaganak gas field in Western Kazakhstan. Texaco acquired a 20 per cent interest in Karachaganak in the fall of 1997 when a PSA was signed. In 2003 Western partners completed a pipeline to Atyrau, joining the Caspian Pipeline Consortium pipeline to Novorossiisk, Russia. Philip Morris Kazakhstan * Philip Morris signed an agreement with Almaty Tobacco Company in 1993, stipulating a US $350 million investment over the first five years. Philip Morris started producing cigarettes for domestic consumption in 1994, and in early 2000 opened a US $200 million cigarette manufacturing plant, employing 3,000 on the outskirts of Almaty. The plant can produce 25 billion cigarettes annually. The company celebrated ten years of investment in Kazakhstan in October 2003. PetroKazakhstan * In 1996 Canadian petroleum company Hurricane Hydrocarbons bought state oil company Yuzhneftegas. Hurricane paid US $120 million and pledged to invest US $280 million. It owns a majority interest in the Shymkent refinery, with a 6.6 million tonne annual oil processing capacity, and produces gasoline, diesel, boiler fuel, fuel oil, kerosene, jet fuel, and liquefied gas. The refinery provides about 50 per cent of domestic petrochemicals. In June 2003 Hurricane was renamed PetroKazakhstan. In September, PetroKazakhstan announced that by year end total investments in Kazakhstan should reach US $1 billion. Texaco-North Buzachi * In September 1998, Texaco bought 65 per cent of the North Buzachi project; ChevronTexaco now operates the field. Texaco-North Buzachi produces approximately 8,200 barrels per day. Kazakhstan’s Central Development Committee approved the company’s Full Field Development Plan in June 2003, enabling increased production.
Part Two Market Potential
2.1
Oil and Gas of Kazakhstan Oil & Gas Vertical Analytical Desk
The Kazakhstan oil industry Oil production is the backbone of the national economy of the Republic of Kazakhstan and is its most rapidly developing sector. The oil sector generates a substantial portion of the GNP and provides a large part of the country’s budget revenues and hard currency earnings. Oil and gas projects have played a catalytic role in investment activities in Kazakhstan. Being the 12th nation in the world in terms of proven reserves of oil and condensate, Kazakhstan is rated 23rd in the listing of the world’s leading oil producing countries. Covering this gap is not an end in itself for this Asian republic, but is rather viewed by Kazakhstan as a means of assuring continuous and steady social and economic development for the nation. Having approached in 2001 the 40 million ton threshold of oil production, Kazakhstan oil companies were targeting the 45 million ton liquid hydrocarbons production level in 2002. Their ambition is to touch the 60 million ton production mark in 2005 while the target for 2010 is quoted to be 100 million tons of oil and condensate production.
Oil reserves In 1899, the first oil gusher was obtained in Karagungul – the first field ever to be developed in Kazakhstan. That event marks the beginning of the history of the national oil industry. A century later, President Nazarbayev stated, ‘Oil production has not only become an important industry of the national economy, but also a symbol of the independence of our state, a source of hope for a better future. Now, Kazakh oil is put to use for the good of the people of Kazakhstan!’ Kazakhstan is among the 15 most oil-rich nations of the world, having 2 per cent of the world’s established reserves of hydrocarbons. Offshore oil fields apart, the Kazakh onshore established resources of
58
Market Potential
oil and condensate amount to 2.9 billion tons and established gas resources total 1.8 trillion cubic metres. Onshore and offshore reserves of oil and condensate in Kazakhstan are estimated at the level of 12–13 billion tons.1 About 210 hydrocarbon fields, including over 100 oil fields and 70 condensate fields, are located in the oil- and gas-bearing regions of the Republic. They cover an area of about 1.7 million square kilometres – approximately 62 per cent of the entire territory of Kazakhstan. With the reserves being spread unevenly, the five largest fields hold two-thirds of the Kazakh recoverable reserves of hydrocarbons. More than half of those are the Tengiz reserves while the rest is split among four other largest onshore oil- and gas-bearing areas: the Uzen and Karachaganak fields, and the Zhanazhol and Kumkol groups of oil fields. Of the 14 administrative regions (oblasts) of Kazakhstan, fields are found in 6: Aktyubinsk, Atyrau, West-Kazakhstan, Karaganda, KzylOrda and Mangistau. But for all that, about 70 per cent of hydrocarbon reserves are amassed in West-Kazakhstan. The Atyrau Oblast has the largest established oil reserves, and accounts for more than a third of the established reserves of liquid hydrocarbons in Kazakhstan. By far the largest field is the one at Tengiz: it holds approximately a third of the established reserves in the Republic. The remaining 74 fields located in this oblast hold about 150 million tons or about 13 per cent of the initial recoverable oil reserves of the Atyrau Oblast. More than half of those are found in the Korolev field (55.1 million tons) and the Kebai field (30.9 million tons). The Mangistau Oblast has about a quarter of the recoverable oil reserves of Kazakhstan. Some 70 fields have been discovered in this oblast, of which less than half are producing. The majority of those fields are at the advanced phase of development and the larger part of the current oil reserves are those whose production is problematic. The largest fields are those at Uzen, Zhetybai, Kalamkas, and Karazhambas. The Uzen field continues to enjoy the status of the second most important oil field in the Republic, holding over 10 per cent of the total recoverable onshore reserves in Kazakhstan. About 15 hydrocarbon fields are located in the West-Kazakhstan Oblast. The undisputable leader among them is the Karachaganak oil and gas condensate field, ranking among the three largest fields in the Republic. Another promising region for oil and gas potential is the Aktyubinsk Oblast. About 25 hydrocarbon fields have been discovered here. The 1
Official Kazakh government sources also point out that Kazakhstan’s share in the world’s established reserves of hydrocarbons is 3.2% for oil (4.6 billion tons) and 1.5% for gas (2.2 trillion cubic metres). Onshore and offshore reserves of oil and condensate in Kazakhstan are suggested to be 17 billion tons for oil and 146.4 trillion cubic metres for gas.
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most significant geological discovery in this region is the Zhanazhol group of fields, holding about 180 million tons of recoverable oil and condensate reserves. Oil production in the Kzyl-Orda and Karaganda Oblasts is based on the Kumkol group of fields, which constitutes the fifth most important oil and gas province in Kazakhstan. New additions to the reserves potential of the oil and gas industry in Kazakhstan are likely to be made as a result of the large scale exploration currently underway in the Republic of subsoil in the Caspian and Aral seas. Thus, the discovery of the Kashagan field in the Northern sector of the Caspian Sea, with initially estimated 1 billion tons of recoverable liquid hydrocarbon reserves, has already been mentioned as the industry’s most significant event in the world in the last 30 years.
Oil production Since 1995, the Republic of Kazakhstan has been continuously increasing oil production. In 2001, a record production of liquid hydrocarbons of 39,962.4 tons was achieved. Production reached a level of 41.97 million tons in 2002, and the numbers for the first six months of this year – 22.3 million tons – proved that this goal was achievable (see Figure 2.1.1). Every year, new fields are brought into production and the number of oil-producing companies grows. In 2001, for example, 27 companies were producing oil and by the middle of 2002 their number had grown to 32. Seven companies, producing almost 86 per cent of Kazakh oil, still play the key role in the Republic’s oil production. TengizChevrOil JV is by far the undisputable leader. Its production is comparable with the aggregated production of its three nearest rivals – Mangistaumunaigaz JSC, Uzenmunaigaz PC and Karachaganak Petroleum Operating BV (as shown in Figure 2.1.2).
Figure 2.1.1 Oil and gas condensate production in Kazakhstan, 1992–2002
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Market Potential Other
PC Uzenmunaigaz
14.2%
10.4% JSC Kazakhstan Emba
6% JSC Hurricane Kumkol Munai
9%
Karachaganak Petroleum Operating
10% JV TengizChevrOil PLC
31.2% JSC CNPC Aktobemunaigaz
8.2% JSC Mangistaumunaigaz
11% Figure 2.1.2 Major Kazakhstan petroleum producers’ shares in oil production, 2001
Table 2.1.1 Further information on Kazakhstan’s major petroleum producers for 2001 and 2002 (in percentage share of the overall volume of production of petroleum in Kazakhstan) Company
2001
2002
TengizChevrOil Uzenmunaigaz Hurricane Kumkol Munai Mangistaumunaigaz Aktobemunaigaz Embamunaigaz Turgai-Petroleum Karazhanbasmunai KazGerMunai Others
31 10.6 9.1 11.2 8.3 6.1 3.8 3.2 2 14.7
31.1 11.5 11.5 11 10.4 6 5.1 4.2 2.4 6.6
Source: Kazakhstan State Agency for Statistics
Oil and Gas of Kazakhstan
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In addition to the leading seven, Turgai-Petroleum Closed JSC and Karazhanbasmunai JSC produce over 1 million tons of liquid hydrocarbons. KazGerMunai JV brings up the rear in the group of the largest ten companies in terms of production. The Atyrau Oblast is the main oil-producing region in Kazakhstan, and some 40 fields are under development there. This oblast is the operating area for TengizChevrOil JV; for Kazakhoil-Emba JSC (one of the two producing companies in the KazMunayGas National Oil Company); for Kazakhoil-Telf; and for Sazankurak JV. The Mangistau Oblast is the oil-producing region in Kazakhstan with the longest history. This area accounts for approximately threequarters of the total oil ever produced in the Republic. Struggling to offset the effect of the natural drop in production at the fields operated for years, local enterprises are making conscientious efforts to upgrade their production facilities and to bring in the latest technologies in order to enhance oil recovery. Fields in the oblast are developed by Uzenmunaigaz PC (the leading producer in the KazMunayGas National Oil Company) and by Mangistaumunaigas JSC, Karazhanbasmunai JSC, and Texaco North Buzachi Inc. Karachaganak Petroleum Operating BV is the leading oil producer in the West-Kazakhstan Oblast; this company is the operator of the project to develop the Karachaganak oil and gas condensate field. The Aktyubinsk Oblast is the operating area for CNPCAktobemunaigaz JSC, which is developing the Zhanazhol and Keniyak fields, and for Kazakhturkmunai JV and Kazakhoil-Aktobe LLC. Hurricane Kumkol Munai JSC and its two JVs, Turgai Petroleum and Kakgermunai, produce the largest share of oil in the Kzyl-Orda Oblast. These enterprises are developing fields of the Kumkol group and a number of other fields in the South Turgai basin. Some of the fields under development are in the Karaganda Oblast.
Thou. tons
40
29.3
30 20
32.4
35.9
21.2 16.5
17.3 Series 1
10
2002 (11 2002 (11 months) months)
2001 2001
2000 2000
1999 1999
1998 1998
1997 1997
0
Figure 2.1.3 Kazakhstan oil and gas condensate exports, 1997–2002
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Market Potential
Save for the two producers that are structural units of the KazMunayGas National Oil Company, all major oil-producing companies in Kazakhstan have foreign equity. This reflects the Kazakh authorities’ desire to use foreign capital to the maximum possible extent for development of the industry, and to bring in the extensive expertise and technologies of the world’s leading oil companies in its quest to optimize the use of non-renewable subsoil resources. All in all, foreign companies have invested US $5 billion in the oil and gas industry of Kazakhstan since 1991. Kazakhstan is the largest recipient of foreign investments not only in the CIS, but among all East European countries too. As shown in Figure 2.1.3, in 2002 Kazakhstan exported more than twice as much oil and gas as it did in 1997. The demand for exports grew at a faster pace than production. There are two reasons for this trend. On the one hand, it reflects the desire of Kazakhstan’s political leaders actively to strengthen the Republic’s position in the world fuel and energy markets, and, on the other hand, thanks to friendly and constructive relations with Russia, Kazakhstan has significantly expanded technical capacities and options for exports of liquid hydrocarbons.
Refining and transportation Kazakhstan has three refineries with the combined capacity of 18.5 mta (370 thousand bbl per day). Figure 2.1.4 shows details. 3.65
3.41
2.00
Atyrau refinery
2.04
1.04
1999
1.13
1.16 0.72
1998
2.18
2.17
1.87
3.39
2.99
2.70 2.40
4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
2000
2001
2002 (7 months)
Pavlodar PCP
Shimkentnefteorgsintez
Figure 2.1.4 The volumes of oil refined by the refineries of Kazakhstan Kazakhstan’s geographical location in the heart of Eurasia, between such industrially developing countries as Russia and China, prompts the rapid development of the industry. Revamps of existing petrochemical plants and feasibility studies for the construction of new ones are being carried out in the country.
Oil and Gas of Kazakhstan
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Kazakhstan has a sufficiently developed infrastructure to move oil and gas from the oil- and gas-producing regions to the Russian pipeline networks to be eventually exported to foreign markets. The joint capacity of export oil pipelines exceeds 310 million bbl per year. The capacity of export gas pipelines is 5 billion cubic metres (bcm) per year, and that of the transit gas pipeline is 110 bcm per year. In 2001 oil transportation volume reached 32.2 million tons while natural gas transit was 106.7 bcm. Oil export reached 28.3 mt, and export of natural gas was 5 bcm. The Caspian Pipeline Consortium commissioned the first phase of its pipeline with a capacity of 28 million tons of oil a year. International transportation of oil is also carried out through the international seaport of Aktau. Several oil-loading terminals with upto-date handling equipment provide for daily loads of 60–70 thousand bbl of oil per day (3–3.5 mta). The company Kazmortransflot, established in Kazakhstan, has chartered 10 tankers that in due course will constitute 50 per cent of the shipping in the Caspian Sea.
The Kazakhstan gas industry The current state and future development of the gas industry in Kazakhstan is determined, on the one hand, by the large resource base of natural and accompanying gas, and, on the other hand, by the vexed problems related to ensuring the most profitable realization of recovered reserves. In the next few years it is expected that the reserves will increase at least by 1.5–2 times due to new fields in the water area of the Caspian shelf. Gross gas output exceeds 12 bcm with the accompanying gas constituting its major part. Future substantial development of gas recovery is expected, mainly connected with increasing oil recovery. Lop-sided allocation of the trunk gas pipelines on the territory of Kazakhstan impedes full-scale gas utilization and total gasification of the country. At the moment only eight areas of the country are provided with gas. Almost 60 per cent of supplied gas is imported. The Government is now working on the industry’s development programme. This programme is aimed at expanding the throughput of existing gas pipeline systems and constructing new ones, increasing gas processing capacity and building new facilities for gas processing, developing the gas-based power generation industry and increasing liquefied gas production. The orientation to export gas, mainly to Western and East Europe, is of great importance to the country’s gas strategy. Long-term agreement with Russia on cooperation in the gas industry provides for a number of joint and mutually profitable projects directed at achieving major goals in the development of the gas industry of Kazakhstan.
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Natural gas reserves The explored resources of natural gas of the country, without taking into account the Caspian Sea shelf, amount to 1.8 trillion cubic metres (tcm). Over 95 per cent of gas reserves, in free and dissolved form, are concentrated in 142 fields, located in the Atyrausky, Aktyubinsky, West-Kazakhstan and Mangistausky areas. Reserves of free and accompanying gas are also found in the areas of Kyzylordinsky (Kumkol and Akshabylak fields), Zhambylsky (Amangeldy field) and Southern-Kazakhstan (Pridorozhnoe field). A major feature of the raw material base of the country’s gas industry is that gas reserves are mainly associated with oil, oil and gas, and oil and gas condensate fields: there are 66 fields with industrial gas reserves and only seven small fields are stand-alone gas fields. The initial sources of stand-alone gas fields make only 4.2 bcm, which is less than 1.5 per cent of the total initial gas reserves of the country. The oil and gas condensate Karachaganak field contains the largest confirmed reserves of free gas, with a volume of 1.35 billion cubic metres (bcm). The Integrated Organization of Karachaganak (IOK) develops the field. Its shareholders are British BG, Italian ENI (holding 32.5 per cent shares each), American ChevronTexaco (20 per cent) and Russian LUKOIL (15 per cent). The project’s operator is Karachaganak Petroleum Operating BV Company. The activity of IOK is regulated by a production sharing agreement signed both by the shareholders and the Government of Kazakhstan. Large reserves of free gas are also being discovered in the oil and gas condensate fields of Imashevskoye, Zhanazhol, Tenge, Urichtau, Uzen, Zhetybai, Juzhnyi, Kalamkas, located at the edges of the Pre-Caspian depression. The largest explored reserves of oil-dissolved gas are concentrated in large developed oil fields in Tengiz (0.3 tcm), Uzen, Zhetybai, Zhanazhol in Western Kazakhstan and the fields of Kumkol and Akshabulak in Kyzylordinsky Oblast. In the next few years it is expected that the gas resources of the new fields in the water area of the Caspian shelf will increase gas reserves by at least 1.5–2 times. According to forecasts of the Committee on Geology and Subsoil Protection of the Ministry of Energy and Mineral Resources of Kazakh Republic, the total reserves of the Kashagan gas fields are not more than 3 bcm with 1 bcm being recoverable.
Natural gas production As dictated by the allocation of industrial reserves, gas is produced mainly in the western part of the country. Production in 2001 reached 8 bcm of gas, with almost 91 per cent recovered in the Atyrausky, West-
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Kazakhstan and Mangistausky areas. The rest of it was recovered in the neighbouring Aktyubinsk and Kyzylordinsky areas2. Compared to the 1990 production rate, Kazakh gas recovery steadily decreased until 1994. It started to increase in 1995, most rapidly in Atyrausky (mainly due to the Tengiz oil and gas field) and WestKazakhstan (due to the Karachaganak oil and gas condensate field). At the same time recovery continued to decrease in the Mangistau and Kyzylordinsky Oblasts and the production rate remained poor, at about 60–70 bcm. Gas is mainly recovered in association with oil. Due to the prevalence of accompanying gas in the recovery structure, one of the urgent problems consists in flaring of significant volumes of recovered gas. In 2001 free gas made 5 bcm, or 39 per cent of total recovery. The rest of it was accompanying gas, 3.6 bcm or more than 28 per cent of which was flared. The remote location of current and forecasted gas recovery centres from major areas of potential consumption, and the absence of any linking gas transport structure, constrain the development of the domestic market and gasification of the country, and impede stimulation of accompanying gas processing. Apart from building new gas pipelines to optimize the geography of gas transportation, one way to address this problem is to pump gas into payout beds in order to maintain pressure. This technology is to be applied at the Tengiz field (in West-Kazakhstan) by JV TengizChevrOil (TCO), which plans to build a facility for backward gas pumping. It is estimated that up to 95
Raw gas
Marketed gas
Source: ME&MR of KR
Figure 2.1.5 Natural gas production in the Kazakh Republic, 1996–2002 2 Official Kazakh government sources also point out that in 2002 natural gas production reached 13.137 bcm and 5,202.2 thousand tons of gas condensate.
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per cent of accompanying gas produced by TCO today, that is 2–3 bcm per year, will be pumped into payout beds. One of the inauspicious features of the country’s resource base is that almost 50 per cent of developed oil and gas reserves are considered to be difficult to recover. The majority of oil and gas reserves are associated with deep-lying subsalt sediments of the Pre-Caspian depression: these are characterized by complicated pore structure and high hydrogen sulphide and carbonic gas content. At the same time many fields are now experiencing setbacks in production. There are 14 currently operating gas producers. Three companies accounting for more than 90 per cent of gas production are Karachaganak Petroleum (with 41.3 per cent of total Kazakh gas recovery in 2001), TengizChevrOil (34.8 per cent), and the Uzenmunaigaz Company, shareholder of National Company KazMunayGas (14 per cent). Figure 2.1.6 gives further details.
Gas transmission and the structure of gas supply The territory of Kazakhstan is covered with large gas-transporting systems connecting the gas-producing areas of Central Asia with the consumers in the European zone of Russia and Transcaucasia. The operating system of trunk gas pipelines, constructed as a part of the FSU gas-transporting system, includes three major trunk gas pipelines: Central Asia–Center; Orenburg–Novopskovsk; Bukhara–Ural, and a gas pipeline delivering gas to the southern regions of the country, Bukhara–Tashkent–Bishkek–Almaty. The total length of all trunk gas pipelines in a single-lane calculation is more than 9,000 km. The capacity of export gas pipelines is 5 bcm per year, while that of the transit gas pipeline is 110 bcm per year. The latter delivered 106.7 bcm of gas in 2001. There are three underground gas storage facilities in Kazakhstan: • Basoi: located at the Bukhara–Ural gas pipeline route in the Aktyubinskaya Oblast (with a storage volume of about 3,500 million cubic metres); JSC
Othe Akto b r… Uzen emunaig a mun aigaz z… T Kara P chag engizche C… anak v Petro roil… leum …
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0.5
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billion metres billion cubic cubic meters
Figure 2.1.6 Gas production in Kazakhstan, by companies, 2001 (marked gas)
4.0
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• AkyrTobe: located at the BGR–TBA (the Bukhara gas region – Tashkent–Bishkek–Almaty) gas pipeline route in the Zhambylskaya Oblast (with a storage volume of 200 million cubic metres); • Poltorazkoye, located at the BGR–TBA gas pipeline route on the border of Kazakhstan and Uzbekistan (with a storage volume of 400 million cubic metres). The main problem for gas trunk pipelines on the territory of Kazakhstan is that they were constructed 20–30 years ago, have reached a critical degree of deterioration and demand large investments – over US $360 million in the next five years. The Kazakh gas-transmission system is a relic of the Soviet past when its only function was considered to be gas transmission from Central Asia to Russia. This explains the north–south orientation of trunk gas pipelines. The absence of latitude links between meridional trunk pipelines and lop-sided gas pipeline allocation in general lead to disproportion: trunk pipelines deliver gas to only 8 of 14 areas of Kazakhstan. Due to the orientation of the gas-transporting system towards foreign markets rather than towards domestic needs, the majority of recovered and utilized gas is exported while the country’s own needs are covered by imported gas from Turkmenistan, Uzbekistan and Russia (BOX 7 Natural gas imports). In particular, in 2001 1.5 bcm of gas, almost 35 per cent of the total gas imported, was imported from Uzbekistan at a price of US $36.47 for 1000 cubic metres; imports from Russia were 1.1 bcm at a price of US $30.35 per 1000 cubic metres; from Turkmenistan, 1.7 bcm at a price of US $35.45 per 1000 cubic metres. At the same time, Kazakhstan exported 5.5 bcm (billion cubic metres) of gas, including 4.8 bcm to Russia, at less than half-price – US $14.7 per 1000 cubic metres. The main trunk gas pipelines (Central Asia–Center, Makat–Northern Caucasus, Orenburg–Novopskov, Sojuz) pass through the western region: the Atyursky, West-Kazakhstan and Mangistausky areas. Gas-processing facilities are also located there. As a result the western region with a low potential demand is supplied with Kazakh, Russian and Turkmen gas. The northwest region, the Aktyubinsk and Kostanajsk areas, is supplied with gas via Bukhara–Ural gas pipeline and from the Zhanazhol field. The southern, most populated and industrial region (Almaty, Zhambylskaya and the Southern-Kazakh areas) is unreliably supplied with insufficient volumes of gas from Uzbekistan through the BGR–TBA pipeline. Gas is currently supplied according to a five-year general agreement concluded between KazTransGas and Uztransgaz in summer 2002. The agreement implies that the Uzbek party should annually, within five years, supply Kazakhstan with necessary
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volumes of gas on contractual prices. It allows Kazakhstan to avoid the gas shortages which arise from time to time in southern regions of Kazakhstan. Its gas demand amounts to about 1.5 bcm annually. At present, Kazakhstan is conducting development of the Amangeldinsky group of gas fields, in the Zhambylskaya Oblast, in order to reduce the dependence of Kazakhstan on Uzbek gas supplies. Natural gas consumption in Kazakhstan totals about 5 bcm. More than 80 per cent of supplied gas was utilized by industrial and agricultural companies, SDPS, TPS, etc. The share of natural gas in the fuel balance of the country’s primary energy carriers is 11 per cent. Areas and districts not covered by the trunk pipeline grid are provided with bottled liquefied gas. Its consumption in 2000 amounted to 287.7 metres.
Gas processing The increase in natural gas production raises the problem of expanding gas processing capacity. Most recovered gas is characterized by a multi-component structure, containing, in particular, sulphurous compounds and hydrogen sulphide. Tank gas production requires the running of the entire technological cycle with separation, fractionation, drying and purification. At present there are three operating gas-processing plants (GPPs) in Kazakhstan with the total projected processing capacity of 6.25 bcm per year. These are: Kazakh GPP (KazGPP) in the Mangistauskaya Oblast; Tengiz GPP (KazGPP) in the Atyrauskaya Oblast; and Zhanazhol GPP (ZhGPP) in the Aktyubinskaya Oblast. Total production of tank gas accounts for not more than a third of total gas production. Kazakh GPP (KazGPP) KazGPP, located in Zhana-Uzen, was built in 1973 (the first construction phase). It was intended to process the accompanying gas from the Mangyshlak oil fields. In 1979 it was modernized to provide the Aktau petrochemical facility with raw materials. The technological cycle of the plant includes processing, purification and extraction of liquid components. The producing capacities are rated at processing 2.9 bcm of gas per year and supplying it for realization. The largest sources, supplying natural gas for processing at KazGPP, are: Uzensky well cluster, which includes the Eastern Uzen gas field, the Western Tenge gas condensate field and the Karamyndybas gas field, which are incorporated into a system for maintaining a combined stream of gas and condensate at production and transportation; and Zhetybaisky well cluster, which includes the Southern Zhetybai, Tasbulat, Aktas and Eastern Normaul fields. Tengiz GPP (TGPP) TGPP (including gas processing, purification, recovering from liquid
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components and removing sulphur), located at the Tengiz oil and gas field, developed by JV TengizChevrOil, reached an annual rate of purified gas production of 2.5 bcm in 2000. In later years, increase in oil recovery volumes and subsequent increase in gas production volumes will require construction of additional facilities for gas processing or backward gas pumping. JV TengizChevrOil plans to increase the volume of gas processing and provide the existing facilities with fractionating capacities. Natural gas from the Tengiz field contains a great quantity of propane-butane fractions, but is at the same time characterized by a high concentration (up to 19 per cent) of hydrogen sulphide, carbon dioxide and other contaminants, which must be eliminated if commercial product is to be produced. While processing, gas is freed from sulphur, for which there is currently insufficient market demand to make it a viable product. Therefore sulphur is stored on the field, and an excess of 4 million tons is already being stored. Further expansion of the TGPP’s production capacity will make sulphur utilization one of the major ecological issues to address. Zhanazhol GPP (ZhGPP) ZhGPP was built in 1984 with initial processing capacity of 710 million cubic metres (mcm) per year. The plant’s productivity increased to 900 mcm when a third processing line was built in 2000. The plant is supplied with gas from the Zhanazhol field. The technological cycle includes gas purification and desulphurization. The existing GPPs obviously lack sufficient processing capacities to cover all the gas produced in the country at present, not to mention future demands. The development of the Tengiz field will require gasprocessing capacity of up to 8–10 bcm per year, that of Karachaganak will require up to 10–14 bcm per year, and for Kashagan not less than 10 bcm per year is needed. Other large fields will also prompt for the development and expansion of gas-processing capacities. The absence of a large GPP in Karachaganak makes Kazakhstan dependent on Russian gas-processing companies, which leads to significant financial losses caused by exports of raw materials. At present time KIO supplies gas and condensate, recovered at Karachaganak, to the Orenburg GPP in Russia. In 2002 KIO plans to increase the raw gas production to 4.7 bcm against 3.8 bcm in 2001. In 2002 the GreekItalian consortium CCC/Saipem plans to launch a GPP (GP-2) under a contract made with KIO in 2000. At some stage in the future it is planned to expand the existing facilities as well as to build new ones at other fields. Apart from at GPPs, liquefied gas is being produced at the three Kazakh oil refineries as a refining by-product. Evidently, this production mainly depends on the volumes of oil refining. Liquefied gas consumption in Kazakhstan in
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2002 was calculated at 353.9 thousand tons, but the total recovered volume made only 212.3 thousand tons. According to data from the Customs Committee of Kazakhstan, the remaining consumed liquefied gas was imported from the Russian facilities located near the Kazakh border in the cities of Orsk, Omsk, Orenburg, etc.
The direction of industry development Decree #25 issued by the Government of Kazakhstan stipulated the ‘Concept of Kazakh gas industry development to the year 2015’. Elaboration of the detailed programme of industry development for the period of 2003–10 is currently being completed on the basis of this Concept. Its main aspect involves stable and diversified utilization of the surplus gas volumes expected to appear due to the development of the oil producing industry, which is identified as being of major importance. It is expected that total gas production in the country will reach 20.5 bcm by 2005, 35 bcm by 2010 and 45–50 bcm by 2015. Growth in gas production will be mainly accounted for by the development of the Karachaganak field, by the offshore development of the Kashagan field and by the increased oil and accompanying gas production at the Tengiz field. The accompanying gas production will increase due to fullscale development of the Urikhtau, Alibekmol and Kozhasai fields. In the Kyzylordinskaya Oblast, accompanying gas production will increase due to the growth of oil recovery at the Kumkol, Maibulak and Aryskum fields; and in the Mangistauskaya Oblast, due to the Uzen, Zhetybai and other fields. The gross gas output of the Amangeldinsk group of fields in the Zhambylskaya Oblast will make 0.7 bcm per year. The limited capacity of the domestic market will raise the problem of surplus gas utilization. Surplus volumes could possibly amount to 12 bcm in 2005, and grow to 30–34 bcm by 2015. The solution to this problem is largely a matter of gas export, which can be provided for by gas pipelines, or alternatively by LNG transportation, and can even be realized in the form of electric power, produced by gas turbines. Russia plays a significant role in these projects. In November 2001 Kazakhstan and Russia formed a 10-year agreement on cooperation in the gas industry. The agreement provides for coordinated activity between the two countries in the following areas: • supplies and transit of Russian and Kazakh gas; • construction, reconstruction and exploitation of pipelines; • construction of underground gas-storage facilities and other parts of the gas industry infrastructure as well as rendering services; • coordination of policy for the development of gas-transporting systems running through the territories of both countries;
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• conclusion of gas swap deals in compliance with the laws of the Russian Federation and Kazakhstan and on the basis of long-term agreements between the corresponding authorized agencies; • development of joint projects that require transportation of gas through the territories of Kazakhstan and Russia to the third markets; • exploration and development of gas fields, in particular, on the basis of production sharing agreements; • elaboration and implementation of uniform normative and technical documents, regulating the functioning of gas-transport systems. The two sides agreed to foster cooperation on the transportation and processing of Kazakh gas at the Russian GPPs with the subsequent realization of tank gas, produced from Kazakh resources, in Kazakhstan. The process can include mutually beneficial swap deals complying with the legislations of the Russian Federation and Kazakhstan and on the basis of long-term agreements between the authorized agencies of the countries. The agreement involves cooperation in the improvement of the onsite treatment of the gas shipped by both countries, up to export standards of quality. It also involves the development of new technologies, joint research and development projects, harmonization of technical and operational standards for gas-related facilities, drafting of regular and technical documentation, and the training of Kazakh gas industry specialists in universities and other organizations in the Russian Federation. A special clause stipulates automatic prolongation of the Agreement for the subsequent 5-year periods, ‘unless one of the Parties notifies the other One of the intention to pull out, at least 2 years prior to the expiration of the current 5-year period’. In June 2002, in accordance with this Agreement, the KazakhRussian joint venture JSC KazRosGaz was established. Its shareholders are the National Company KazMunayGas (50 per cent), JSC Gazprom (30 per cent) and Rosneft (20 per cent). JSC KazRosGaz is responsible for practical implementation of all the terms stipulated in the Agreement. These include the purchase and marketing of Kazakh natural gas, and transportation and processing of gas at the Russian GPPs, including that intended for consumption in Kazakhstan. One of the JV’s main tasks will consist in fulfilling operator’s duties in joint projects targeted at the transportation of Kazakh gas through Russia and Kazakhstan to the markets of other countries, ie export and realization of Kazakh gas in Europe. JSC KazRosGaz planned to transport 3.54 bcm of natural gas from Kazakhstan in 2002 and to increase its transportation rate to 6 bcm per year by 2004.
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The opportunity of entering world gas markets and of selling Kazakh gas at international prices is highly significant when addressing issues related to the development of Kazakhstan gas industry.
Investment climate At present, attracting direct investments into the Kazakh economy is based on: • stability, predictability and transparency of legal regulations; • protection of investors’ rights; • equal conditions for foreign and local investors; • fulfilment of contract provisions; • encouraging direct investments to the priority sectors of the economy; • ensuring informational transparency of the local stock market. Investments in hydrocarbon subsoil utilization increased in the country between 1996 and 2001 from US $0.9 billion to US $4.8 billion. Investments in hydrocarbon exploration and production amount to approximately 74.5 per cent of all investments in the subsoil production industry of Kazakhstan. Of these, about 86 per cent are foreign investments3. Creation of a favourable investment climate to ensure the influx of direct investments in high-tech production, especially in the mineral and raw material sector, remains one of the main factors in the development of the country’s economy in the near future. Kazakhstan is pinning its hopes for further uninterrupted investments on the anticipated discovery and development of large hydrocarbon reserves on the Caspian shelf. As of 1 January 2002 hydrocarbon production was carried out on 213 objects. In 2001 46 objects were offered at the tender for hydrocarbon exploration and production. It is worth emphasizing that the Government of Kazakhstan is committed to the principles of stability of tax legislation, improvement of the investment climate in the country, and protection of investors’ interests. Kazakhstan is also committed to secure the balance of economic interests of the state and investors, and equal conditions for all taxpayers. Kazakhstan intends to attract investments to capital-intensive projects to develop petrochemistry and the oil and gas industry, and to 3 Official Kazakh government sources also point out that for the period 1996–2002, the total volume of investment from all sources into the oil and gas sector totalled $US 17.879 billion. Of these investments, 68% came from foreign sources during this period, although this figure has since grown to 84%.
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create joint ventures to manufacture oil and gas equipment involving Kazakh companies and specialists to the maximum degree, which would promote further improvement of the mutually beneficial relations and encourage development of small and medium-sized businesses.
Regulatory legislation The Republic of Kazakhstan has signed 34 intergovernmental agreements on support and mutual protection of investments, including 32 agreements already ratified. It is expected that Kazakhstan will sign another 13 such intergovernmental agreements in the near future. Since 21 October 2000 the Republic of Kazakhstan has been a full member of the 1965 Convention on the procedure of settlement of investment disputes between states and foreign entities. Investments are regulated by over 30 legislative acts that are qualified by foreign experts to be among the most liberal in the CIS countries. The Laws ‘On Foreign Investment’ and ‘On State Support for Direct Investments’ secure the following guarantees to foreign investors: • guarantees in case of nationalization and requisition; • guarantees from illegal actions of public bodies and officials; • compensation and reimbursement of losses to investors; • guarantees against disclosures of investment details; • guarantees in case of a state audit. Regulation of subsoil development is based on the contract system. The Decrees of the President of the Republic of Kazakhstan ‘On Subsoil and Subsoil Development’ and ‘On Petroleum’ stipulate the tasks and principles of the legislation; general rules of subsoil development; respective competences of executive bodies; and rights and obligations of subsoil producers. The legislative base is being continuously developed in order to improve the investment climate in the country to encourage economic relations and to ensure stable budget earnings. In this context, both the Law on Foreign Investment (1994) and the Law on State Support for Direct Investments (1997), have been superseded by a new law ‘On Investments’, introduced on 8 January 2003. The new law is designed with the primary intention of creating an adequate regulatory environment to stimulate investment activity in Kazakhstan, provide state support and an array of protective guarantees for investors, and promote adequate measures for the resolution of disputes in which investors are involved. For a fuller discussion on the new investment law see chapter 3.9 of the present volume: Protection of Investment in Kazakhstan.
2.2
Oil and Gas Regulation in Kazakhstan Denton Wilde Sapte, Almaty
Regulation of oil and gas exploration and production Kazakhstan has world-class reserves of hydrocarbons with estimated oil reserves of 8 billion tonnes and gas reserves of 3 trillion cubic metres. Following the recent discovery of the Kashagan field in the Caspian Sea and the recent approval of the programme for development of the Caspian Sea, Kazakhstan plans to open up other offshore blocks during the next few years. While the Government clearly sees development of the oil and gas sector as being crucial to the growth of the economy, it also seeks to promote development of related domestic industries and is assertively adopting new policies in the petroleum sector to accomplish this goal. The primary legislation for the oil and gas industry consists of the Edict of the President of the Republic of Kazakhstan having the force of law ‘On the Subsurface and Subsurface Use’ dated 27 January 1996 (the ‘Subsurface Law’) and the Edict of the President of the Republic of Kazakhstan having the force of law ‘On Petroleum’ dated 28 June 1995 (the ‘Petroleum Law’), each as amended. The Subsurface Law is a legislative act dealing with the right to engage in all underground activities (the ‘subsurface use right’) and has a broad interface with the Petroleum Law. A number of other legislative acts apply to specific petroleum activities. Rights to use the subsurface are obtained by conclusion of a contract with the authorized government agency (ie the Competent Authority), which is currently the Ministry of Energy and Mineral Resources (the ‘Ministry of Energy’). A subsurface contract can take the form of a production sharing agreement (‘PSA’), a tax-royalty agreement or service contract.
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Subsurface use licensing In contrast to the other CIS countries, Kazakhstan has a unique situation with regards to subsurface use licensing. Until August 1999, subsurface use rights were granted on the basis of a licence. After the licence was issued a contract for subsurface use was negotiated and entered into. The provisions of such a contract could not contradict the content of the licence. In August 1999, amendments to the Subsurface Law (the ‘1999 Amendments’) eliminated the concept of licences for subsurface use and introduced a system of granting subsurface rights on the basis of a contract only. However, all subsurface use licences issued prior to enactment of those amendments remain in force until their expiration. With respect to suspension, revocation, termination or invalidation of licences previously issued, the laws in effect prior to the amendments introduced in August 1999 apply. The 1999 Amendments did not provide for amending or reissuing previously granted licences, which in practice has caused some difficulties when dealing with the matters of transfer, reissue or amendment of licences. Subsurface use rights in Kazakhstan are now granted solely by entering into subsurface use contracts.
Subsurface use contracts Subsurface use rights may be granted on the basis of a tender and subsequent negotiation of a contract for exploration and/or production. Subsurface use rights may be granted without a tender to the national company Kazmunaigas. Exploration rights may be granted up to six years with the possibility of two extensions for up to two years each. Production rights may be granted for 25 years and can be extended. The Petroleum Law further provides that production contracts may be issued for 40 years if the recoverable reserves are more than 100 million tonnes of crude oil or over 100 million cubic metres of natural gas.
Pledging subsurface use rights Kazakhstan law permits subsurface users to pledge their subsurface use rights in order to obtain additional funds for carrying out subsurface use operations. Kazakhstan has a requirement that funds secured by a pledge of subsurface use rights must be used only for the purposes of subsurface use as provided for in the contract and/or licence. Further, Kazakhstan prohibits financial institutions from becoming the operator of subsurface use rights when foreclosing on the pledge of a subsurface use right. Instead, the right would have to be sold at a public auction. Because Kazakhstan law requires the approval of the Competent Authority for any transfer of a subsurface use right, presumably a foreclosure sale could not be completed until the approval of the Competent Authority is obtained.
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National oil and gas company In February 2002 the closed joint-stock company Kazmunaigas was created by merging the assets of the former national oil and gas company Kazakhoil and TransNeftiGaz, the holding company for the national transportation companies KazTransGas and KazTransOil and other companies. Kazakhstan officials have stated that Kazmunaigas was formed as a fully integrated company to unify the State’s policies for oil and gas development and to prevent inefficient competition between the former national companies.
Powers and role of the national company A list of Kazmunaigas’ powers was approved by the Kazakhstan Government (‘Decree 707’)1 in which the company is designated the ‘working body’ of the Ministry of Energy. Kazmunaigas is tasked with representing the state’s interests by having an equity share in PSAs and other petroleum-related contracts. It also has regulatory powers (as the ‘authorized agency’ or ‘authority’) over the fulfilment of those same PSAs/contracts. It can be engaged as an expert by the Competent Authority to approve petroleum projects or to verify that production schedules are being carried out. Another Kazakhstan Government Decree (‘Decree 708’)2 was issued concurrently with Decree 707 pursuant to which Kazmunaigas is to take a mandatory part in the ‘corporate management’ of PSAs and other petroleum contracts. Significantly, Decree 708 explicitly states that Kazmunaigas’ powers are not to supplant those of Kazakhstan government agencies. Decrees 707 and 708 (the ‘KMG Decrees’) (i) shift a number of functions of the Competent Authority for supervision of petroleum operations, currently the Ministry of Energy, to Kazmunaigas and (ii) authorize Kazmunaigas to represent the state’s interests in exploration and production contracts. Thus, the KMG Decrees give Kazmunaigas the role of both participant and regulator of petroleum operations in Kazakhstan. Kazmunaigas has emerged as a significant player in the development of Kazakhstan’s oil industry, with numerous roles as competitor and potential partner in exploration and production, as monopoly operator of Kazakhstan’s oil and gas pipeline systems, as a major oil field supplier of goods and services and, potentially, as a regulator of Kazakhstan’s petroleum industry.
1
List of powers of closed joint-stock company ‘National Company “Kazmunaigas’’’ in petroleum operations approved by RK Government Edict of 29 June 2002 no.707. 2 Rules for the National Company representing by way of an obligatory equity share in contracts the state’s interests in contracts with contractors who carry out petroleum operations approved by RK Government Edict of 29 June 2002 no.708.
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Local content Under the provisions of both the Petroleum and Subsurface Laws, parties carrying out petroleum or subsurface use operations are obliged to use equipment, materials and finished products manufactured in Kazakhstan, and attract Kazakhstani enterprises and organizations for the performance of work and services provided that they meet appropriate standards and other requirements. In addition, they must give preference to Kazakhstani personnel when carrying out subsurface use operations. Typically subsurface use contracts contain provisions substantially similar to those in the Subsurface and Petroleum laws requiring contractors to hire Kazakhstan citizens and to use or give preference to Kazakhstani suppliers of goods, works and services.
Procurement rules On 7 June 2002, the Government adopted Decree 612 approving ‘Rules for the procurement of goods, works and services when carrying out petroleum operations’ (the ‘Procurement Rules’), which established specific procedures related to the procurement of goods, works and services by a petroleum contractor or a third party acting on its behalf. The Procurement Rules are intended to promote the development of Kazakhstan suppliers of goods and services to the petroleum industry. The Procurement Rules require that almost all purchases be undertaken by competitive tender. Notably, the purchaser is obliged to have the tender terms and procedures for each individual tender approved by the ‘authorized state body’ and to have the results of each tender approved as well. In addition, the authorized state body is to appoint a representative to sit on a purchaser’s tender commission. In November 2002, the Ministry of Industry and Trade was nominated the authorized state body for purposes of implementing the Rules. Though investors are generally in favour of promoting the development of domestic goods and services, there was strong reaction to the Procurement Rules as drafted because the Rules are considered too restrictive, burdensome, time consuming and costly to implement. Though a working group established to address investors’ concerns proposed a number of changes to the Rules, to date none have been made. In November 2002, by Governmental Decree No. 1204 the Ministry of Industry and Trade was given responsibility for implementation of and ensuring compliance with the Rules instead of the Ministry of Energy, which originally had such responsibility. While the Rules required the preparation and adoption of instructions which would help implement the Rules, no such instructions have yet been adopted.
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Market Potential
The current situation is that the Rules are technically in place and must be complied with. Practically, however, the Ministry of Industry has not established the necessary procedures to implement the Rules.
Pipelines Because Kazakhstan is effectively landlocked, transportation is a key issue for the development of the Kazakhstan petroleum market. Tariff rates, access to pipelines and available capacity are critical to any petroleum project. The majority of oil pipelines lie in the west, although one main pipeline crosses the country from north to south in the east. The existing oil pipelines deliver Kazakhstan crude oil to one of three existing domestic refineries, or export crude oil to world markets primarily through Russia, with some volume through the port of Aktau. The main international routes via Russia are the Russian Transneft system (through Samara) and the CPC pipeline. Significantly, in 2001 the CPC pipeline (which stretches from Tengiz to Novorossiysk) became operational with initial capacity of 28 million tonnes per year. This effectively tripled Kazakhstan’s existing export pipeline capacity, while at the same time the discovery of the Kashagan field offshore Kazakhstan will further increase the demand for capacity. Most of the gas pipelines, like the oil pipelines, lie in the west. Through several pipelines originating in Turkmenistan and Uzbekistan passing through western Kazakhstan to Russia, a few cities are supplied with Uzbek gas. The main transmission lines, from Turkmenistan in particular, are not fully utilized. The main transportation companies are the national companies KazTransGas (KTG) and KazTransOil (KTO), both subsidiaries of Kazmunaigas. Both KTG and KTO are considered natural monopolies. The tariffs of petroleum pipelines considered to be natural monopolies while set by the company must be approved by a joint resolution of the Agency for the Regulation of Natural Monopolies, Protection Competition and Support of Small Business and the Ministry of Energy. Regulated pipelines are required to be open-access. The CPC Pipeline is exempt from this requirement based on special decrees of both the Russian and Kazakhstan governments. Under the Natural Monopoly Law, tariffs can only be changed twice per year and public hearings must be held prior to the approval of such changes. In order to change tariffs the provider must submit a request for an increase 60 days in advance. In June 2002 an international gas enterprise was established as a closed joint-stock company in Kazakhstan: KazRosGaz. The founders are Kazmunaigas (50 per cent), Gazprom (the chief Russian gas
Oil and Gas Regulation in Kazakhstan
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conglomerate – 30 per cent) and Rosneft (the Russian national oil company – 20 per cent). The primary focus of the enterprise will be marketing of natural gas and the development of gas projects. The founders will also cooperate on gas transportation and infrastructure development. The legal regime for oil and gas pipelines is evolving. There is no specific legislation wholly devoted to pipelines; rather, the legal basis for the regulation of pipelines is found in the Petroleum Law.
Petroleum processing There are three refineries in Kazakhstan: Pavlodar, Atyrau and Shymkent. In April 2003 the law ‘On State Regulation of the Production and Turnover of Certain Oil Products’ was adopted (the ‘Petroleum Products Law’) and became effective on 1 July 2003. Along with adoption of the Petroleum Products Law, parliament also adopted related changes to the Petroleum Law and the law ‘On Licensing’ (the ‘Licensing Law’). Now the production of certain petroleum products – namely petrol (other than aviation fuel), heating oil and diesel fuel – requires a licence. Most notably the law permits the Government and authorized state bodies to establish minimum volumes of production. However, any such requirement necessitates that refiners are able to obtain corresponding amounts of raw materials or crude oil. Thus, the Petroleum Law was amended to allow the Government to regulate oil exports by the approval of export quotas. This power to limit exports is expected to be used to ensure that local producers make crude oil available to Kazakhstan refiners to enable them to meet production requirements.
Proposed changes in applicable legislation At present, the Government is considering draft amendments to the Petroleum Law and the Subsurface Law which are expected to be adopted by the end of 2003. The proposed amendments incorporate some of the requirements of the new Procurement Rules and the provisions of the KMG Decrees, but also include other important changes impacting the industry. A number of amendments have been proposed, including, for example: improved procedures for suspending subsurface contracts by notifying the subsurface user before suspension; granting the Competent Authority the functions of a ‘licensing body’ to eliminate some of the uncertainty which arose from the 1999 Amendments involving existing licences.
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Market Potential
In addition to the proposed amendments to the Petroleum and Subsurface Laws, the Government is currently preparing a law on PSAs (the ‘PSA Law’). It hopes to adopt the law before the end of 2003. The adoption of a PSA Law is deemed to be important for the development of the offshore Caspian fields. The Government expects that much of the Caspian will be developed on the basis of PSAs. Related to the development of the Caspian, the Ministry of Finance has proposed a new tax model. The new model, which would apply only to new investments, includes a revised excess profits tax and a progressive oil sales tax. This proposal is currently being debated within the Government.
Dispute resolution The Petroleum Law and the Subsurface Law both contain provisions on dispute resolution. Under both, an investor may choose to submit a dispute related to the performance and termination of a subsurface use contract to either the courts of Kazakhstan or to international arbitration tribunals for resolution. Thus, investors in the oil and gas sector may choose international arbitration to settle disputes arising out of their subsurface use contracts, provided such provision is contained in their subsurface use contract.
Stabilization Stabilization is generally provided by the new Investment Law, although it is not as comprehensive as the prior Foreign Investment Law. Both the Subsurface and the Petroleum Laws contain provisions guaranteeing legislative stability of contracts. Specifically, each states that changes to legislation which deteriorate the position of a contractor shall not apply to contracts which were concluded prior to such amendments. Such guarantees do not apply to legislative amendments concerning defence or environmental and health protection. Prior stabilization provisions in the Tax Law have been eliminated. Stabilization is a complex issue that requires careful consideration when negotiating petroleum contracts.
2.3
The Mining and Metallurgy Sector The World Bank1
Introduction Kazakhstan is fortunate to be exceptionally well endowed with petroleum and mineral resources and has a long tradition as a mining country. But, since independence, the vast majority of new investment in the sector has been devoted to petroleum. New investment in the mining and metallurgical sector has not been commensurate with the country’s geological potential or the importance of a sector which accounts for over 30 per cent of total export earnings, 10 per cent of GDP, and 19 per cent of total industrial employment. Kazakhstan is the ultimate mining and metallurgical country with ferrous and non-ferrous minerals. Some 233 mining enterprises produce a wide variety of commodities: coal, iron ore, chromites ores and ferroalloys, alumina, copper, lead, zinc, manganese, steel, titanium sponge, uranium, barites, and others. The total value of mineral commodities produced in 1999 is evaluated by the National Statistical Agency as the equivalent of approximately US $2.7 billion. The majority of this production is exported to the countries of the former Soviet Union and to international markets, over US $2.1 billion in 1999. Mining and metallurgy account for 34 per cent of government tax revenues and employ directly nearly 200,000 people nationwide. The economies of Karaganda, East Kazakhstan, Pavlodar, and Kustanai are dominated by mining and metallurgy. Moreover, the structure of the existing plants is such that they provide essential infrastructure and social services to the communities in which they operate. 1
This article contains extracts from a summary of the World Bank Report No 24708-KA Kazakhstan: Strategic Review of the Mining and Metallurgy Sector, Europe and Central Asia Region, Country Unit VIII, September 2002.
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Market Potential
To develop even part of Kazakhstan’s estimated mineral reserves will be expensive. For example, based on the capital costs of recent ‘green field’ mining projects in other countries, an average of US $5,700 must be invested for every ton of copper produced; an average of US $640 must be invested for every ounce of gold produced. To develop its mineral resources Kazakhstan will have to mobilize international capital resources. Other countries have faced similar challenges and have successfully mobilized investment by carrying out a comprehensive mining reform programme. The reform programme requires a fundamental redefinition in the role that the state plays in the mining sector. Instead of acting as owner/operator of mines the new state role is that of regulator and referee for the sector. Investing and operating mines should be the responsibility of the private sector, which is better suited to mobilize the funds and take the risks associated with such activities. The reform programme generally includes updating overall sector policies, adopting internationally competitive laws, regulations and taxes, strengthening government oversight institutions, improving capacity of the civil servants within the institutions, and modernizing the earth science database. The Kazakhstan Government has adopted a policy of fostering private sector development for mining and metallurgy and has privatized the existing plants. However, new exploration investment in the sector is far below the levels required to replace reserves and upgrade technologies, or those seen in other countries with similar geological potential. A key element of such a programme is an open, efficient and transparent mineral title licensing system. Since the late 1980s, several countries that have undertaken such programmes have achieved remarkable success in terms of exploration expenditures, new
Table 2.3.1 Balance reserves of major commodities Commodity
Kazakhstan % of total world reserves
Lead Zinc Copper Iron ore Manganese Titanium Chromium Bauxite Gold
16.0% 18.9% 7.0% 3.8% 8.0% 2.5% 22.4% 1.2% 20.8%
Source: Ministry of Natural Resources and Ecology
Other countries having significant reserves Australia, Russia Canada, China Chile, Russia, USA, Zambia Russia, Ukraine, USA, China South Africa, Ukraine, Gabon South Africa, Australia South Africa, Zimbabwe Australia, Guinea, Jamaica South Africa, Canada, Australia
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investment, and increased production, exports and tax revenues. If Kazakhstan vigorously implemented a mining reform programme it could achieve similar positive results. Kazakhstan has a world class minerals resource base; carrying out a comprehensive mining reform programme would help to develop those resources. Table 2.3.2 Kazakhstan selected minerals production: 1999 Commodity
Volume
Coal and Lignite Iron ores Bauxite Chromites ores Steel Ferroalloys Ferrochrome (60%) Refined gold Aluminium Lead metal Zinc metal Refined copper
58.4 million tons 9.6 million tons 3.6 million tons 2.4 million tons 7.7 million tons 999,603 tons 731,563 tons 9,655 kilograms 1,157,692 tons 158,890 tons 248,754 tons 361,890 tons
Value (million tenge)
Value (million US $)
20,549 17,632 2,349 6,066 89,558 27,414 19,988 7,740 13,074 6,714 23,833 62,931
171.8 147.4 19.6 50.7 748.6 229.1 167.1 64.7 109.3 56.1 199.1 526.0
Source: National Statistical Agency
Aluminium/bauxite Reserves Bauxite reserves of the sedimentary karst type deposits are located in Belinskolye, Koktalskoye, Krasnooktyabrskoye, Tuansorskoye, and Vostochno-Ayatskoye. There are economic reserves of 355 million tons at 44 per cent alumina, sufficient for 60 years at projected levels of output. Operating plants Pavlodar Alumina Plant produced approximately 1 million tons of alumina in 1999 and also produced a by-product gallium. The plant exports alumina to aluminium smelters in Russia. Ownership/management Pavlodar Alumina Plant was previously owned/managed by Trans World Group (TWG) and Kazakhstan Mineral Resources Corporation and Whiteswan Ltd. These commercial arrangements were declared null in January 1999 and ownership management is currently with Eurasian Bank. International litigation is still being pursued.
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Market Potential
Barite Reserves Reserves are estimated at 162 million tons of BaSO4, almost 30 per cent of world reserves. Deposits are located at Ansay, Bestube and Zhayrem. Operating mines In the Karagayly and Zhayrem mines (in southern Kazakhstan) 11 deposits are worked, accounting for 70 per cent of barite output. In spite of the demand for barite for the Kazakhstan oil industry, petroleum companies are critical of the quality of Kazakhstan barites.
Chromites and ferroalloys Reserves Kazakhstan ranks second in the world (21 per cent in total world reserves) in terms of balance reserves of chromites. The main deposits are located in Donskoy, Aktobe Oblast, with reserves estimated at 317 million tons at 50 per cent Cr2O3. Operating mines/plants Kazchrom operates the Donskoy GOK mines which produce chromite ores from four open-pit and underground mines. Of the 2.4 million tons produced in 1999, 0.75 million were exported to Russia or Ukraine, with the remainder processed at the Aksu and JSC ferroalloys plants in Kazakhstan. Ownership/management Kazchrom was previously owned/managed by TWG and Kazakhstan Mineral Resources Corporation and Japan Chrome Corporation. Ownership/management is now vested in Eurasia Bank Group.
Coal Reserves Over 400 coal deposits contain an estimated 30,000 million tons of coal. Major deposits are at the Ekibastuz, Karaganda, Maykuben and Turgay basins with additional resources in the Borly, Karazhir (Yubileyny), Kuu-Cheku, Priozemoye and Shubarkol deposits. One-third of the coal is brown coal; the Karaganda basin supplies coking coals while the Ekibastuz deposit is a major suppler of coal for power generation. Mines and enterprises In 1999 about 58.4 million tons of coal was produced, down substan-
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tially from 1996 when 77 million tons were produced. Fifteen coal mines in the Karaganda basin were sold to Karmet, some of which were later rationalized or shut down. Other mines have been sold or are operated by consortia of local and foreign interests such as Access Industries.
Copper Reserves Kazakhstan ranks fifth in the world in terms of balance reserves of copper, 7 per cent of total world reserves. Major deposits (porphyry, cupriferous sandstone, and copper pyrite) are located in Zhezkazgan, Aktogoia, Boshekul-Maikan, East Kazakhstan, Taldy Kurgan, and Zhambyl. Reserves are estimated at 37 million tons at an average grade of 0.68 per cent copper. Producing mines/plants Kazakhstan ranks 11th in terms of world copper production. The majority of its copper comes from the operations in the Zhezkazgan region. Major producing mine enterprises include Zhezkazgantsvetmet, Kazakhmys, and JSC Zherzkentsy GOK. Kazakhmys operates concentrators and smelters at Zhezkazgan and Balkash. Most of the production is exported. In 1999, 362,000 tons of refined copper was produced, an increase over levels in 1996. Ownership/management Samsung (Deutschland) GmbH, a subsidiary of Samsung (Korea), has owned the majority shares of Kazakhmys since 1997.
Gold Reserves Kazakhstan has gold reserves of an estimated 800 tons of gold in ore grading 6.3 grams per ton. About 134 lode deposits are known with an additional 60 polymetallic deposits. About 40 per cent of the gold can be processed with simple gravitation techniques; the remainder, however, are complex ores, are difficult to beneficiate, and require sophisticated technology. Producing mines/plants A state owned firm, Altynalmass, which seeks to contract with foreign firms, was created in 1993. Other gold enterprises which produce primary or by-product gold include: Maikanzoloto, ABC-Balkash, Altai JSC,
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Market Potential
Balkash AGRK, GMP Pustynoe, GRK Altyntobe, FIC Alel, and Nugrim Ltd. The Bakyrchik deposit is also being developed by Ivanhoe Resources. The Balkash smelter processes much of the nationally produced gold. Ownership/management So far, foreign investment in the gold sector has been disappointing, both as a result of inappropriate government policies as well as speculative foreign ventures. Currently, Newmont Mining is active in exploration. A major gold deposit, Vasilkovskoye, has been previously tendered without successful result. This is probably Kazakhstan’s most attractive undeveloped gold deposit and potential candidate to attract serious private sector development interest.
Iron ore Reserves Kazakhstan reportedly has 9,000 million tons of iron ore in 27 major deposits, of which over half are in the proven category grading 39 per cent Fe. Magnetite deposits supply the Sokolovsko-Sarbay beneficiation enterprise, haematite deposits the Lisakovsky enterprise, and sedimentary deposits the West Karazhal mining enterprise. Operating mines/plants Iron ore is both consumed locally and exported. In 1999, a total of 9.6 million tons of iron ore was produced, a reduction from the 13 million tons produced in 1996. The largest iron ore and pelletizing plant is the Sokolovsko-Sarbay kombinat. Other mines are Lisakovskoye, Kacharskoye, and Aya. Ownership/management Sokolovsko-Sarbay is owned/managed by Eurasia Bank, having passed through the hands of the TWG. This group accounts for 92 per cent of iron ore production. Orken Ltd, Togai Ltd, and JSC Elrovo Concern are also active enterprises in iron ore production.
Lead/zinc Reserves Reserves of lead are 15 million tons and of zinc 35 million tons. However, the ore is very low grade: 1.3 per cent Pb and 3 per cent Zn. Most operating deposits are located in East Kazakhstan with some in Zhambyl. New deposits are under development at Artemovskoye.
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Operating mines/plants The Kazzinc enterprise includes mines, beneficiation plants, and smelters at Leninogorsk, Ust-Kamenogorsk, Zyryanovsk, East Kazakshtan copper-chemical plant, and the Tekeli complex. A leadprocessing plant in Chimkent also exists. In 1999, 158,890 of lead and 248,754 tons of zinc were produced, much of which was exported. Ownership/management Kazzinc was formed in 1997 and is majority owned by an affiliate of Glencore International AG (Switzerland).
Manganese Reserves A total of 426 million tonnes of manganese ore is classified as economic; reserves are grade 20 per cent Mn. This is relatively low grade by world standards. Operating mines/plants Seventy-five per cent of the manganese is extracted from the AtasuZhairem open-pit mine. Other producers include Zhezkazganruda JSC, TNC Kazchrom, Abaiken Ltd, and Tulpar. The Zhairem complex is under the management of the Swiss firm Nakosta.
Phosphate rock Reserves Kazakhstan reports economic reserves of 785 million of P2O5 ores, the majority of which are located in the Karatau basin and the remainder in Aktobe. Operating mines and plants Phosphate rock was produced and processed at plants in Zhambyl and Chimkent. However, the collapse of markets in Russia and elsewhere, combined with the low grade and difficult mining conditions of the phosphate rock, have caused most production to cease. The future of this industry is uncertain.
Steel Operating mines and plants In 1999 Kazakhstan produced 4.1 million tonnes of steel, an increase from 3.2 million tonnes produced in 1996, though still down from peak
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Market Potential
production of over 6.7 million tonnes of crude steel produced in 1990. The main (coal) mines and steel plant are located in Karaganda (Timertau). Ownership/management In 1995 Ispat International (UK and India) acquired the management contract and later an equity ownership in Karmet, the Karaganda Iron and Steel works. The firm has injected new funds into the enterprise and has begun developing export markets in Asia and elsewhere.
Titanium Plants Kazakhstan produces titanium sponge at the Ust-Kamenogorsk Titanium-Magnesium (UKTM) plant. Capacity is rated as over 40,000 tons but has fallen to just 4,000 tons in 1998, still making Kazakhstan the world’s third largest producer of titanium sponge. The titanium is produced from slags imported from Russia and Ukraine, though plans are afoot to develop local limonite deposits. Ownership/management UKTM is owned by Specialty Metals Corporation (Belgium).
Uranium Reserves Kazakhstan was the largest producer of uranium in the Soviet Union; however, production has fallen since the break-up of the Soviet Union. About 87 per cent of the U3O8 produced came from the Tseliny complex. Ownership/management Kazatomprom is the government entity responsible for uranium production. It is in joint-venture negotiations with Cameco (Canada) for Inkai deposit and Cogema (France) for the Zhambyl deposit based on in-situ leaching technology.
Post-Soviet fever and investments Immediately following the break-up of the Soviet Union the traditional markets for Kazakhstan mining and metallurgical kombinats disappeared or became insolvent, with the result that mineral output fell and the kombinats came under severe financial pressures.
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The Asian and Russian financial crises further depressed the markets for Kazakhstan mineral products. In 1994–96, in an attempt to redress the situation and maintain production, employment, and social services, the government either privatized or awarded management contracts for many of the kombinats to consortia of local and foreign investors. It should be noted that many of the foreign firms obtaining management contracts were not well-known mineral producing companies but rather trading or other companies whose core businesses were not minerals production. The results of the privatization programme and management contracts system have been mixed. On the one hand, production has stabilized and the kombinats have continued to provide employment and social services to the communities where they operate. This has been the case, for instance, of the Ispat International (UK–India) takeover of the Karmet iron and steel works, the Samsung arrangements with Dzhezkazgan and Balkash copper kombinats, and Glencore Trading (Switzerland) commercial arrangements through Kazzinc. On the other hand, some investors allegedly did not honour their commitments and their management contracts were later cancelled by the Government. Disputes related to these cancellations have led to litigation and/or arbitration in local and foreign courts. The most prominent case involves TWG that through various subsidiaries and affiliates acquired control of bauxite and alumina combines (Whiteswan Ltd), the Sokolovsko-Sarbay iron ore complex (Ivedon International), and the Donskoy chromites and ferroalloys operations (Japan Chrome Corporation). Following a dispute with its jointventure partner, Kazakhstan Mineral Resources Corporation (KMRC), the Kazakhstan Supreme Court annulled the commercial arrangements of TWG. This decision was the subject of international litigation but has now been settled. Other management contracts that have been cancelled include those pertaining to phosphate and certain lead/zinc operations. In addition to the privatization and/or management contracts of existing kombinats during the mid-1990s, many investors, foreign and domestic, were interested in exploration and new project development in Kazakhstan. The results of these new investments have not been entirely satisfactory, from the perspective of both the investors and the Government. Many foreign companies were more interested in shortterm speculation rather than long-term development. Several misunderstandings between the investors and the Government, some of which have resulted in litigation in local and international courts, have clouded the atmosphere for investment in Kazakhstan. Indeed, due in part to the damage to the country’s reputation caused by these previous bad experiences, Kazakhstan is viewed by the international mining investment community as something of a no-go
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Market Potential
country. The country attracted only US $9–10 million in new exploration in 1999, an amount entirely inadequate to replace reserves currently being exploited. Part of the reason for this failure to attract sustained investment in exploration is the reduced availability of funding in the international capital markets and low commodity prices. But other countries, with less geological potential than Kazakhstan, continue to attract new investment. The main reasons for the current situation could be summarized as follows: • the lack of a clear government strategy and policy for the sector; • deficiencies in the legal, taxation, and institutional arrangements; • a tendering system for mineral properties which is not in accordance with international practice; • a reserve classification system which is incompatible with international standards; • the stigma, rightly or wrongly deserved, of unfair and arbitrary dealings between the Government and the private sector, mostly due to questionable governance practices. During this early period, the Government was ill prepared in terms of legal and institutional arrangements to deal with the requirements of foreign investors. A licensing system was at first attempted with mixed success. Subsequent revisions to the mining legislation put the emphasis on a contract/tendering system and the institutional arrangements were adapted to this type of system accordingly. Most recently, the impact of the changes to the institutional set-up introduced in December 2000 have at the writing yet to be fully implemented. The confusion between a licensing and a contract/tendering system continues to be a principal hindrance to new mining investment, particularly in exploration. Except for oil and gas, Kazakhstan is not attracting sufficient new exploration in minerals resources. New exploration should thus be a priority for the Government, as existing reserves will become increasingly exhausted and uneconomic unless new reserves are found and put into operation.
Management of residual government shares There are at least a dozen large privatized mining companies in which the state has significant residual holdings (see Table 2.3.3). The actual number of joint-stock companies in the sector with state shares is larger, however, totalling some 25–30 companies; a strategic investor generally consolidates its shareholdings in the parent company, leaving
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the Government with larger residual shares in the subsidiaries. Various considerations may prompt a government to keep residual shares in privatized enterprises: earning dividends on government shares, equity appreciation with time to earn more proceeds when the capitalization increases (during a public offering, for instance), or ‘golden shares’ held in companies of strategic significance. Table 2.3.3 Residual state shareholdings in mining and metallurgical kombinats (October 2000) Enterprise name, mineral(s)
State shareholding, per cent
Agency/firm managing state share
Private strategic shareholders
Aluminium of Kazakhstan (aluminium)
31.68
State Property Committee, Ministry of Finance
Eurasian Bank*
Kazakhmys (copper)
35.0
Trust management, Samsung Deutschland
Samsung Deutschland
Kazchrome (chromites, ferroalloys)
32.37
State Property Committee, Ministry of Finance
Eurasian Bank*
SokolovskoSarbaevsky (iron ore)
39.5
State Property Committee, Ministry of Finance
Eurasian Bank*
Kazzinc (lead/zinc)
27.64
Ministry of Energy, Industry and Trade
Glencore
UstKamenogorsk TMK (titanium, magnesium)
15.0
State Property Committee, Ministry of Finance
Specialty Metals Co
Akbaiskiy GOK (gold)
33.3
Trust management Altynalmas
Altynalmas
Vasilkovskiy GOK (gold)
90
Trust management Gold & Silver
Gold & Silver
Maikainzoloto (gold)
25
Trust management
DP Handel GmbH
Bakyrchik Joint Venture (gold)
30
State Property Committee, Ministry of Finance
Central Asian, Mining Ltd.
Bogatyr Access Komyr (coal)
N/A
Trust management Access Group
Access Group
* Property rights are not yet final after repossession of TWG holdings in early 2000. Eurasian Bank was appointed the exclusive agency for any financial transactions of the seized companies. Source: State Property and Privatization Committee, Ministry of Finance
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Market Potential
Stock markets Most of the trading in shares of the mining companies is over-thecounter. The blue-chips programme to list shares of major mining companies on the Kazakhstan Stock Exchange (KASE) was launched by the Government in 1998 using the sizable residual holdings retained by the Government for this purpose. Initially there were plans to list the following mining companies on KASE: Kazakhmys, Ust-Kamenogorsk TMK, Aluminium of Kazakhstan, Kazchrome, Sokolovsko-Sarbayskoye GOO, Kazzinc, but these plans have not been fulfilled. But, as of 2000, only common and preferred shares of Kazakhmys were traded with modest volumes of 500 million tenge during 1998, and only 236 million tenge during 1999. The rest of the blue-chips have not yet been listed and no immediate plans seem to be in place to do this. Lack of reporting and transparency prevents more active trading of shares at KASE.
Environmental status of existing operations It is generally difficult to obtain accurate information on current environmental issues and problems at mining kombinats from Kazakhstani government authorities. Generic problems cited by the authorities include waste materials (particularly related to uranium mining operations), disturbed topography (from open-pit mining), damage to ecosystems and contaminated mine water recharge. It is known that severe environmental problems exist at several sites, for example groundwater contamination related to the large metallurgical complexes in Ust-Kamenogorsk that are subject to an investigation by a French team at present. In general, such information is not publicly available and where it is known (through audits or assessments) it is mostly confidential to the kombinats or new investors. One exception is Ispat Karmet, which when privatized was subjected to a full environmental audit that was publicly disclosed. However, there was no requirement for subsequent public disclosure of environmental monitoring at the project.
Kazakhstan railway system Mining and metallurgical products account for over 85 per cent of the total freight traffic on Kazakhstan railways. Following independence, the rail system implicitly subsidized the industry by supplying commercial and social services in spite of a dramatic fall in rail traffic and revenues. Freight rates in Kazakhstan, as calculated on a per tonkilometre basis, are very low by international standards; this implies a continued subsidy to the mining and metallurgical industry. The low freight rates have been made possible by drawing down on reserves of
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materials, tracks, locomotives, wagons and other infrastructure. However, little new investment has been made and it is expected that over the next 14 years an investment of US $4 billion will be required in new infrastructure and rolling stock. Mobilizing this funding will require a reduction in operating costs, an increase in tariffs, and access to private investment. To facilitate this the Government has just passed a new railways law that will restructure the state railway company, Kazakhstan Temir Zholy (KTZ). Many KTZ services will be divested and/or privatized and the creation of ‘own account’ operations will be authorized. The restructuring is a promising step towards improving efficiency and exploiting new market opportunities for Kazakhstan mining enterprises. In the meantime, measures are being taken, including building of new track, to remove bottlenecks in the rail transport system and to cut costs.
Importance of railways to the mining and metallurgical sectors At independence, Kazakhstan inherited a well-developed rail transportation system comprising over 13,000 kilometres of single and double track, 28 per cent of which is electrified. Operational control of the railways is vested with Kazakhstan Temir Zholy (KTZ), a stateowned enterprise created in 1997. The Ministry of Transportation and the Ministry of Finance have supervisory responsibilities for KTZ. More recently, the Government has adopted a new railway transportation law that will reorganize the railways again, principally through privatization and segmentation of certain services. Kazakhstan railways are critical to the national economy, transporting over 96 per cent of all freight. Indeed, some recent studies would suggest that Kazakhstan is more dependent on railways than any other country in the world. This is certainly true of the mining and metallurgical industries which have virtually no alternative to rail transportation, except in the case of very high value-added commodities such as gold or specialty metals. Rail traffic in Kazakhstan is currently over 100 billion tonnekilometres. Transport of bulk mineral commodities such as coal, iron ores, ferrous and non-ferrous metallic ores, and construction materials make up 75 per cent of the total traffic. For most of these commodities, there is no other feasible mode of transportation. The largest current customers for KTZ are Access Bogatyr (coal), Eurasian Bank Companies (aluminium, chrome, ferro-chrome, iron ore, coal), IspatKarmet (steel, iron ore, coal), and TengizChevronOil (petroleum). Much of this traffic is intra-company, ie traffic moved between origins and destinations belonging to the same company, as for instance IspatKarmet, which transports coal between its mines and steel plant. The remainder of the freight traffic is destined for external and transit
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Market Potential
markets, principally the industrial centres of Russia and Ukraine, transit to Europe and Asia through Russia, and (increasingly) to China.
Railways restructuring programme In June 2001 the Government adopted a railways restructuring programme and a new railways law. The fundamental thrust of the programme and new law are to privatize and/or divest certain services and non-core assets from the railways. The divestiture programme will be implemented in stages and with due caution in order to avoid the problems encountered in countries such as the UK. Under the programme, tracks, signals, dispatch stations and locomotives would remain the property of and be operated by state organs. Other assets would be privatized or divested, including: • remaining social and municipal assets (these have largely already been divested from KTZ); • certain rail service enterprises and other non-rail assets (some of these services, such as track maintenance, construction and locomotive/wagon repair already have been or are in the process of being divested); • passenger services (a new company will be formed to provide passenger services with some form of government subsidy to maintain low tariffs and acceptable levels of passenger services).
Costs of rail transport Introduction of competition in the market for railway services in theory could lead to more advantageous pricing options for companies. In practice, these pricing advantages will probably take some time to work through the system; in the meantime, prices for rail transport services could actually increase, especially if the Government seeks to recover the full marginal costs of track, signalling and other elements which will remain in its control. Developing a traffic costing information system is a priority for the railways and depends, in turn, on a reliable and timely source of operational and financial/accounting information. This new costing system is particularly important in respect of the tariff structure. Charges for rail transportation of bulk mineral commodities in Kazakhstan would appear to be very low by international standards. However, this can be confusing. As outlined earlier, when considered on cost per ton-kilometre the rates are very low. For instance, for a distance of 500 kilometres the rate per ton-kilometre in Kazakhstan for coal is US $0.003; a comparable rate for the same distance in the United States for east coast coal is US $0.048. On longer hauls of 1,500 kilometres, the rate
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per ton-kilometre for coal in Kazakhstan is US $0.0024; a comparable rail transportation charge for Powder River Basin coal in the United States is US $0.013 per ton-kilometre. See also Table 2.3.4. Table 2.3.4 Rail transport cost per ton-kilometre (US $)
Kazakhstan United States Canada
500 km (300 miles)
2000 km (1,200 miles)
0.003 0.048 NA
0.0024 0.0132 0.0156
When rail transport charges are considered as a percentage of total sales price of the commodity, Kazakhstan tariffs would appear more in line with international standards. For example, the percentage that rail transport represents of the total sales price of east coast US coal is about 26 per cent; in Kazakhstan it is 29 per cent, and in Australia about 27 per cent. (It is worth noting that the cost of rail transport of Powder River Basin coals in the USA is about 80 per cent of total sales price. This is an anomaly explained by the low mine mouth costs of coal, long-haul distances, lack of adequate competition on the rail routes, and desirability of low sulphur coal with electricity power plants.) Comparing tariff rates can be difficult since it is not known what elements are included in the calculation of Kazakhstan costs – whether they include, for instance, charges for loading and unloading, insurance, overhead and administrative costs. Table 2.3.5 shows figures for different products. Table 2.3.5 Costs of rail transport as a percentage of product price Commodity
Transport cost as % of product price
Ferrous ores Coal Gas Oil Steel Zinc Copper
47.3 29.4 9.5 9.3 2.2 1.2 0.5
Source: Ministry of Transportation, Railways Department
Also, freight rates may be kept deliberately low which would imply a subsidy to the mining industry. Finally, as calculated as a percentage of total sales price, the transportation competitive percentage may simply reflect a lower sales price for domestic consumers than that
96
Market Potential
used internationally. A new cost information system would provide a better basis on which to calculate tariff rates. It would also supply justification for the Kazakhstan railways to raise the rates currently charged to the mining and metallurgical enterprises – assuming, of course, that by doing so it did not negatively influence the fair market price of the commodity.
Minerals legislation The cornerstone of development of the mining and metallurgy sector is the body of laws and regulations that govern access by the private sector to mineral rights. The Kazakhstan constitution, in fact, provides a basis for such private access, and other legislative acts governing mining and subsurface usage further define the role of the state to facilitate access to mineral rights. A fundamental problem in Kazakhstan is the confusion of the mining and metallurgy sector with the oil and gas sector. The economics of the two sectors are entirely different and what works for one does not necessarily work for the other. A case in point is the tendering system for blocks of geologically promising ground that is contemplated in the legislation. This practice, while extensively used in the oil and gas industry, is very uncommon in mining and metallurgy and, in the countries where it has been tried, relatively unsuccessful. Because of the cumbersome tendering system and long delays in negotiation of contracts, gaining exploration rights in Kazakhstan is more complicated and time consuming than in other countries. The legislation also does not strictly adhere to the doctrine of ‘the same rules for all investors’ by giving preferential treatment to obtain mining rights to ‘National Companies’. This appears to leave open the possibility of direct state intervention to own and operate mines which would seem to be inconsistent with the policies of private sector led development in mining and metallurgy. Security of tenure – the right to exploit a deposit in the event of a discovery – is a key concern for an investor. This actually is a concept that encompasses a number of issues such as the nature of the mining right (property or contract), exclusivity, continuity from exploration to exploitation, term lengths, maintenance requirements and work obligations, among others. On each of these issues (with the possible exception of term lengths), the legislation not only could be clearer and more precise but also more in line with international practice. It is important that investors have liquidity of their investments – that is the ability to transfer the mining right. In fact, the amendments to the subsurface law introduced in 1999 added provisions in this respect, though they could be strengthened by conforming more closely to the provisions governing pledges. Investors also will be concerned about the centralized and
The Mining and Metallurgy Sector
97
bureaucratic environment. Argentina, for example, annually attracts in excess of US $100 million in exploration. Ghana, Tanzania, Mali and Burkina Faso each annually attract amounts in the range of US $20–50 million. Comments such as ‘...arbitrary and little flexibility...’ and ‘...command and control mentality...’ were used by investors when asked about this particular issue. Finally, in a number of domains such as the certification of reserves, obligation to produce at volumes designated by the state, and the requirements to use local goods and services, the legislation provides for government interference in what, in most other countries, are matters for the private operator to decide.
Mining taxation The taxation regime applied to mining and metallurgical enterprises in Kazakhstan is fundamentally unattractive to new investment and not competitive internationally. This is due, in part, to several taxes that confuse the mining and metallurgy sector with the oil and gas sector. In particular, discovery and signature bonuses, as well as reimbursement of historical costs, are highly unusual in the international mining industry and increase the costs and risks to new investors. Royalties on minerals produced, if any (and the international tendency is to eliminate minerals royalties), should not exceed 2 per cent net smelter return. The royalty should be determined in the law or regulations and not negotiated on a case-by-case basis. Concession fees and surface rents should be based on a set amount per hectare of the surface area of the land held under exploration or exploitation permit; for the exploration permit, these amounts may be increased each year during the life of the permit to discourage holding the land for purely speculative purposes. In order to encourage exploration, import and customs duties should be eliminated during the exploration phase of the investment; import duties of around 5 per cent are generally acceptable during exploitation operations. The value added tax should be zero rated for mining projects that export their products. Since value added taxes are reimbursed for exports anyway, zero rating will eliminate accumulation of reimbursements that the Government must subsequently make to export companies. The basic rate of taxation of corporate profits (30 per cent) and dividend withholding taxes (15 per cent) are competitive internationally. Kazakhstan mining taxation legislation, correctly, does not provide for exemptions from profits taxes or ‘tax holidays’. However, the Government may wish to consider removing the excess profits tax. In other countries, this taxation instrument has proven ineffective in increasing government revenue and is sometimes perceived negatively
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Market Potential
by investors in the mining sector. Also, for the calculation of taxable profits, internationally competitive dispositions relative to depletion allowances and accelerated depreciation could be put into place. Government guarantees that the tax rates and methods of calculation will not change for a certain period – tax stabilization – have been effective in other countries to reduce the risks perceived by investors. Though not directly under central government control, many oblasts have local taxes and levies that investors find confusing and often complain about. Finally, regulations should be prepared to determine the tax treatment for funds and other allowances which companies make for mine closure. Public institutions to administer the legislation fairly and adequately are essential for the development of mining and metallurgy. At independence, Kazakhstan inherited the old Soviet institutional structure. This structure has been substantially modified since independence, most recently in December 2000, in an attempt to make it more responsive to the needs of a market economy. Specifically, the vesting in the new Ministry of Energy and Mineral Resources of primary responsibility for oil and gas as well as mining and metallurgy creates a single focal point for the sector that has proven to be successful in other countries. However, while the new institutional setup could do much to remove the present overlapping responsibilities and cumbersome jurisdictions of several national and oblast agencies and ministries, the Government will have to guard against allowing mining to be confused with oil and gas and to pay due attention to the specifics of the mining and metallurgical sector. Government policy is clearly to promote private sector development of mining and metallurgy. However, there remains in several agencies and ministries a command and control mentality, specifically with reference to reserve certification and usage, that is inconsistent with this policy or international practice. Finally, there is, as is common in all countries, the question of sustainability of public institutions. The present level of funding, logistical support, recruitment and training of professionals for the public institutions responsible for mining and metallurgy is insufficient for long-term sustainability and requires close government attention.
Governance Many investors have cited lack of good governance and transparency in public and private sector decision making as significant obstacles to investment in mining and metallurgy in Kazakhstan. As noted previously, the privatization programme has stabilized production and maintained employment – and social tranquillity. But if the existing plants are to be able to attract investment on an international level,
262,709 21,895
Tons Tons
16,240 3,181
14,449
1,735 47,298 143,142 568,986 2,107,670
345,647
Thou tons
5,748
946 60,978 149,549 261,920
23,075
Thou tons
3,938
540,406 194,646 21,219
20
Thou tons
164,907
381,775
Value US $000
1,907,893 471,936 132
6,081
Thou tons
Tons Kilograms Kilograms Tons Tons Tons Tons Tons
20,839
Thou tons
Coal Iron ores and concentrates Copper ores and concentrates Zinc ores and concentrates Manganese ores and concentrates Chromites ores and concentrates Pig iron Iron, non-alloyed steel Ferroalloys Crude silver Crude gold Crude aluminium Crude lead Crude zinc Refined copper Totals
Volume
Unit measure
Commodity
1996
2,798,505 609,732 254 8,489 1,755 77,823 191,126 287,934
579,647 20,136
119,329
57,964
11
9,271
24,857
705,663 205,022 37,545 89,801 4,011 49,464 219,172 604,658 2,515,792
15,654 2,383
7,064
14,340
2,386
193,688
364,941
Value US $000
1997 Volume
Table 2.3.6 Kazakhstan selected minerals exports: 1996–99
2,374,888 575,514 449 16,121 1,702 85,170 218,024 322,982
388,448 866
421,832
74,538
0
7,355
23,578
Volume
13,529 153
23,543
16,754
1
177,737
323,173
Value US $000
515,909 224,043 77,926 147,430 3,520 40,831 181,635 507,859 2,254,043
1998
2,919,383 722,813 636 24 12,015 109,968 207,044 355,291
528,272 409
547,877
78,300
10
3,496
16,175
Volume
600,317 212,946 104,447 177,487 9,648 48,376 162,988 525,595 2,106,176
19,232 48
37,766
15,201
1,922
38,156
152,047
Value US $000
1999
100
Market Potential
directly or through a listing on a major stock exchange outside Kazakhstan, internationally accepted standards for transparency, disclosure, accountability, and auditing must be adopted as well as other basic measures to protect shareholder rights. These reforms are also necessary to attract new investment. No domestic or foreign investor will risk substantial new investment in the ad hoc atmosphere that prevails currently on many of these critical governance issues. Finally, there are significant shortcomings with the remaining trust management arrangements and with the residual shares still held by the Government in many of the privatized enterprises. These shareholdings have not produced any significant dividend streams for the Government, do not give rise to any substantial government influence on corporate decision making, and consume scarce government management resources. It is recommended that the Government proceed with a responsible programme of divestiture as, for example, the reactivation of the blue-chips programme.
2.4
Kazakhstan Utilities BISNIS
Introduction Kazakhstan’s power generation registered an increase of 7.3 per cent in 2001. About 55.2 million megawatt hours (MWh) of electricity were generated in the same year, an increase ministry officials credited to a 6 per cent increase in power consumption in the southern regions of Kazakhstan, and also 300 MWh of contracts for power exports that were signed by Kazakhstan’s Ekibastuz GRES-1 and Russian power distribution companies. Power consumption in Kazakhstan itself rose 4.2 per cent year-on-year in 2001, totalling 56.5 million MWh. Electricity imports fell by half, from 2.95 million MWh in 2000 to 1.43 million MWh in 2001. However, it is noteworthy that some northern areas of Kazakhstan, notably West-Kazakhstan Oblast and some districts of the Aktobe and Kostanay regions, are not connected to the national power system, and thus are forced to import all of their power from Russia.
Market size and sales potential Unlike power generation facilities, the vast majority of the Regional Electric Companies (RECs – 15 all over Kazakhstan distributing energy) have not been privatized. The REC privatization process moved much slower than expected with specific contests being continuously postponed. The current trend reflects the complexity of the issue and the extent of the political battles behind the process. However, as soon as the privatization process moves forward, it will represent a major strategic opportunity for foreign suppliers and investors since the majority of the RECs are in very poor shape with most of their equipment requiring urgent repairs or replacement. Overall, 94 per cent of Kazakhstan’s gas turbines, 57 per cent of its steam turbines, and 33 per cent of its steam boilers have been in use for at least 20 years. Electricity transmission networks are inefficient,
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Market Potential
with transmission and distribution losses accounting for approximately 15 per cent of the energy produced. At the same time, construction of new power plants and expansion of power distribution networks is being discussed and is likely to be implemented in the medium term. Consequently, it is possible to project steady growth of the market for a wide range of power generation and distribution equipment. Currently, major categories of goods imported by the electric power generation sector include: non-irradiated fuel elements; liquid dielectric transformers, inverters, and parts for transformers and inverters; and vapour-generating boilers and parts. Considering the overall remodelling of KEGOC’s systems and development of power generation plants, its possible to forecast the growth of demand for IT support, management and communications systems. However, marketing of relevant US products and services will have to be carefully and strategically designed to overcome an extensive set of challenges. Foreign companies have to be prepared for serious competition from Russian and German companies that have acquired strong positions in the market and sometimes are entitled to tax breaks and other preferential treatment (in particular, qualifying as investors and not as importers). Also, it is necessary to consider that local consumers are extremely price sensitive and require special training to become accustomed to US products and technologies. Consequently, attempts to sell equipment for the power generation sector can only be successful if based on a strategic approach to the market and accompanied by appropriate training, servicing, and consulting programmes. The ability of foreign companies supplying equipment to Kazakhstan to secure project financing can be the decisive factor, allowing increased profitability and market share. However, political and commercial risks have to be carefully considered in such cases. Table 2.4.1 gives statistics for the power industry sector. Table 2.4.1 Electric power industry sector statistics (US $ millions) Estimated total market size 1997 1998 1999 2000 2001
49.4 71.2 n/a 277.8 344.2
Total local production
Total exports
Total imports
Total imports from the United States
— — — 105.5 140.6
— — — 5.07 7.7
49.4 71.2 n/a 177.4 211.2
0.8 1.8 n/a 8.6 9.8
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105
Infrastructure Kazakhstan’s power generation industry has undergone a challenging and painful transformation from a centrally planned economy to the free market. Currently, this sector of Kazakhstan’s economy consists of power-generating companies, three levels of transmission networks, wholesalers, and end-users of electric energy. Transmission networks are divided into interregional, regional and local networks. Interregional networks include high voltage lines (1,150, 500, and 220 kV) transmitting energy from producers to the largest regional networks and users. Regional networks include 220 kV lines transmitting energy from interregional substations to smaller end-users and redistribution (wholesaler) enterprises. Local networks operate lines supplying energy to individual end-users and households. Kazakhstan Electricity Grid Operating Company (KEGOC) is responsible for the overall management of all three network levels.
Kazakhstan Electricity Grid Operating Company (KEGOC) Created by the Government of Kazakhstan in 1997, KEGOC is 100 per cent state-owned and is based on the assets of the National Energy Company, Kazakhstanenergo, that existed until 1997. KEGOC owns transmission networks and central and regional dispatch departments. Key functions of the company include transportation of electricity from suppliers to wholesalers, development of the industry, its plans and technical policies, as well as organization and technical operation of the wholesale electricity market. As of the end of 2001, conceptually, the wholesale electricity market was a system of free bid-and-ask relations and transmission of electricity in accordance with contractual terms among the market’s members. Members include energy producers, the National Electricity Grid, regional transmission and redistribution networks, wholesale buyers, and other organizations working under centralized dispatch management allowing equal access to provided services. Operations of the wholesale power exchange were launched by KEGOC in October 2001, with completion of the first phase by the end of the year. The exchange arranged for the following: • day-in-advance power trading; • calculation of a market price for energy on the basis of current supply and demand; • optimization of supply and demand mechanisms.
106
Market Potential
In the second phase, which started on 1 January 2002, the exchange began organizing hour-in-advance energy trading. Currently, in accordance with the Law on Natural Monopolies, KEGOC uses a triple-level tariff for its services that includes: • a tariff for dispatch control of consumption of imported electric power; • a constant component for utilization of interregional networks; • a variable component for utilization of interregional networks, depending on the transmission distance (two levels of the variable component are set for distances below and above 600 km). The Kazakhstan Electricity Grid Rehabilitation Project, implemented by KEGOC and financed by the International Bank for Reconstruction and Development, represents one of the keystones defining the development of Kazakhstan’s electricity grid. The project is to be implemented during 2000–05. The Project milestones are as follows: • modernization of substations (switches, power transformers, basic isolators and accumulating batteries, etc); • upgrade of relay protection at most KEGOC substations (upgrade of relay protection will be combined with installation of Remote Terminal Units to be used by SCADA system); • modernization of dispatch control, including purchase and installation of SCADA/EMS system, digital corporate telecommunications; • a network, commercial record-keeping system, and trading system; • organizational development of KEGOC, including development, shipment, and installation of a management information system; • technical assistance, including designation of the main project consultant and technical consultants for each project component. The tenders for specific components of the Project were under the overall oversight of the World Bank: • satellite communication network (September 2001); • corporate information network (October 2001); • commercial record-keeping system (October 2001); • management information system (February 2002); • energy trading system (May–June 2002). The Government of Kazakhstan has auctioned off more than 85 per cent of its power generation capacity. In 2000, Kazakhstan’s power
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107
plants produced 51.4 million MWh of energy, which is 9 per cent more than in 1999 and 5 per cent more than in 1998. Despite the relatively stable overall level of electricity production, there were quite significant fluctuations in some of the regions over extensive periods of time. The main reasons for reduction of electric power production across Kazakhstan include fuel shortages, breakdowns of obsolescent equipment, non-payments by end-users, and destruction and stealing of power cables, transformers, etc. Approximately 80 per cent of Kazakhstan’s energy generation is centred in the northern part of the Republic. Power plants are mostly coal-fired, using coal shipped from Ekibastuz and Karaganda regions. At the same time, northern regions of Kazakhstan are also the most significant electricity users, claiming nearly 70 per cent of all electricity consumed in the country, because the vast majority of Kazakhstan’s electricity-intensive heavy industry is located there. Overall, Kazakhstan does not produce enough electricity and imports up to 5 million MWh per year from Russia and neighbouring Central Asian states. The Russian power-generating monopoly, UES Rossia, supplies electricity to the western part of Kazakhstan while power shipments from Kyrgyzstan are directed to southern regions of the Republic. About two-thirds of Kazakhstan’s electricity production is generated at coal-fired plants. The remainder comes from petroleum-fired plants and seven hydroelectric stations. Of Kazakhstan’s 54 coal/petroleumfired plants, 46 supply electricity, heating, and hot water to nearby residences and industries during the winter. The remaining eight coal/petroleum-fired plants, the country’s largest generating facilities, are devoted solely to electricity production.
Case study US company AES is active in Kazakhstan’s power generation sector. This Virginia-based company is a major US investor in Kazakhstan, currently managing more than 30 per cent of the country’s generating capacity. In 1996–99, AES invested more than US $150 million in the Kazakhstan power generation industry. In August 1996, AES purchased Kazakhstan’s largest power plant – coal-fired Ekibastuz GRES-1 – with a total production capacity of 4,000 megawatts or about 25 per cent of Kazakhstan’s total installed generating capacity. AES intends to upgrade the facility, which was operating at less than 20 per cent capacity at the time of purchase, to up to 65–70 per cent of its total capacity over the investment period. In 2001, AES-Ekibastuz announced that in the first quarter of the year it generated 1.38 million MWh of energy, a 19 per cent increase over power generation volumes during the corresponding period of 2000. In fall 1997, AES purchased four
108
Market Potential combined heat and power stations and won concessions on two hydroelectric stations in East Kazakhstan Oblast, with a combined total capacity of more than 1,300 megawatts. In summer 1999, AES reached an agreement with the Government which, when implemented, will allow AES to take over management of several regional electricity distribution companies as compensation for the Government’s debt to AES. However, AES continued to encounter various administrative challenges and drawbacks. In May 2001, an East Kazakhstan Oblast court denied an appeal of a ruling against management of a regional energy company, AES Sogrinskaya. The court reconfirmed the order issued by a lower court requiring the power generation company to pay a fine for environmental pollution. Despite the difficulties, AES is determined to stay in the market, providing a vivid example of the long-term approach needed to succeed in this challenging sector.
2.5
The Cement Industry Vsevolod V Markov and Arlan Yerzhanov, Michael Wilson & Partners Ltd
General The cement industry in Kazakhstan was set up in the beginning of the 1950s when the first facilities of the Sastobe and Karaganda plants were put into operation. The following years were marked by the increase of production capacity owing to both the construction of new plants and the development of existing plants. The industry reached its peak in 1989 with the production of 8,650,000 tons of cement (6.2 per cent of the all-Union production). Table 2.5.1 gives further details. Table 2.5.1 Cement production in the Republic of Kazakhstan (000 tons) (1950–2002) 1950 1960 1970 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 16
2,173 5,654 7,099 8,301 1,772 1,115 657
621
846
1,170 2,029.2 2,129.4
Overview of cement plants The cement industry in Kazakhstan is represented by five plants, each of which is described below. Tables 2.5.2 and 2.5.3 provide further information. Bukhtarma Cement Company CJSC This company is located in Oktyabrsky village, East Kazakhstan Oblast. In November 1996 Bukhtarma Cement Company JSC (BCC) was spun off Ust-Kamenogorsk Cement Plant OJSC. BCC is one of the major plants in Kazakhstan. It was built in 1964 with a capacity of 1.6 million tons of cement per annum and employing about 1,800 people. Its market is limited to the northern oblasts of Kazakhstan and
110
Market Potential
regions on the border with Russia. However, the company has lost its customers in Russia over the last years due to high prices. Cement JSC This plant is located in the vicinity of Semipalatinsk, East Kazakhstan Oblast. It was established in 1958 and reorganized into a joint-stock company in 1992. It has 1,300 employees. About 80 per cent of the production is M-400 Portland cement. Key cement customers are construction companies and plants manufacturing reinforced concrete in Kazakhstan and regions on the border with Russia, as well as mining companies Zhezkazgantsvetmet and Tekeli lead-zinc plant. Central Asia Cement JSC Created in 1953, this plant is located in Aktau village, Karaganda Oblast. It is one of the major cement producers in the country having a production capacity of 3.5 million tons per annum. Such major companies as IspatKarmet JSC, Karagandacoal JSC, Zhezkazgantsvetmet JSC and Balkhashmed JSC are among the customers of Central Asia Cement. Shymkentcement JSC This plant is located in Shymkent, South Kazakhstan Oblast. Shymkentcement JSC was reorganized into a joint-stock company in 1993. The plant has cut cement production over the last few years due to the economic crisis affecting the southern regions of Kazakhstan that specialize in processing operations; they continue to reduce production, and investment opportunities are limited. Furthermore, the region encounters some difficulties in procuring the natural gas used as a basic raw material in cement-production technology. The price of gas procured from Turkmenistan is much higher than that offered by competitors from Kyrgyzstan and Uzbekistan, which has had a material impact on the competitiveness of Shymkent cement. Sastobecement JSC Located in Sostyube village, 30 km away from Shymkent, the Oblast centre, the plant specializes in production of cement for decorative construction works. Like Shymkent Cement Plant, and for similar reasons, Sastobecement JSC has sharply reduced its production in the last few years.
Technologies The basic cement production technology applied by Kazakhstan’s plants is the so-called ‘wet’ technology (see Table 2.5.2).‘Dry’ technology, along with wet technology, was applied at the Karaganda Cement Plant
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111
Table 2.5.2 Production of the cement plants of Kazakhstan Plant
Central Asia Cement JSC Sastobecement JSC Bukhtarma Cement Company CJSC Cement JSC Shymkentcement JSC
Years of Technology construction
1953–84
Capacity, 000 tons (as of 1 Jan 1999)
Utilization of facilities, % (1999)
2,955.4
9
1949–81 1969–86
Wet Dry Wet Wet
411.6 1,546.2
0 16
1958–65 1959–61
Wet Wet
1,205.8 2,077.8
21 4
Source: Statistic Agency of the Republic of Kazakhstan
only. In 1992 about 62 per cent of cement production was based on the dry technology. Subsequently, its use steadily declined, then was stopped in 1997.
Obstacles The plants in Kazakhstan are equipped with life-expired and worn plants and equipment (the degree of wear is up to 60–80%). Use of outdated technology results in increased power consumption per unit of product as compared to foreign technology – twice as much, or more, power per unit is consumed. The sweeping growth of energy costs in 1991–96 led to a rise in the cost of local cement. As a result the specific weight of fuel and power in terms of production cost varies at plants from 21 per cent at Central Asia Cement JSC and 27 per cent at Bukhtarma Cement Company CJSC to 49 per cent at Shymkentcement JSC. Cement plants in Karaganda, Semipalatinsk and Ust-Kamenogorsk use coal as a fuel and Shymkent and Sastobe plants use natural gas supplied by the Bukhara–Almaty gas pipeline. Gas purchased by cement plants from Uzbekistan is much more expensive than that supplied to the Uzbekistan cement plants. Moreover, the southern regions of Kazakhstan experience shortages of electric power. The cost of 1 kWh is 2.3 times higher here than in Kyrgyzstan where Kant cement and asbestos sheeting plant is located. The major product from all plants is M-400 Portland cement. The best high-quality cement in the country is produced by
112
Market Potential
Ust-Kamenogorsk cement plant, affiliated with Bukhtarma Cement Company CJSC. However, in the mid-1990s a number of Kazakhstan’s plants suffered from damage to kiln linings as a result of an incorrect temperature regime in tube kiln operation and due to lack of funds to purchase coal and gas. This resulted in deterioration in the quality of the plants’ cement.
Limestone
Crushing
Clay
Preliminary drying
Crushing
Crushing with simultaneous drying
Blending and grading of working mass
Burning to obtain clinker
Gypsum
Clinker cooling
Crushing
Crushing
Cement storage, packing and shipment
Figure 2.5.1 Cement production
Mineral additive
Crushing
Blending and grinding of clinker, gypsum and additives
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113
Sastobecement JSC is a special case, specializing in the production of coloured cement for decorative construction works. In March 2000 the plant, owned by Central Asia Cement JSC, mastered the production of oil-well cement used in oil-well construction. The cement is shipped in bulk or in paper bags, packed by standard equipment specially developed for the cement industry. However, lack of plastic liners and poor equipment efficiency make it impossible to pack and ship cement for long distances and prevent long-term storage. Table 2.5.3 Production rates of Kazakhstan’s cement plants 000 tons Plant Central Asia Cement JSC Sastobecement JSC Bukhtarma Cement Company CJSC Cement JSC Shymkentcement JSC Total
1992
1993
1994
1995
1996
1997
1998
1999
2,020.8 1,013.1
482.5
294.0
43.0
64.2
108.7
272.3
387.7
70.4
20.4
19.4
22.7
5.7
13.6
5.1
N/A*
1,496.5 1,183.8
737.8
631.5
369.0
105.9
226.1
294.3
N/A*
1,088.6 1,527.0
477.4 315.3
539.3 287.8
516.3 163.9
383.4 97.3
235.6 35.5
206.5 67.3
N/A* N/A*
6,436.3 3,963.3 2,033.4 1,772.0 1,114.9
656.5
619.5
845.5 1.169.9
303.4
945.9 750.1
2000
* Official figures not available Source: Statistic Agency of the Republic of Kazakhstan
Cement market The capacity of Kazakhstan’s cement market over recent years is estimated at around 1.1 million tons. Table 2.5.4 gives recent cement production and consumption figures. In February 1999, in order to protect the domestic market from cement supplies from other Central Asian countries, the Government of the Republic of Kazakhstan introduced a special customs duty – 200 per cent on cement imported from Uzbekistan and quotas on its import from Kyrgyzstan amounting to 20,000 tons in the first quarter and 30,000 tons until the year end. As a result, the import of cement fell twice in 1999 and decreased in value from US $16–18 million in previous years to US $8.5 million. However, these measures resulted in the growth of cement imports from Russia by almost 25 per cent (from US $4.2 to US $5.2 million). Details of cement imports are given in Table 2.5.5.
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Market Potential
Table 2.5.4 Cement production and consumption in 1996–2002 000 tons 1996 Production
1997
1998
1999
2000
20021
2001
1,114.9
656.3
620.7
Export
229.4
47.5
10.6
1.1
20.6
49.7
74.9
Import
227.3
405.6
467.6
238.5
382.4
312.3
265.7
including from Kyrgyzstan
151.9
340.2
351.7
42.2
91.0
57.8
62.1
Domestic consumption 1
846.5 1,175.0 2,029.2 2,129.4
1,112.8 1,014.6 1,077.7 1,058.9
N/A
2,554.5
N/A
Here and throughout the table data for 2002 refers to January–November, 2002.
Source: Statistics Agency of the Republic of Kazakhstan
Table 2.5.5 Structure of cement imports in Kazakhstan (as a percentage of total imports)
Imports – total including from: Kyrgyzstan Uzbekistan Russia Other
1998
1999
2000
2001
2002
100
100
100
100
100
76 4 17 3
18 2 74 6
24 1 73 2
18 0.2 79 2.8
23 0 74 3
Source: Statistics Agency of the Republic of Kazakhstan
In 2000 the Government cancelled the special customs duties in respect of Uzbekistan and quotas for Kyrgyzstan. Reduction of cement exports from Kazakhstan was caused by its expulsion from the Russian market due to non-competitive prices. Bukhtarma Cement Company CJSC, supplying cement to Altai region, Omsk and Tyumen, was the main cement exporter on the Russian market.
Prospects Currently, cement is not in sufficient demand on the domestic market to ensure break-even for the country’s cement plants. There is confidence that this situation will improve though, because growth in investments in Kazakhstan’s capital assets is likely to increase demand for cement (as it is a basic material for construction of largescale projects and facilities).
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115
However, for the Kazakh cement to become competitive the cement plants should be restructured, quality of management improved, new marketing systems introduced and, of course, investments are needed for modernization of plants. It should be noted that even if investments are increased, the demand for cement will not rise adequately in the near future. Many parts and structures made of reinforced concrete will not find a market due to poor quality and non-compliance with international construction standards and requirements. Large-block construction of poorly equipped facilities and buildings will not be carried out to the same extent as before. At the same time there will be a need to construct modern highways, underground buildings infrastructure (garages, parking lots, warehouses, etc) and modern airports. As was predicted, the cement industry may become profitable after 2003, with competitive products and demand from modern construction companies for cement for complex high-strength constructions. Furthermore, it is expected that within a few years mining companies will have to revert to underground mining, allowing further exploitation of existing reserves. In turn, this will result in growth of demand for cement for preparing filling mixture. The indicative plan of social and economic development of the Republic of Kazakhstan for 2001–05 worked out and approved by the Government of Kazakhstan provides for increase in cement production by around 7–9 per cent in 2005 as against 2000. Due to spare production capacity in the period to 2005 and in the long term up to 2015 (as referred to in the Plan for Development and Location of Productive Forces in the Republic of Kazakhstan for the period up to 2015), no construction of new cement plants is planned. The key issue is still to increase product competitiveness based on reconstruction and modernization, and introduction of resource-saving technology. If such measures are implemented, the cement industry will be able to meet the future needs of the domestic market and to increase the volume of cement export.
2.6
Food and Beverages: Outlook, Issues and Trends in Kazakhstan Jay Nathan
The food and beverage industry plays an important role in Kazakhstan’s economic development. Its share in the aggregate of Kazakhstan’s industrial production is increasing. The food and beverage industry joins the oil and gas industries as a growth industry. Development of the food-processing industry in Kazakhstan is a very important task for the agro-industrial sector. This sector has attracted considerable foreign direct investment. 0.1 4.6 8.1
0.3 7.7 4.4 4.9
34.7
35.2
31.5
35.9
Year
2002
0.2 4.9 7.9
0.3 9.4 3.4 6.5
2001
0
20
40
60
80
100
% Meat
Processed and preserved fish
Processed and preserved fruits and vegetables
Vegetable oil and animal fat
Milk foods
Flour and cereals foods
Finished fodders
Beverage
Others
Figure 2.6.1
Structure of food production
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117
Since independence, the food industry has become more consumeroriented and competitive. Changing lifestyles and incomes; growing awareness of health issues; concerns over the quality and quantity of foods available; demands for products lower in sodium, fat, cholesterol; consumers desiring more convenience and service; cultural factors; and labelling issues: all have altered the patterns of demand for food consumption and production in Kazakhstan. Domestic and international trends continue to drive the marketing and distribution of food and beverages in Kazakhstan. The two factors that are consistent throughout the world are as follows. Healthy foods – healthy eating is at the forefront of customers’ demands, and the industry must develop systems that clearly show on the products the labels. Convenience – this is a must. Many targeted customers have high income, long working hours, and limited shopping time: they require products that are prepared and ready within 20 minutes, and they expect products to be fresh and packaged for smaller families. Customers may be cash rich, but they are time poor, and the industry must therefore tailor products to meet their demands.
Food and beverage distribution In general, there are two possible schemes of distribution in the food and beverage industry in Kazakhstan: • Specialized shops • Bazaars (markets) Wholesaler • Kiosks 1. Manufacturer • ‘Babushkas’ (sole traders Distributor selling on the streets) • Public places (restaurants, cafés, hospitals) • Supermarkets • Own shop 2. Manufacturer (manufacturerowned) • Public places (restaurants, cafés, hospitals)
Industry profitability and other financial results In 1999 and 2000 food and beverage manufacturers had negative results in their operations, but the losses are part of a decreasing trend, and many companies now show profitability. Positive balances of
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Market Potential
incomes and losses of medium-sized and large businesses, as well as smaller businesses’ financial results, are shown in Table 2.6.1. Table 2.6.1 Operation results (million tenge) 2002 1999 Small businesses Medium-sized and large businesses Total
2000
2001
Q1
Q2
Q3
–1488.5 –509.3 –3015.2 61.7
–716.1 1261.1
–124.6 274.3
–140.5 217.6
–193.6 504.9
–4503.7 –447.6
545.0
149.7
77.1
311.3
Source: Ministry of Economics
In the analysed period, there were only positive balances of incomes and losses in the production of meat, vegetable oil and animal fat, and beverages. The manufacturers of finished fodders for domestic animals showed consistent loss (see Table 2.6.4). The number of unprofitable foodstuffs manufacturers increased from year to year in comparison with companies in the manufacturing industry and with the average in Almaty. The highest number of unprofitable businesses were involved in the production of meat, finished fodders for domestic animals and other foodstuffs (see Table 2.6.8). The number of unprofitable food manufacturers in small businesses was higher than the number of unprofitable manufacturers in medium-sized and large businesses in both the manufacturing industry and as a whole in Almaty. The main reasons for this are that small businesses are less competitive and that they face great risks in attempting to capture the market (as shown in Table 2.6.2). Table 2.6.2 Share of unprofitable food and beverage businesses, % 1999
2000
2001
Q3 2002
Manufacturing industry Small businesses Medium-sized and large businesses Foodstuffs production Small businesses Medium-sized and large businesses Total in Almaty For the whole of Kazakhstan
45.1 44.0 51.2 51.8 53.8 42.9 42.6 1999
40.2 39.6 45.2 45.7 45.6 45.9 40.3 2000
35.2 34.9 38.0 43.9 43.5 46.2 34.0 2001
Small businesses Medium-sized and large businesses
43.1 37.9
40.2 41.3
33.8 40.1
33.9 33.9 34.6 39.1 40.0 34.9 30.5 3rd Quarter 2002 30.3 34.7
Sources: Ministry of Agriculture, Ministry of Economics
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A high proportion of unprofitable food manufacturers has negative impact on the indicators of the entire food industry. In the analysed period, the profitability of food and beverage manufacturers was lower than that of manufacturing industry as a whole and lower than the average in Almaty. (This is shown in Figure 2.6.2.) Meat manufacturers had the highest profitability in the industry and manufacturers of finished fodders, processed and preserved fruits and vegetables experienced the lowest profits, or even losses (see Table 2.6.4). It should be mentioned that expenditures of food manufacturers have increased constantly in recent years. In the cost structure the highest expenses are attached to raw materials and other expenses connected with general operational and administration activity. Table 2.6.3 Cost structure, %
Raw material Direct labour Depreciation Other expenses Total
1999
2000
2001
9 months 2002
42.9 17.1 10.5 29.5 100.0
58.3 7.3 3.9 30.5 100.0
62.8 6.1 3.8 27.3 100.0
59.1 4.7 7.5 28.7 100.0
Source: National Statistics Agency
% 10 5 0 –5 –10 –15 –20 –25 –30 1999
2000
2001
2002 (3rd quarter)
Year
Food-stuffs manufacturers
Manufacturing industry
Total in Almaty
Figure 2.6.2 Dynamics of food manufacturers’ profitability
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Market Potential
There have been recent changes in cost structure. Increases in the costs of raw materials and decreases in the share of direct labour have been observed. The food industry is one of those that is raw-material intensive. In 2000, the rate of per unit consumption of material was 0.78 tenge, whereas in 2001 it was 0.76 tenge.
Industry liquidity At the end of the third quarter of 2002 accounts receivable for food and beverage manufacturers were 11,026.7 million tenge (2.3 per cent of city volume), which is a 38.3 per cent rise compared with the beginning of 2002. Small businesses account for 30.8 per cent of total receivables and medium-sized and large businesses 69.2 per cent. The receivables from goods and services add up to 40 per cent of the total, beverages amount to 44.6 per cent, flour and cereals 14.2 per cent, and vegetable oil and animal fat 11.1 per cent (see Table 2.6.5). As for debts, they totalled 32,249.4 million tenge at the end of the third quarter of 2002 – 20 per cent more than in the beginning of 2002. Medium-sized and large businesses had 77.1 per cent of total debts, smaller businesses 22.9 per cent. Most of the debts (80 per cent) represent payments to suppliers and contractors and bank loans (see Figure 2.6.2). The highest debts in the country were borne by manufacturers of beverages (47.8 per cent), vegetable oil and animal fat (16.2 per cent) and flour and cereals. Increases in debts give the manufacturers opportunity to increase production, use new technology and meet customer needs. So Rahat offered a wider assortment of sweets; Maslodel began mayonnaise production; beverage manufacturers, in particular PRG Bottlers, CocaCola Almaty Bottlers, Asem-ai, established production of non-alcoholic beverages, and so on. The share of overdue receivables and non-payment of payables were 1.3 per cent and 1.9 per cent respectively. Beverage manufacturers had the highest share of receivables and payables – 19.6 per cent and 60.3 per cent. At the end of the third quarter of 2002, payables were greater than receivables by 2.9 times, whereas in 2001 this ratio was 3.3. City ratios in this period were 2.1 and 2.4 correspondingly. It can be said that the manufacturers of food industry had low solvency.
Balance sheet At the end of 2001, the total assets of the food industry were 40,352 million tenge (or 3.7 per cent of city volume), 46.9 per cent of which were fixed assets and 53.1 per cent current assets. During nine months of 2002, total assets increased up to 45,320 million tenge, or by 12.3 per
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cent. At the end of 2001, receivables formed 36.1 per cent of total current assets, inventory formed 35 per cent and cash 14 per cent. Source equity amounted to 13,483 million tenge or 33.4 per cent and liabilities totalled 26,885 million tenge or 66.6 per cent.
Industry investments It is common for Kazakhstan food manufacturers to invest in acquisition of fixed assets. In 2001 investments in fixed assets were 5,833.6 million tenge and at the end of the third quarter of 2002, 2,187.4 million tenge. In the food industry beverage manufacturers and flour and cereals manufacturers make the largest investment in fixed assets (see Table 2.6.4). Table 2.6.4 Investment in fixed assets 2001
Total foodstuffs production Meat Processed and preserved fish Processed and preserved fruits and vegetables Vegetable oil and animal fat Milk foods Flour and cereal foods Beverages Finished fodders Others
9 months 2002
million tenge
%
5833.6 186.8
100 3.2
36.3 199.9 200.7 1508.7 2841.2 162.2 697.8
million tenge
% 100 3.3
0.6
2187.4 72.6 0.1 13.4
3.4 3.4 25.9 48.7 2.8 12.0
34.7 451.7 188.4 970.5 4.7 451.3
1.6 20.7 8.6 44.4 0.2 20.6
0.6
Source: Ministry of Agriculture
Development of the food and beverage industry has progressed well. There is constant growth of production volume and the share of foodstuffs products in the country’s total industrial production. Equipment and technology are more modernized as a result of investments. But the industry has problems with losses and significant liabilities.
Issues facing the industry As in many other industries in Kazakhstan, the service and customer handling aspects of the food and beverage industry are poor. Even in such major cities as Almaty and Astana, with the exception of a few supermarkets and specialized shops, customer service is generally lacking throughout Kazakhstan.
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Market Potential
Cheating can occur in shops of all types. Weights and measures are not standardized and prices are not clearly marked in many retail shops. There is a lack of fresh produce and customers sometimes inadvertently end up buying rotten food. Most customers do not pay attention to the cleanliness and maintenance of retail shops. They are simply looking for the quality of the food and beverages. For instance, some consumers are confident that fruit and vegetables sold in the Zeleny Bazaar are 100 per cent better quality than those sold in supermarkets. Supermarkets are considered as artificial and empty. Similarly, some customers think that milk sold by the old lady in a street is tastier and more natural than wellpackaged milk sold in a shop. The food and beverage industry lacks well-trained and qualified people in all segments of the supply chain (manufacturing, selling, distribution, and logistics). There is a lack of market focus and safety and standards in the food and beverage industry as a whole.
Wages in the food and beverage industry Salary levels in the industry are below the average salary in the country. Among small businesses this difference is 24–48 per cent, and in medium-sized and large businesses 8–15 per cent. The average monthly salary paid by small businesses is significantly lower than that in medium-sized and large businesses. Table 2.6.5 Average monthly employees’ wage in the food industry* 2002 1999
2000
2001
Average monthly employees’ wage, tenge Small businesses 7,908 8,009 9,328 Medium-sized and large businesses 16,711 18,994 21,807
Q1
Q2
Q3
10,820
12,262
13,289
22,299
23,189
23,441
Average monthly employees’ wage compared to the overall country level, % Small businesses 75.7 56.0 51.4 55.5 57.0 59.3 Medium-sized and large businesses 108.9 102.4 93.2 86.5 84.2 83.8 Sources: Ministry of Economics, National Statistics Agency *
These are reported figures; however, the actual figures are much higher.
The number of employees working in the food and beverages industry from January–September 2002 was 12,509. This is equivalent to 17.9 per cent of personnel employed in all Almaty manufacturing businesses and 2 per cent of all the country’s employees.
Food and Beverages: Outlook, Issues and Trends in Kazakhstan
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Tables 2.6.6–2.6.10 give further financial information about Kazakhstan’s food and beverage manufacturers. Table 2.6.6 Sales, million tenge 2002 1999
2000
2001
Q1
Q2
Q3
Food and beverage 19,573.80 production Meat 925.00 Processed and 71.40 preserved fish Processed and 155.00 preserved fruits and vegetables Vegetable oil and 1,223.70 animal fat Milk foods 757.60 Flour and cereal 1,429.20 foods Beverages 7,149.40 Finished fodders Others 7,862.50
27,022.20
38,362.30
9,504.50
11,884.10
12,187.90
1,353.40 72.70
1,720.00 81.70
410.60 25.40
456.80 22.40
480.70 25.70
665.30
1,091.90
355.10
288.50
276.60
1,763.60
5,496.10
1,388.80
1,420.70
1,356.40
744.40 1,719.80
787.40 2,507.80
429.80 445.00
493.60 492.00
473.90 638.30
10,076.50 158.50 10,468.00
13,984.50 160.30 12,532.60
3,215.20 25.30 3,209.30
4,565.40 7.20 4,137.50
4,987.70 4.90 3,943.7
Table 2.6.7 Profit and loss, million tenge 2002 1999
2000
2001
Food and beverage –4,503.70 production Meat 148.10 Processed and –0.40 preserved fish Processed and –243.80 preserved fruits and vegetables Vegetable oil and –1,031.00 animal fat Milk foods 30.10 Flour and cereal –169.10 foods Beverages –3,488.80 Finished fodders Others 251.20
–447.60
1,977.20
149.60
77.10
311.30
99.30 –0.80
73.30 0.90
24.10 0.50
22.40 –0.70
33.80 1.70
–47.70
20.00
–91.90
–37.60
–31.50
–428.70
359.90
72.40
65.20
55.80
27.50 –129.10
–8.30 76.30
–10.30 –7.40
–61.00 –57.80
–29.40 –78.00
–115.20 –4.50 151.60
1,209.90 –11.20 256.40
57.30 –4.80 109.70
38.10 –2.80 111.30
350.80 –4.00 12.10
Sources: Ministry of Agriculture, National Statistics Agency
I
II
III
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Market Potential
Table 2.6.8 Share of unprofitable food manufacturers, % 2002
Food and beverage production Meat Processed and preserved fish Processed and preserved fruits and vegetables Vegetable oil and animal fat Milk foods Flour and cereal foods Beverages Finished fodders Others
1999
2000
2001
Q1
Q2
Q3
51.80
45.70
43.90
37.60
41.80
39.30
53.80 50.00
40.00 33.30
44.80 27.30
44.40 20.00
44.00 36.40
24.10 33.30
100.00
20.00
16.70
33.30
33.30
50.00
33.30
40.00
50.00 36.40
50.00 39.40
46.70 43.60
43.80 42.20
50.00 51.20
45.80 38.10
51.90
42.20 100.00 51.90
47.40 60.00 46.20
49.10 100.00 29.20
33.30 50.00 44.00
41.90 50.00 41.60
56.50
14.30
14.30
Table 2.6.9 Profitability of food manufacturers, % 2002
Food and beverage production Meat Processed and preserved fish Processed and preserved fruits and vegetables Vegetable oil and animal fat Milk foods Flour and cereal foods Beverages Finished fodders Others
1999
2000
2001
I
II
III
–23.60
–1.60
5.30
1.60
0.70
2.70
19.00 –0.50
7.80 –1.10
4.40 1.10
6.10 1.90
5.10 –2.90
7.50 7.30
–18.60
–6.60
1.80
–28.20
–13.90
–11.50
–45.70
–20.10
6.90
5.60
4.90
4.30
4.10 –11.70
3.80 –7.10
–1.00 3.20
–2.30 –1.60
–11.40 –10.50
–6.20 –10.80
–55.40
–1.20 –2.80 1.50
8.90 –6.50 2.10
1.80 –16.20 3.50
0.90 –10.60 2.70
7.80 –12.00 0.30
3.40
Sources: Ministry of Agriculture, Ministry of Economics
Food and Beverages: Outlook, Issues and Trends in Kazakhstan
Table 2.6.10 Receivables and payables, million tenge Receivables
Food and beverage production Small businesses Medium-sized and large businesses Meat Processed and preserved fish Processed and preserved fruits and vegetables Vegetable oil and animal fat Milk foods Flour and cereal foods Beverages Finished fodders Others
Payables
2001
Q3, 2002
2001
Q3, 2002
7,972.70 1,770.50 6,176.20 167.70 3.00 560.70
11,026.70 3,392.40 7,634.30 73.80 7.80 452.10
26,869.30 4,224.80 22,644.50 445.10 9.00 1,429.10
32,249.40 7,395.20 24,854.20 100.90 27.30 1,341.60
806.70 137.70 629.50 3,706.40 18.90 1,942.10
1,223.90 301.90 1,571.30 4,922.30 188.70 2,284.90
5,922.70 521.30 2,172.30 12,144.70 36.50 4,188.60
5,212.10 1,456.00 2,600.30 15,415.40 1,089.20 5,006.60
Sources: Ministry of Economics, National Statistics Agency
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2.7
Food and Beverages Case Study: Almaty Restaurants as an Arena for Future Growth Russell Hughes Ragsdale
Background for failure Since the beginning of transition in Kazakhstan, the essential problem with the expansion of cuisine styles in restaurants has been authenticity. It is an obvious impossibility to reproduce something one has never tasted. Recipes go a long way down the path to getting to the reproduction of a classic dish, but if you have never been somewhere before, you cannot know you’ve arrived unless someone is there to assure you that this is the right place. The obvious technique used to overcome this problem has been to put foreign chefs in charge of local personnel. Usually the foreign chef is only able to hold the kitchen to the pattern required by the menu for a short period. He or she is considered an unnecessary expense too quickly and the kitchen is turned over to local direction. The predictable result is the proverbial situation of the blind leading the blind. The character of ownership seems to be the blame. General lack of experience in the restaurant business, coupled with a specific lack of sophistication in food, doom the owners to acting in ways that usually lead them to non-productive businesses. They fail to utilize expertise properly, and characteristically fail to understand the true complexities of the industry. Most local establishments are not capable of evaluating the qualities of local staff or recognizing these staff as valuable. This results in a very thin layer (low demand) of highly qualified professionals. The nature of the culinary institutes – from the time of the Soviet Union – as the last institute one could qualify for when one could not get accepted anywhere else, provided the industry with another negative
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pressure. The candidate for that institute was as likely to be motivated by the desire to get into an institute more than any interest or talent in cooking. Because of low qualification standards, low intelligence is often a component in the make-up of a local culinary institute graduate. Consequently the personnel require much decision-making supervision and it is often not possible to use them in management positions.
Analysis of a success An important aspect of the transformation in the restaurant business in Almaty has been the presence of the Moscow group behind the American Bar and Grill chain. It was a chain operating in Moscow from early post-transition days that had done well in that marketplace. The company eventually targeted Almaty as a site for business expansion. It did well in picking a location and did remarkably well in putting together a structured operation in its first site. In a city where perhaps as many as 100 restaurants, some even with world-standard interiors, sit virtually empty, American Bar and Grill has managed to capture and hold a strong market position. It has now brought in its Planet Sushi and Patio Pizza chains and has a growing number of outlets in a time in which others regard the market to be saturated. The American Bar and Grill is a restaurant-style operation while the other two are predominantly fast-food type outlets. Some analysis of the basis for the company’s success is instructive. The chain is said to have had foreign partners and that includes the necessary kitchen training component. The Almaty outlet contains all local staff, however, and that is usually a recipe for failure. In their case the result was completely the opposite. The main differences between these and other local staff used in food outlets is that these locals had the best and longest experience in world-standard food preparation and service, and were selected for their management skills. They were undoubtedly expensive by local standards. The importance of strong and knowledgeable management, however, is imperative to business success. Also, the staff selected were sent to Moscow or other locations outside Kazakhstan for in-depth and sometimes extended training. Because they work in a chain they have the benefits of a recipe book (an Excel program, or similar) and a professional menu. The menu is fairly standard and therefore is able to be taught in one location and practised in another. This means that the staff can be sent to be taught to the best-performing kitchen in the chain and learn to work at the highest level of accomplishment the chain demonstrates. Such training procedures elevate the cost per employee significantly but other
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Market Potential
policies can be used to minimize the risk incurred by such practices. Management is used to impose strong standards of work and the employee is deterred from elective change of work place by virtue of a stiff financial penalty imposed on termination of the employment contract before two years has elapsed. Another difference is that the management of these operations is professional in ways that are standard elsewhere in the world. When employers treat the staff as would be customary in developed countries it makes a significant difference. Generally, the people have become used to being treated as vassals and serfs rather than employees. It is difficult to say where this might have come from. The cult of the powerful person seems to be a hangover from earlier times and this would be a logical extension of that. This would also match the common management style which has only the localized centralization of the type found in a feudal kingdom. This structure is also based on the concept of the powerful person, rather than a structure specifically aligned toward management by and for people with specialized talents and skills. The latter structure can be more effectively shaped to meet the needs of a specific marketplace whereas the feudal type is much more generalized. A professionally structured organization such as this Moscow-based chain is more suited to meet modernizing needs (people very seldom ate in restaurants during the Soviet Union times) and to deal with staff in a modern and professional way (which produces a modern product). The importance of an extra-regional standard of production should not be understated. The chain product is mandated by the presence of the recipe book (which also has menu pricing, product uniformity, purchasing, and accounting implications) but this is only part of the process of achieving an imported standard. Another component is the centralized and specialized management structure that can successfully import a menu outside the scope of local conception. There must also be a training aspect for local management that exceeds the scope for local standards and promotes the actualization of the imported standard. Expatriated training (where staff from the local facility can observe that different standards are really normal) seems to be most effective for this type of training. Finally, having that specialized, centralized management effectively support local actualization of imported production standards, perhaps to the point of chain-wide recognition of achievement, seems to make this whole system function in an environment riddled with apparent failures.
Brief overview of other new trend institutions There are two directions visible in the vanguard of successful restaurants, including fast-food outlets. International cuisine and local
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regional cuisine both appear to be functional options as the basis for menus. In addition to their supermarkets, Ramstore and Dostarkhan (Eubelenya) both have large food courts. Both are very successful. At Ramstore’s food court the selection is international; at Dostarkhan the menu is local. There is seating for around 300 people in both locations and sometimes it is difficult to find a table at either place. Venitsia is a pizza–pasta outlet that has held on to its popularity for a good number of years. It, like Ramstore, is reputed to have a few foreign chefs in leading positions. Dostarkhan, on the other hand, seems to be being supervised by Russian chefs of long experience. There is one recent addition to this group. In the summer of 2003 a Korean businessman opened a summer seating restaurant serving local food. It also has a large, open-air seating capacity and is rumoured to take a million tenge (a little less than US $7,000) a day. There are also several pubs and bars in Almaty. The brewery and pub Altin Orda continues to be successful, serving local dishes with its own beer. It started with foreign supervision of its brewing process but for some time now has maintained that process itself. The only other local pub has become a billiards place and few foreigners still go there. The Soho bar and restaurant has had its ups and downs over the past few years but is currently enjoying some good client response. A Belgian restaurant and bar called the Line Brew has been successful for a number of years but it is the foreign part of the management that maintains its European standards. Dickens, an English pub, has made attempts at international cuisine, but not particularly successfully. It is a busy operation but the clientele is exclusively local. Mad Murphy’s Irish Pub is enjoying an upswing due to the presence of a new foreign manager. City Market has opened in a mall-type location and has a limited but busy food court. The offerings are a burger place and a local food café. There is one good hamburger place in town whose product is comparable with standards in Europe. It is a Hesburger outlet and, since it is probably a franchise operation, it achieves a standard in excess of the local marketplace. It deserves mention as a local enterprise, with all local staff, which is driven to higher standards of performance, thereby making it part of an elite category. Unfortunately, it is a little like Dorothy’s house in the film The Wizard of Oz – it came down whole but in the wrong place. It is close to the Green Bazaar and, although many people come to that area, they are generally from the wrong client base. Certainly this shows that one can make mistakes in location if the business specializes in high volume, as is the case with fast-food outlets. The last important area to mention is the bazaars themselves. They always have little cafés, bars, and the inevitable shashleek, chiborecky and plov stands. They are always busy during shopping hours and are
130
Market Potential
entirely local in every sense. The one change in this aspect of fast food over the last ten years has been the inclusion of doner stands at the bazaars which are Turkish owned and operated generally. Their inclusion has been popular over the long term and, although their sales are experiencing pressure from restaurants away from the bazaar areas, they remain as strong as ever within the traditional market areas.
Industry recommendations It appears obvious that there must be an upgrade of the quality of personnel who go into the restaurant industry. Legitimate colleges and universities should be offering degrees in hotel and restaurant management in Kazakhstan, as is the case in all the developed countries. This is one of the fastest ways to increase the number of highly qualified hotel and restaurant personnel. Those that are lost to the recruiting needs of the world marketplace still enhance the local work pools by increasing the attractiveness of their occupations to prospective workers. Additionally, there is real value to be gained by training and work experience received outside the local work area. The example presented earlier shows that part of any programme should, in any case, include out-of-country training sabbaticals. Provincialism in taste seems to respond most quickly and thoroughly to this kind of experience. Couple that with the benefits associated with high qualifications and the staff begin to resemble what the model history demonstrated. Currently the work pool is already depleted of top-level personnel and the apprentice system is too slow to yield results fast enough to meet current demands for the highly qualified. It appears a reliance on foreign personnel will stay a part of the current success pattern. In reality it has persisted in sophisticated, cosmopolitan areas such as England, Europe, and the United States for a long time as talent is welcomed in those places, regardless of its origin. If nationalistic promotions succeed in driving the foreign presence from the workforce (and such pressures are at work), they will have to relax that pressure if Kazakhstan is ever to achieve the level of tourist infrastructure to be enjoyed in the developed countries. Hotel and restaurant management experience is also in short supply in Kazakhstan. Management styles must change and this can only be achieved by increasing the education level in this specific area of business, as mentioned earlier. Once again it is a question of timeliness. The market is demonstrating the value of the right type of management and competition will call for some capitulation to a higher standard. Unfortunately improvement will undoubtedly be an unnecessarily slow process without direct and swift intervention.
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Current national food patterns are not ideally suited for showcasing to a broadly marketed tourism programme. They will give rise to some tourist trade in the future, but most of what is exportable has already gone out through tourism in Russia. Many current food offerings here are already on the streets of the major cities in the United States. This leads one to conclude that an expanded selection of cuisine types will continue to prosper here. The pattern of success enjoyed by the companies in the examples is still only replicable with the inclusion of some imported skills, until such time as the educational institutions input major improvements in the training given to professionals for this industry.
2.8
Telecommunications Services David M Josselyn and Jeff Andrusevich, IT & Telecoms Working Group, The American Chamber of Commerce
Market overview Kazakhstan’s basic nature as a landlocked country with a relatively small population spread out over a large geographic area has created special challenges in the provision of telecommunications services. Large steps have been taken in meeting these challenges since the former CIS country gained independence in 1991, with accelerated progress in the past three years. The dominant player in the market is the national operator, Kazakhtelecom. Kazakhtelecom has over 2 million fixed line subscribers and capacity for several hundred thousand more with current equipment, which is still being modernized as new digital equipment replaces older analogue gear. The number of telephone lines per capita in urban and rural areas illustrates the special challenges posed by Kazakhstan’s geography. Only 20 per cent of households in Kazakhstan have a telephone; the density of lines is 14 per 100 nationwide; however, the rate in urban areas is 19 per 100 and in rural areas only 5 per 100. The role of private companies in the telecommunications market is largely limited to mobile telephony, Internet-related services, and services for the corporate market, namely in the oil and gas, mining, energy, banking and aviation sectors. Competing companies have made significant gains in mobile telephony; however, in this sector either the Government of Kazakhstan or Kazakhtelecom itself owns significant portions of two of the three mobile operators. The Government and Kazakhtelecom now control what was once the leading independent Internet service provider (ISP), Nursat.
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The Trans Asia–Europe Optical Fiber Cable project has been completed and is now in full operation. It connects China, Kazakhstan, Uzbekistan, Russia, Iran, and Turkey. Incoming capacity for Internet traffic now well exceeds 100 Mbps, more than doubling in three years. The modernization of the country’s telecommunications infrastructure has encouraged many foreign manufacturers to establish a presence in Kazakhstan, including Alcatel, Cisco Systems, Daewoo, Ericsson, Hua Wei, Lucent Technologies, Motorola, Nokia, Nortel, and Siemens. The size of the entire telecommunications market in terms of imports is estimated at approximately US $98.5 million. The country produces no telecommunications equipment of its own, and does a limited amount of re-exporting to other countries in the region.
Mobile services Kazakhstan has three major mobile operators. The dominant two operators use the GSM standard on the 900 MHz band. Of those, GSM Kazakhstan, marketing under the name K’Cell, is the market leader with over 1 million subscribers and over 60 per cent market share. The next nearest competitor is the GSM operator KarTel, which uses the brand name K-Mobile, with less than half the subscriber base, claiming 400,000 subscribers. While the growth of the mobile market since the introduction of GSM in 1999 has been extremely high, with a more than ten-fold increase occurring between 1999 and 2003, as the market matures, operators have begun introducing value-added services. K’Cell introduced GPRS and MMS services in the fall of 2003, and K-Mobile was reported to be on the verge of doing the same. Altel, which operates on AMPS 800, was the first mover in the mobile market, but was hard hit when the introduction of GSM and the resultant competition forced prices and margins down. Previously a joint venture with Metromedia, a company that had many technology and media interests in the region, Altel is now solely controlled by Kazakhtelecom, which owns 50 per cent, and a group of local investors. The company has hitched its future on an upgrade to CDMA, which should increase quality and offer new services that the analogue AMPS standard was unable to provide. The company has selected Ericsson as the vendor for this equipment. Both GSM operators, while enjoying some success, have faced stiff challenges both from Kazakhtelecom and the Government. Longstanding disputes exist with the Government over the fulfilment of reciprocal obligations, with operators claiming that the Government has not met its contractual obligations for the provision of radio
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spectrum, and the Government claiming that operators have not met commitments for geographical coverage.
Fixed line services Kazakhtelecom dominates the market for voice services over wireline, with approximately 61 per cent market share. All of Kazakhtelecom’s international and long distance networks are digital, and as of mid2003, approximately 45 per cent of the local network had been upgraded to digital equipment. Three international switching stations are now online, compared to only one three years ago. Independent operator Arna, marketed under the name Ducat, is the second-largest fixed-line public operator in Kazakhstan. Within its primary market, the former capital of Almaty, it enjoys nearly equal access to the local market with Kazakhtelecom; it has its own publicly accessible block of numbers (beginning with 50) and so is able to offer voice telephony and dialup Internet to clients on an equal footing with the national operator, free of the restrictions placed on companies that only have licences for operating private (corporate) networks. The only private, truly full-service telecommunications provider in Kazakhstan, Ducat has continued to expand its all-digital network and introduce value added services. DSL became available in 2003, along with wireless local loop (WLL) services for less accessible areas. However, as the only private competitor in many of these areas, Ducat faces unique challenges when dealing with operators providing national service on the local level, such as AlmatyTelecom and AtyrauTelecom, since these companies control access to ducts and interconnection to the PSTN. However, it is anticipated that changes in the telecommunications regulations will grant equal access to networks and ducts.
Regulatory climate The regulatory climate of the telecommunications market in Kazakhstan is driven by several apparently conflicting trends. The Government has committed to what it refers to as ‘full liberalization’ of the sector by 2005, and has officially adopted a programme to fulfil that goal. Towards that end, the monopoly on international traffic granted to Kazakhtelecom is being cancelled early; this should take place in the first quarter of 2004. In addition, two changes have been made in the structure of how the sector is regulated: the Anti-Monopoly Committee, which regulated pricing in monopoly markets, including transportation and telecommunication, has been transformed into a separate Anti-Monopoly Agency; and
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the former Committee on Telecommunication and Informatization, which was part of the Ministry of Telecommunications and Transportation and regulated both telecommunications and information technology policy, was also made a separate, independent Agency for Informatization and Communications. Both report directly to the President of the Republic of Kazakhstan. It is anticipated that this latter move was made in part to fulfil the requirements for WTO accedence that specify an independent telecommunications regulator; as part of the Ministry, the Committee for Telecommunications and Informatization did not qualify because the Government owns an interest in several operators, including Kazakhtelecom and its private competitors. However, against the backdrop of these positive changes there have been some unsettling movements. As part of the sector development plan to be enacted from 2003 to 2005, the Agency for Telecommunications and Informatization has been charged with revising the country’s telecommunications regulations. Certain drafts of the new law have introduced new restrictions, such as a cap on the foreign investment in telecommunications operators which might be applied retroactively, negatively affecting existing operators with significant foreign investment. In midOctober, an official from the newly formed Agency for Informatization and Telecommunication approached several major providers with foreign investment, advising them that a limit of 49 per cent of foreign ownership in a telecommunications provider exists in the new draft law governing the telecommunications sector, and requesting that management inform their shareholders and respond within three days. Such actions could have a chilling effect throughout the entire foreign investment community. In addition, Kazakhtelecom is requesting that it be allowed to raise certain tariffs on other operators in order to compensate for the loss of its monopoly on international traffic.
Key players Altel Kazakhstan’s first mobile operator suffered heavy losses of clients after the 1999 entry of two GSM companies, and is now staking its future on upgrading to the CDMA standard to offer higher quality and additional value-added services. Prior to 1999, the company had enjoyed a virtual monopoly in the mobile telephony market, and prices were quite high. The Government owns 50 per cent of Altel, the rest is held by Wireless Technology Corporation Ltd. http://www.altel.kz/. Astel Founded in 1993 as Arna Sprint Data Communications, after 10 years Astel is one of the larger non-state operators, and holds licences for a
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dedicated satellite network and local telephone networks. It offers data transmission services, and has offered Internet access since 1996. It has representative offices in 20 cities in Kazakhstan, including Almaty, Astana, Aksai, Atyrau, Karaganda, Shymkent, Pavlodar, and Semipalatinsk. It has network operations centres in Astana and Almaty, and has fibre optic channels to Hong Kong and Russia. http://www.astel.kz/. Ducat (Arna) Arna, marketing itself under the trademark Ducat since early 2002, operates in Almaty and Western Kazakhstan, primarily Atyrau. It offers PSTN services in Almaty with prefixes in the 50 exchange. In the past two years, it has expanded to focus on broadband Internet and non-voice value-added services, which now account for 20 per cent of revenues. Since 2002 it has offered DSL for businesses and individuals, and in 2003 began offering WLL services for locations inconvenient to serve with wireline. Incoming capacity has increased significantly since 2001. The company continues to invest in expanding its network. 2003 revenues are expected to be approximately US $17 million. http://www.ducat.kz/. Jarykh Created in 1991, Jarykh Ltd was one of the first private companies in Kazakhstan providing satellite telecommunications service. It has several licences for service provisioning within Kazakhstan. Several companies have been formed with the active support of Jarykh: Alma TV, AlmaPage, Instaphone, KazPage, Spectrum, Asibo and others. Jarykh is a signatory and control centre for Inmarsat within the territory of Kazakhstan. http://www.jarykh.kz/. Kazakhtelecom Kazakhstan’s national operator holds a large advantage over nearly all its competitors in every market segment in which it offers service. Established in 1994 under the Ministry of Communication, it became an Open Joint-Stock Company in 1997. Kazakhtelecom is held 50 per cent by the Government, 30 per cent by Kazkommertsbank, and 10 per cent by the Bank of New York, with the balance of voting rights being exercised through preferred shares. Kazakhtelecom owns interests in several other major operators, including 50 per cent of GSM mobile operator GSM Kazakhstan (K’Cell), 50 per cent of the AMPS mobile operator Altel, which intends to upgrade to CDMA, and 41.25 per cent of Nursat. Kazakhtelecom now has over 2 million fixed line customers. All international and long distance exchanges are digital, and as of mid2003 approximately 45 per cent of local exchanges have been upgraded
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to digital equipment. The company had approximately US $380 million in operating revenue in 2002. http://www.telecom.kz/. K’Cell (GSM Kazakhstan) GSM Kazakhstan, marketing under the trademark K’Cell, is Kazakhstan’s leading mobile operator. It uses the 900 MHz GSM band and since beginning operations in 1999 has gained over 1 million subscribers. It has a prepaid card product marketed under the name Activ. K’Cell has been aggressive in launching new value-added services, such as GPRS for high speed Internet access, which became available in September 2003. GSM Kazakhstan is owned 49 per cent by the Government and 51 per cent by FinTur Holdings, which is 58 per cent TeliaSonera and 42 per cent TurkCell. http://www.kcell.kz/. K-Mobile (KarTel) KarTel, operating under the brand name K-Mobile, is also a GSM 900 mobile operator. It began operation in 1999 and currently claims approximately 400,000 customers and has a prepaid card product called Excess. Of late the company has been the subject of a protracted court battle between local and Turkish investors. http://www.k-mobile.kz/. Katelco Katelco provides broadcast services for national, regional and corporate TV; it specializes in audio and video delivery, but also offers data transmission and Internet access. The company was founded in 1995, and has partnered with Hughes, Motorola and Gilat. http://www.katelco.kz/. KazTransCom OJSC KazTransCom is a subsidiary of the national oil and gas company KazMunaiGaz and has its branches in seven cities of Kazakhstan: Atyrau, Aktyubinsk, Pavlodar, Uralsk, Mangistau, Almaty and Astana. KazTransCom’s primary business is oriented to provide the oil and gas sector with modern communications services over the entire geographic area of Kazakhstan. http://www.kaztranscom.kz/. MCI (Worldcom) MCI is the United States’ second largest long distance company. It delivers a comprehensive portfolio of local-to-global business data, Internet and voice services. A leader in IP network technology and virtual private networking (VPN), MCI delivers VPNs based on private data networks and its global Internet backbone, which spans six continents, over 140 countries, over 2,800 cities and over 4,500 Points of Presence. MCI’s portfolio includes private lines, frame relay, ATM and a full range of dedicated, dialup and value-added Internet services.
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In Kazakhstan, MCI has been active since 1992 with Kazakhtelecom and other telecom operators, as well as Government and business customers. http://www.mci.com/. Nursat Nursat, once the country’s leading ISP, is now largely under the control of Kazakhtelecom and the Government, with approximately 40 per cent of shares held by the national operator and approximately 20 per cent held by the Government. Nursat has a countrywide data network operating in nearly every populated area of the country, and in recent years was very successful marketing a prepaid card that offered Internet access as well as international telephone calls at heavy discounts utilizing controversial VOIP (voice over Internet Protocol) technology. Given fierce competition between Nursat and the national operator, the recent change in ownership signals some uncertainty in the company’s future direction. The company holds a licence for data communication and a licence for a private network with the prefix 571. http://www.nursat.kz/. SA Telcom (Golden Telecom) Russian telecom operator Golden Telecom came to Kazakhstan in 2000 and operates as SA Telcom. SA-Telcom LLP had been founded in 1995 as an outgrowth of Sary-Arka’s telecommunications department. SA Telcom provides data transmission and high speed Internet access in 17 cities of Kazakhstan, including Almaty, Astana, Atyrau, Aksai, Tengiz, Pavlodar, Karaganda, Semipalatinsk, and Shymkent. http://www.goldentelecom.kz/. Spectrum Spectrum is a major trunking provider that operates MPT1327 and SmartTrunk II networks. Spectrum operates in regions around Kazakhstan, including Almaty, Astana, Atyrau, Pavlodar, Shymkent, Semipalatinsk and Mangistau. http://www.spectrum.kz/. TNS-Plus TNS-Plus offers VSAT and Inmarsat satellite service in Kazakhstan since 1995. TNS-Plus was the first company to receive an area code for its private network, which is 570. http://www.tnsplus.kz/. Transtelecom Transtelecom is the company which provides modern communications services along the railways of the Republic of Kazakhstan.
2.9
Regulation of the Telecommunications Sector in Kazakhstan Alexander V Barsukov, McGuireWoods Kazakhstan LLP
Introduction Telecommunications in Kazakhstan represent an important part of its economic and social infrastructure. Substantial growth of wireless services and data transmission and the introduction of modern telecommunications technologies are the key factors for the rapid development of Kazakhstan’s telecommunications industry. The existing communications network in Kazakhstan is being constantly improved and upgraded by implementing value-added services and sophisticated facilities. This, however, requires the existence of a developed legal and regulatory framework that now is represented by the Law on Communications of 1999, as amended (‘Communications Law’), some other laws, and various governmental rules and regulations. The Communications Law provides the framework for regulation of virtually all sectors of the telecommunications business and provides a basis for the adoption of detailed rules, procedures and regulations.
Regulating authority Before 13 June 2003, the regulating authority of the telecommunication sector of Kazakhstan was the Committee for Telecommunication and Information Technology Development of the Ministry of Transport and Communications. On that date the Presidential Decree ‘On Further Improvement of the System of Public Administration’ abolished the Committee and transferred all its functions and authorities
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to the newly established Agency for Information Technology Development and Telecommunication (the ‘Agency’). The Agency is responsible for implementing and pursuing state policy in the telecommunications and information technology development industries, for carrying out state regulation, engineering supervision and control in these sectors, and for development of the national information and telecommunication infrastructure. The Agency is also responsible for issuing licences to telecom operators, for radio frequency allocations, for issuing permits for sale, operation and import, as well as registration of radio-electronic and high-frequency devices, and for managing the state shareholdings in the national companies engaged in the telecommunication and information technology businesses, such as Kazakhtelecom and National Information Systems. The Agency also supervises and controls telecommunications operators and monitors compliance with the terms of their telecommunications licences. A number of other state agencies and institutions also have authority over the telecommunications sector. The National Security Committee is responsible for presidential, government and military communications. The Committee for Standardization, Metrology and Certification of the Ministry of Industry and Trade has authority over the standardization and certification of telecommunications equipment. The Agency for Regulation of Natural Monopolies and Protection of Competition (the ‘Antimonopoly Agency’) has authority over the approval, regulation and supervision of tariffs and tariff policy for natural telecommunications monopolists, such as Kazakhtelecom, and has control over procurements of goods and services by such companies. The State Inter-Departmental Commission for Using Radio Frequency of the Government of Kazakhstan is in charge of formulating recommendations and proposals relating to the distribution and use of radio frequencies in Kazakhstan.
Public telecommunication networks Public Telecommunication Networks of Kazakhstan, which is run by Kazakhtelecom, includes all Kazakhstani communication networks, except for dedicated and departmental networks (ie telecommunication networks that are owned and operated by State agencies for their own needs or special purposes). In fact, Kazakhtelecom has a monopoly position on the market of interregional and international communications of the public network. The interconnection of departmental communication networks with the public telecommunication networks is carried out on the basis of an Interconnection Agreement with Kazakhtelecom, provided a
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departmental network complies with the requirements and technical norms established for the public communication network. The departmental telecommunication networks may be used to render communication services to third party customers only in accordance with a licence issued by the Agency. Dedicated telecommunication networks may be created by any legal entity or individual. The provision of services by operators of a dedicated telecommunication network is subject to licensing by the Agency. If a dedicated telecommunication network is interconnected to the public telecommunication networks, the dedicated network becomes an integral part of the public telecommunication networks. The procedure for connection of telecommunication networks of various operators to the public telecommunication network, the regulation of the passage of traffic and payment for interconnection and the use of the network resources are governed by the Regulation on the Procedure for Connection of Telecommunication Networks to the Public Telecommunication Networks and the Procedure for Regulation of Passage of Telephone Traffic through the Public Telecommunication Networks (the ‘Regulation’) approved by the Agency. Pursuant to the Regulation, all telecommunication networks connected to the public telecommunication networks are deemed to be an integral part of the public networks and the rules for provision of services applicable to the public networks are extended to cover the connected networks. In practice, however, Kazakhtelecom often delays connection of independent operators to the public network since, as a natural monopoly, it is not interested in increasing competition in this sector of the telecommunications business. In order for a telecommunication network to be connected to the public telecommunication network it must comply with the stability and information security requirements established by Kazakhstani legislation, and only certified telecommunications equipment may be used on such a network. Such a network must be managed by a management centre located in Kazakhstan. The technical conditions of connection of a network to the public network are established by specifications issued by the operator of the public network, ie Kazakhtelecom. Pursuant to the Regulation, if an operator of a connecting network complies with all the requirements of the Regulation and Kazakhtelecom’s specification, it may not be refused connection to the public network by Kazakhtelecom. Any such refusal would be deemed a breach of its licence as an operator of the public network. Passage of local, interregional and international traffic of the public network through connecting networks can only be made on the basis of agreements entered into between Kazakhtelecom and the operators of connected networks. All incoming and outgoing international traffic of the public networks and connected networks can only be passed
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through the international telephone exchange of Kazakhtelecom as international operator of the public telecom networks. In practice, however, many telecommunications operators do not pass their interregional and international traffics through the international telephone exchange of Kazakhtelecom using IP telephony and, thus, are in breach of applicable regulations.
Licensing Pursuant to the 1995 Licensing Law and the Governmental Regulation on the Procedure for Licensing Business Activities in the Sphere of Postal Services and Telecommunications, and Using of Frequency Range in the Republic of Kazakhstan of 1996, as amended, the Agency is the authorized state body for issuing licences to provide various telecommunications services. The scope of licensing covers almost every type of telecommunications business. Thus the Agency issues licences to provide the following services, among others: • local, interregional and international telephone services; • satellite communications; • cellular communications; • data transmission services; • telegraph, telex and teletype services; • paging services; • mobile radio communication services; • TV and radio broadcasting and satellite TV; and • cable television services. A company may hold several different licences to provide one or more services. Licences are not transferable. A licence is not required for the following services: internal communication networks within the same company provided for its own purposes without connection to a public network or using a radiofrequency range; and telecommunication services provided exclusively for state purposes, including state administration, defence, security and protection of public order. If a company wants a licence to use a radio frequency range, such as for cellular communications or for TV or radio broadcasting, it must obtain from the Agency a Permission for Using of Radio Frequency Range, which is renewable every six months until the expiration of the term of the licence.
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A licence for telecommunications service may be issued for a term of 3 to 15 years, depending on the type of business, and is renewable. The licence contains a detailed description of the services to be provided, including the scope of the work (or network capacity), the area of coverage and the liability of the operator to its customers. There is an official annual licensing fee of 5,232 tenge or approximately US $35 at the current applicable exchange rate. In practice, however, much higher amounts are paid to obtain a licence through a tender procedure which, pursuant to the Regulation, must be held if there are more applications for a particular business than it is technically possible to satisfy, or if new telecommunications services involving the use of the most economically efficient frequencies are offered. The terms and conditions of a tender for each particular licence shall be established by the Agency. In order to hold a tender, a special Tender Commission must be organized by the Agency. Members of the Tender Commission, in addition to representatives of the Agency and the State Inter-Departmental Commission for Radio Frequency, may include representatives of various state agencies, including the Antimonopoly Agency, the State Property Committee, local authorities, or experts or consultants. The Tender Commission establishes the terms of the licence, the minimum price at which the licence will be sold, its commencement date, the date of submission for applications and the tender procedure. All information concerning the terms and conditions of the tender must be published in the media. Applications must be submitted to the Tender Commission and the applicant offering the best terms should be elected as the winner of the tender. A licence may be suspended or revoked by the Agency. The licence may be suspended for the following reasons: • if the payment of the licence fee is overdue for more than a month; • failure to comply with the terms and conditions of a licence as determined by an inspection by the Agency; • failure to comply with technical norms, operational regulations or quality of services; • failure to provide services within three months after the date of the licence’s commencement; • provision of inaccurate information about the quality of communication services provided to customers; or • refusal to provide documents requested by the Agency in order to evaluate the quality and scope of the licensee’s services. The Agency’s decision to suspend a licence may be challenged in a court. A licence may be revoked through a judicial procedure for the following reasons:
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• performing activities not envisaged by the licence; • failure to remedy the circumstances that resulted in a suspension of the licence; • a breach of antimonopoly legislation established by the Antimonopoly Agency; or • temporary or permanent transfer of a radio frequency assigned to a licence holder to a third party.
National Operator The Communication Law provides that the National Operator shall be the operator of the public networks that is responsible for providing public communication services to any user in any populated area. Kazakhtelecom currently enjoys the status of the National Operator because of its monopoly in the market and its ability to provide local communication services in distant areas of the country at low rates and below the prices that are established by the Government for socially important tariffs. The losses incurred by Kazakhtelecom from the provision of such services are covered by the income received from interregional and international telecommunications services, ie socalled cross-subsidies. Regulations on the National Operator that should establish rights, obligations and liability of Kazakhtelecom as a National Operator and rights and obligations of other telecom operators vis-à-vis Kazakhtelecom must have been approved by the Government pursuant to the Communications Law, but to date the Government has only passed a Resolution that confirmed the status of Kazakhtelecom as the National Operator and the exclusive operator of interregional and international telecommunications.
Telecommunication equipment Telecommunication equipment, including radio, electronic and highfrequency devices imported or produced in the Republic, is subject to mandatory certification.The requirements for certification are established by the Law on Communication, the Law on Certification, and the Law on Standardization of 1999. The State Committee for Standardization, Metrology and Certification is of a certification authority. Certification is conducted in order to ensure technical compliance of telecommunication equipment to Kazakhstani state technical standards. Certification is carried out by the certification institutions approved by the Agency and pursuant to the rules and conditions established by the State Committee for Standardization, Metrology and Certification and
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the Agency. In essence, the certification process involves several stages of testing and evaluation and is lengthy and expensive.
Plans for reform and further developments On 18 February 2003 the Government of Kazakhstan approved the Programme of Development of the Telecommunication Industry of the Republic of Kazakhstan for 2003–05 (‘the Programme’). The main goal of the Programme is to create conditions and to develop tools for sustainable development of Kazakhstan’s telecommunications industry and its integration into a global communications infrastructure. In order to facilitate this goal, the Government is planning to improve the system of state regulation and control over the telecommunications industry, to increase the effectiveness of the telecommunications infrastructure and the development of fair competition in the telecommunications market, and to ensure favourable conditions and equal rights for successful work of all telecommunications operators. It is envisaged that the regulatory framework will be improved by amending the Communications Law and the other laws and regulations acts that regulate the industry. It will also be necessary to adopt new laws and regulations in order to provide regulation of the relations between telecommunications operators, service providers, regulating authorities and the ultimate customers. The Government should resolve the problem of development of the local communications market. On the one hand, this market is formally open to potential investors and telecommunications operators but, on the other hand, its development is restrained by low local communication tariffs that are regulated by the Government and high tariffs of Kazakhtelecom for connecting operators to the public network and for transit of interregional and international traffics. Pursuant to the Programme, the Government is planning to liberalize the Kazakhstani telecommunications market in two stages. The first stage should commence in early 2004 by granting a right to provide interregional and international communication services to all telecommunications operators, which means that Kazakhtelecom will lose its exclusive right to provide such services. At this stage, the Government will also consider the possibility of imposing a 50 per cent restriction on participation of foreign investors in charter capital of local telecommunications operators until 2008, or until a date agreed with WTO after accession of the Republic of Kazakhstan to this organization. The full liberalization of the Kazakhstani telecommunications market is scheduled at the end of 2005, subject to successful completion of the first stage. Kazakhtelecom will retain its status as National Operator but will mostly concentrate on providing network services to other telecommunications operators.
2.10
Kazakhstan IT Sector: Onrush of Technology and Lag in the Law Kuhn Corporation, Moscow, Russia & Kuhn Consulting, Almaty, Kazakhstan
Overview The Kazakhstan Information Technology (IT) sector represents a growing and dynamic market that is especially attractive for international market players in view of the slowdown in the global economy. Although still relatively small, at about US $220 million, the Kazakhstan IT market grew by 25–30 per cent in 2002. It was expected to reach US $275 million in 2003. The major factors contributing to Kazakhstan’s IT sector growth have been a very loose dependence of the local market on the world economy and growing local demand and project market segment extension. The Kazakhstan IT market is extremely price-sensitive. The average consumer generally prefers a low-cost computer to a globally recognized brand. Nonetheless, the Kazakhstan market remains one of the promising emerging markets. Since the Internet became available eight years ago, Kazakhstan’s people, government and private organizations received a lot of information on the opportunities that the Internet and new telecommunications technologies could offer. Local and international organizations and private companies invest millions of dollars into the development of IT in Kazakhstan annually. Due to the efforts of international and local not-for-profit organizations, the Internet has entered various spheres of the country’s development, eg business (online stores), mass media (information Web sites, created by both government and nongovernment organizations, as well as by private companies) etc. The use of the Internet is especially active in education – according to the research conducted by Actis Systems Asia, every third Internet user in the country is a student. The Kazakhstan Government realized the
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importance of the Internet and information technologies in improving the efficiency and effectiveness of the government bodies, educational institutions, etc in promoting economic growth, enhancing transparency and improving quality of life in general. It is therefore trying to explore all opportunities to utilize the IT advantages of Kazakhstan. There is growing demand for imported equipment in the corporate sector. A substantial increase in electronic hardware and software procurements for state-funded national and regional programmes has also contributed to sector growth. Despite growth in the number of small- and medium-sized private enterprises there still isn’t an increased demand for legally imported operating systems, software application packages and enterprise management software. The only fully licensed customers in Kazakhstan are in the public sector, mostly because of government control.
Legal environment Laws and regulations on the IT sector were not a priority for the Kazakhstan authorities but during the last two years or so a number of important regulatory papers were developed. Some of them were adopted by the Majlis (Kazakhstan Parliament Lower House) and have come into force. The Law on Electronic Digital Signature and the Bill of Informatization and the Regulation on Electronic Document Flow which are now under the Majlis’ consideration, along with the already passed laws and decisions, should improve the legal environment for Internet providers and boost the country’s use of Internet technology. At the same time there are some problem areas in the legal environment in the IT sector in Kazakhstan that are common to the whole international community. These are pirated software and ‘grey import’ issues. For example, actual demand for IT products is difficult to determine due to the high level of pirated software products and of ‘grey’ imports (shipments through third countries unauthorized by the original supplier), estimated by the International Planning and Research corporation (IPR) to be as high as 89 per cent of the total market. In recent years, the Kazakhstan Government has taken steps to improve enforcement against piracy, but pirated consumer software remains readily available in street markets. Poor IPR enforcement is likely to severely limit the sales potential of legitimate software suppliers in Kazakhstan. The foundation of the Kazakhstan IT Industry Association in 2001 is perceived as an important step in the industry’s development and legal aspects promotion to the Kazakhstan IT market. Around 12 companies, both Kazakhstani and the local representations of foreign
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companies, have become founding members. The goals of the association are to represent the interests of the Kazakhstan IT industry domestically and internationally, to foster conditions for the future growth of the IT market and to protect the corporate interests of IT companies. The association members include BIPS, ALSI, Actis Systems Asia and GLOTUR as well as Kazakhstani companies.
Government sector An ambitious state programme called ‘Forming and Development of a National Informational Infrastructure in Kazakhstan’ was launched in 2001 and was aggressively used to stress the importance of the IT sector to national authorities. The estimated cost of the programme for the period 2001–03 is about US $130 million. The target is to create key elements of the national informational infrastructure that are able to provide the country with independence and security. Current Kazakhstan Government priorities for the sector are: • to make Internet access easy for private individuals and public sector organizations; • to support IT investments, stressing support to domestic developers; • to proceed with legislative and regulatory grounding of the IT sector. Step by step realization of the state doctrine in this field should be achieved through: • information and telecommunications systems monitoring; • data exchange standardization; • e-commerce promotion; • development of the information infrastructure for the state authorities; • state finance information and telecommunications integration; • development of state databases covering people, legal entities and ‘Kazakhstan Resources’; • monitoring of the social and economic environment in Kazakhstan. State orders have become an important demand driver for IT products. Increased government spending on computers contributed to the growth of the sector with more tenders held for government projects and budget-funded public schools in rural areas. In 2001 government and educational institutions accounted for 35–40 per cent of computer demand. Another factor that boosted PC sales was major IT
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investment projects in mining, banking, financial services and manufacturing. Several state-supported projects were implemented in 2001 including the Presidential programme ‘Computerization of Secondary Schools’. According to the Statistical Committees of the Republic of Kazakhstan, around 81,000 PCs were bought for 8,200 schools in this programme. There is 1 PC per 40 students on average in Kazakhstan, compared with 1 PC per 80 students in Russia. The winners of the tender for this project included ALSI, GLOTUR, and others. There are computerized classes in many high schools in Kazakhstan. But teachers, especially in rural areas, often cannot exploit computerization advantages because they do not have necessary training. According to Kazakhstan Communication Ministry officials, the Government of Kazakhstan supports the growth of basic telecommunications infrastructure and wishes to stimulate competition in the supply of telecommunications and Internet services. A favourable enabling environment is also needed to foster the development of a wide range of IT and non-IT business services needed to support the development of e-commerce systems and their use by business organizations, government, and consumers. Developing a supportive policy and regulatory environment will require active dialogue between government policy makers and private-sector participants involved in the IT industry. To increase private-sector inputs into the policy-making process, private-sector participants will need to join together and form effective IT industry associations. Representatives of the telecommunications industry are currently organizing a telecommunications association to lobby for changes in some of the basic telecommunications regulations and laws. Additional segments of the IT industry in Kazakhstan could benefit from association development efforts.
Internet The number of Internet users in Kazakhstan increased by almost 100 per cent in 2002 against 2001, exceeding 1.28 million people. Regular Internet users in Kazakhstan were estimated at 0.4 million at the end of 2002, an Internet penetration rate of just 33.8 per cent in large cities. The number of regular Internet users in Kazakhstan is estimated to reach 1–1.2 million by the end of 2005. According to the Statistical Committees of the Republic of Kazakhstan, revenues from Internet access services are expected to rise 50 per cent year on year to US $26 million in 2001. The growth in Kazakhstan’s economy (GDP growth in 2001 was 13.5 per cent) and its partly well-educated population presents a large
Kazakhstan IT Sector: Onrush of Technology and Lag in the Law
Novice Users (715.3)
151
Ordinary Users (410.0) 18.9%
10.8%
Advanced Users (150.4) 4.0% 1.1% Programmers (41.9)
100% (3790.6)
65.2%
Without PC skills (2473.0) Figure 2.10.1 PC literacy of adults in Kazakhstan’s large cities
potential demand for Internet hardware and services. Every third adult city-dweller in Kazakhstan has PC literacy. At the same time this demand is significantly constrained by low disposable income. Astana and Almaty, with their relatively strong economies and relatively high income levels, will remain the most attractive telecommunications and Internet markets. Other fast-growing markets include UstKamenogorsk in Kazakhstan’s east, and some settlements of the western oil-producing regions. The IT association is planning significant measures to improve Internet connectivity in the regions, as part of its Kazakhstan plan of e-commerce expansion, but such plans are subject to availability of funds. Table 2.10.1 Estimated growth in Internet use in Kazakhstan
Number of phone lines (thousand) Number of Internet users (thousand) Internet penetration (%)
2001
2005 est
2010 est
1940 400 2.6
2200 1200 7.8
2800 2400 16.0
Sources: Actis Systems Asia and Statistical Committee
In 2002, in Kazakhstan there were about 300,000 PCs connected to the Web, a number projected to grow to 500,000 by the end of 2005. The Internet Service Provider (ISP) market is very fragmented, with about 50 ISPs in Kazakhstan. In Almaty alone, 20 ISPs provide
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Market Potential
Internet access services. Representing three of Kazakhstan’s ISPs (the National Operator Kazakhtelecom, Nursat and Ducat), they generate about 80 per cent of total revenue. However, consolidation of regional operators, mergers and acquisitions are taking place. The largest ISP is the National Operator Kazakhtelecom (with US $350 million revenue). For Kazakhtelecom, 2001 was a landmark year, in that it achieved the key tasks of development and realization of a number of priority investment projects of great national significance. Of the country’s telephone exchanges, 34 per cent were now digital and the transport network was 82 per cent digital. The significant event of 2001 for the telecommunications network’s modernization and development programme was the commissioning of the Western FOCL. The launch of the second International Switching Centre (ISC) in Astana city upgraded the quality of long distance and international communication. To satisfy growing needs in accessing world information resources the first Internet Data Centre (IDC) in Central Asia was established in some cities. This centre provides service to 50,000 users. Average Internet usage in Kazakhstan is still behind that of Europe and the United States, but it is increasing rapidly and is a good driver of hardware sales. Over the last few years the country has seen a rapid growth of ISPs and Internet users. The number of corporate users has started to outnumber private ones. In 2000, 69 per cent of Internet users in Kazakhstan were corporate and 46 per cent were private; in 2001, 53 per cent were corporate and 47 per cent private users. Men are more inclined to use the Internet at home than women. The age of Internet users has also been surveyed: 39 per cent are above the age of 25; 35 per cent are aged between 25 and 35; and 26 per cent are older than 35. Territorially, Kazakhstan Internet users are most likely to be found in Astana and Almaty: these areas account for 33.4 per cent of Internet audience in Kazakhstan. Some increase of activity was registered during the last two years. The front-runners among Internet users in the regions are Shymkent, Ust-Kamenogorsk, Pavlodar, Atyrau, and Karaganda. (See also Figure 2.10.2.) Office workers and experts are prevalent among Internet users. They make up 30 per cent of all Internet users. Students account for 27.7 per cent of users, and managers and businessmen 22.8 per cent. Regular Internet users form one of the most solvent groups in Kazakhstan. Dialup to the Internet is the most common way of connecting, the method used by 60.4 per cent of Internet users. The second most common method is using an allocated channel on a residential telephone line – 15.9 per cent of users connect this way. Connection via satellite has not become widespread due to high cost. It is used only in remote areas, by 3.7 per cent of Internet users.
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Number of adults in large cities, thous. habits. Over 750
Astan a
400 - 750 Less 400
-2002
Structure of adults in large cities by depth of Internetization, %
Almaty
Outside Internet influence zone Internet audience environment Unregular aud ience Regular audience
PC literacy, % Less than 30 From 30 to 40 Over 40 (Astana and Almaty)
Figure 2.10.2 PC literacy and Internet penetration in regions of Kazakhstan
There is a drastic rise in the transactions using TCP/IP protocols. In 2002 these transactions at the Kazakhstan Stock Exchange (KASE) exceeded US $24.6 billion.
PC supply and production World PC supply dropped by about 5.1 per cent in 2001 on a year-toyear basis. But a fall in supply was not experienced in Kazakhstan, where state budget allocations for the National Informatization Programme meant that many PCs were supplied to the government sector. The total number of computers in Kazakhstan exceeded 600,000 in 2001, a penetration rate of 4 per cent. Four out of every five companies and institutions in large Kazakhstan cities use PCs. Figure 2.10.3 shows a breakdown by sector of the amount of PCs used. Imports account for 12 per cent of Kazakhstan’s PC market, while low-cost products assembled by Kazakhstan manufacturers from foreign components met most of the demand for PCs. PC assembly accounts for 88 per cent of hardware revenues, while peripherals, networking and larger system hardware are dominated by imports. Locally assembled PCs dominate the Kazakhstan market, and dozens of local computer companies are estimated to control half of the market. According to the IT Association, the fastest growing local PC producers in 2002 were ALSI, GLOTUR, Imanali and LOGYCOM. GLOTUR adopted Quality Production System Standards ISO9001/ ISO9002.
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Market Potential
Among world brands Hewlett Packard, IBM and Compaq have enjoyed the largest growth. HP has become the number one international vendor in the market. Demand in the Kazakhstan PC market is extremely price sensitive. Lower-cost local producers compete successfully with foreign brands in the low end of the market, and have forced importers to lower their prices. Cost-saving considerations have given some foreign equipment manufacturers the idea of setting up assembly operations in Kazakhstan, thus to be able to compete with local suppliers. The percentages shown in Figure 2.10.3 did not change drastically during the years 2002–03 with corporate and state sector domination ahead of private and educational consumption.
35% 35%
40% 40%
20% 20%
5% 5%
State sector State sector Education Education Home Home Corporate Corporate
Figure 2.10.3 Kazakhstan 2002 PC demand breakdown
Demand for high-performance equipment As the Kazakhstan economy gains strength, increasing numbers of modern companies are looking for advanced IT systems. Rising need for Internet access, shared resources, networking and applications solutions have generated a substantial demand for computer systems and servers.
Software Kazakhstan’s rapidly expanding software market in 2001 was estimated at US $16–20 million, and growing at an annual rate of 15 per cent. The best sales prospects are for data management products, which currently account for 35 per cent of the software sector, and enterprise resource planning (ERP), which accounts for 15 per cent. There are no means for accurate evaluation of software demand due to the fact that this sector of the IT market is very opportunistic and unpredictable, when a single big project of approximately US $2 million may crash all the trends and expectations. The packaged software sector experienced a major boost during 2002, rising by 18–20 per cent. Growing demand has been reported for
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155
basic operating systems, integrated ERP and application tools for database development and management.
IT services demand Kazakhstan companies spent around US $65 million on IT services in 2002. Companies like Real Soft (with over US $4 million in service revenue), Elsi Tech (over US $4 million), NCI and NAT (over US $10 million), are among the major players of the market. Kazakhstan companies BIPS, ALSI, Imanali-soft, AlphaTech, ActisSystems Asia and PlusMicro are mentioned as leading local players with 10 per cent of the market, but this segment is not yet mature. Information systems development expenses made up around a quarter of the whole IT services spend. This segment is still defined by vendors from the public sector as a leading customer for bespoke development. Development of the tax system alone has cost US $10 million annually for the past 4 years. Banks and petroleum enterprises add to this picture by launching new IT projects. International companies’ presence on the local IT services market is still scant. Most of them still focus on the development and technical support for the local partner’s networks. Hewlett Packard, Cisco Systems, Samsung Electronics and LG Electronics work actively in Kazakhstan. Almaty remains the centre of the programming industry, followed by Ust Kamenogorsk and Karaganda. The segment is relatively small by world standards but is well positioned for future expansion. Expected Kazakhstan programming market growth is about US $8 million by the year 2003 (international vendors’ development centres not included) with a penetration rate of up to 35 per cent in the total volume of software development. Realization of the Governmental Informatization Programme stimulates the development of electronic commerce. Potential future business partnerships and opportunities were identified in the area of e-commerce. Initial discussions on launching a pilot e-procurement system for Almaty City as a way to streamline and create transparency in the procurement process are under way. Potential partnerships among donors and the private sector were identified for business and Internet and IT technology awareness training.
End users The major groups of IT end users in Kazakhstan are as follows: • multinationals; • government agencies and institutions;
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Market Potential Other
Oil industry
4%
7%
Heavy industry
7% Government
12%
Food processing
9% Building
5% Education
13%
Finance
4%
Public health
ICT and transport
16%
15% Retail trade
Service
14%
4%
Figure 2.10.4 Kazakhstan end-users by sector, 2001 • Kazakhstan exporters of raw materials and commodities; • Kazakhstan companies with progressive management seeking to increase operational monitoring/control efficiency (banking, telecommunications companies, freight industry, food processors); • small and medium-sized Kazakhstan companies, which are growing in number and becoming an economic force in the country.
Oil industry 100% Miscellanea
Heavy industry 80% 60%
Government
Food processing
40% 20%
Culture
Building Internet influence zone
0%
PC literacy Education & Science
Finance Internet audience
Public health Retail trade
ICT and transport Service
Figure 2.10.5 Penetration of IT infrastructure by sectors, 2001
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Almaty, Atyrau and Astana are the most important computer markets to date. However, there are heavily populated industry centres in western oil-producing regions that are starting to become a focus of interest for suppliers and distributors of IT products and services. The longer-term opportunities for expansion in the regions under healthy economic conditions are more than promising.
Conclusion We can quickly identify the main trends in the Kazakhstan IT market when summing up the developments described above. These trends are as follows: • Continued industrial growth has spurred IT spending by industrial enterprises. • State-financed procurement has increased considerably. • Organizational and financial support of the programme ‘Forming and Development of National Informational Infrastructure’ by the Kazakhstan Government has contributed. • The reduction of PC prices resulted in a small market growth in dollar terms. • Laptop and server markets grew faster than the desktop market. • Distributors are expanding from their traditional markets in Almaty into Kazakhstan’s regions. • Demand for enterprise management software increased with local IT companies’ expansion deeper into the sector providing enterprise solutions and not only hardware delivery. • Internet use, both private and corporate, is booming. • The level of software piracy remains extremely high. • High dynamics of the mergers–acquisitions–reorganization process inside the Kazakhstan business community prevents the local IT market from predictably and steadily growing. A brief description of the growing Kazakhstan IT sector can cover only the main tendencies in market development and perspectives. During 2002 a dozen brand name market research companies, local and foreign, made efforts to describe Kazakhstan’s IT potential and provide to their clients a comprehensive description of quid pro quos. As far as is publicly known, none of these reports made a generally negative evaluation of the Kazakhstan IT market perspective.
2.11
The Paper Industry Seimar Investment Company
Introduction The overall position of the paper and cardboard market in Kazakhstan is characterized by two main tendencies. Like anywhere in the world, in Kazakhstan paper consumption per capita is actively growing, although unlike economically developed countries, paper consumption in the Republic is noticeably low. As an example, in Europe this index measures 106 kilograms on average, in South America 35 kg, in Russia 19 kg, whereas in Kazakhstan it is only 10 kg. However, in the context of the rapidly developing economy we can predict an increase of paper and cardboard consumption in Kazakhstan in the near future.
Demand on the rise With year-on-year growth in GDP and development of domestic industries, consumption of paper in Kazakhstan is growing intensively. The main consumers of paper are enterprises in the actively developing food industry (butter, milk, juices, confectionery products, alcohol and soft drinks, conserves, etc). This branch is in need of good-quality packaging materials, which are among the most important marketing elements of production. The Kazakhstani market for packing materials has been already estimated at more than US $50 million, and the capacity of this market is growing daily. The growth of the economy of Kazakhstan will stimulate creation and development of new product lines (electromechanical devices and electronics, furniture, footwear, soft-roofing materials, etc). Like the food industry, all these enterprises use mainly corrugated containers for their production. The annual requirement for corrugated materials in Kazakhstan is 50–60 million square metres (20 thousand tons). By the beginning of 2004, the majority of food industry enterprises in Kazakhstan will have increased the volume of their production by
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20–30 per cent and there will be an additional boost in consumption of corrugated materials by 20–25 million square metres. Kazakhstan’s own packaging production, despite an intensive increase of this market’s capacity, does not yet provide sufficient volume for all requirements: paper and cardboard imports constitute more than 90 per cent of the market. Thus, a priority in this market is substitution of imports by good-quality manufacture of paper and cardboard products, capable of superseding import and, accordingly, lowering outflow of currency abroad and creating new work.
Trash stimulus The second tendency in this area stems logically from the first. Active growth in consumption leads to an increase in the volume of waste. Dumps, especially in large cities, are filled with hundreds of tons of used packing materials. Burnt and unsorted packaging frequently emits toxins into the atmosphere. According to the 2001 data (when consumption of paper was not so high as at present) in Almaty more than 450,000 tons of waste products were dumped annually, of which 130,000 tons was paper fit for recycling. The city streets get littered with tons of waste, of which used packaging materials form the greatest part. The traditional solution of the problem is to receive and process secondary raw materials for recycling. However, since Soviet times use of this process has declined. The methods used in the past to encourage recycling have become outdated. These included the giving out of coupons with which to buy rare books, and the view that recycling was a socially responsible and admirable thing to do. The only actual stimulus here is an economic one. For this purpose hi-tech manufacture of paper and cardboard of secondary raw material is needed. Prior to 2001 there had been no such manufacture in the Republic, although a third of all paper in the world, and more than a half of paper in some countries, is made of recycled paper. Paper for recycling is collected and processed not only in order to prevent contamination of the environment, but also to preserve woods and forests (only a few of which remain in Kazakhstan). In order to solve the most important problems of the paper sector, Kazakhstan needs a paper industry meeting the highest standards, with a line processing paper for recycling, and modern and powerful equipment.
One for all In Kazakhstan there is only one such enterprise, unique to all Central Asia. It is Kazakhstan Kagazy CJSC, situated in the village of Abaj in
160
Market Potential
the Almaty Oblast. In 2001 the Kazakhstan Kagazy industrial complex was launched here. The project, with a total estimated cost of US $16.5 million, has been partly financed by the Development Bank of Kazakhstan (with US $10 million credit over five years); Kazkommertsbank (with US $4.5 million credit over four years); and the OJSC ‘Seimar’ (with a US $2 million contribution). The project has been significant to the whole Republic almost from the very beginning of its realization. The paper complex is important for the state’s economy, as it is to some extent an indicator of the development of several branches, able to provide customers with cheaper and higher quality products than imported ones. It will certainly have an effect on the prices of a significant number of goods. The company has a wide production range due to a strategic line of investors who have equipped the complex with modern technological equipment – Italian, Chinese, Czech and Swiss. All the suppliers are the leaders in their field who have proven the efficiency of the supplied equipment. For example, the Czech company Papcel has equipped Kazakhstan Kagazy with a Bukovets papermaking machine (PMM-2) and a paper-cutting operation installed in the main producing premises. The launch of Bukovets has enabled production of wallpaper, label paper and white paper for office equipment. Initially the project was focused on satisfying the needs of the food processing industry though it is able to serve other sectors. For example, it is quite probable that additional demand for cardboard will increase with the launch of the German factory Knauff in Kapchagaj (near Almaty), which will produce plasterboard for construction works. The range of the paper complex’s production will broaden. It is thought that it will move into supplying offset, writing and label papers, notebooks, layers for foffered cardboard and containers, and also grey cardboard and grey paper. The complex’s capacity is 50 thousand tons of paper and cardboard per annum. At present, the complex makes 2,200 tons of paper and cardboard per month, and design capacity is due to be achieved in 2004. As a first stage the complex has begun producing corrugated cardboard and containers with a three-colour flexseal. The design capacity of this process is up to 5 million square metres per month. The complex’s products are in demand and there seem to be no problems selling them. Moreover, a significant number of consumers – manufacturers who use packaging – prefer good-quality and inexpensive local production. Thus, besides the price factor, delivery terms are of great importance. (Delivery of paper and cardboard from Europe is very slow.) Kazakhstan Kagazy manages almost zero-waste manufacture, which is very important both for ecology and the economy of the project. For example, the equipment installed in the Kaluga experimental factory
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allows production of corrugated containers with linings and bars from partial spoilage and scraps of corrugated cardboard. Due to the Kazakhstan Kagazy complex, the process of collecting paper for recycling, partially forgotten since Soviet times, is reviving in Kazakhstan. As a rule, the paper for corrugated cardboard manufacturing had been imported from Russia and Ukraine. But since the end of 2002 Kazakhstan Kagazy has operated its own industrial output of paper – layers for corrugated cardboard – from recycled paper on the Italian Carcano papermaking machine (PMM-1) at a production rate of 80–100 tons per day. Another major contributor is the PAPCEL grinding preparatory line for recycled weights (manufactured in the Czech Republic), processing up to 150 tons of paper for recycling per day. These lines are unique for Kazakhstan. The complex is planning to increase volumes of paper produced for corrugated cardboard each month. For the time being, 2,200 tons of such paper is produced per month. The installation of PMM-1 was an extremely important event not only for Kazakhstan Kagazy, but also for the Republic’s whole paper industry. The first test of PMM-1 was on 10 April 2002 and it resulted in production of the first roll of high-quality paper. And this fact has confirmed the opportunities of the Kazakhstani paper industry and potential of Kazakhstan Kagazy in the process of import substitution. The exploitation of PMM-1 at the complex also allows a significant contribution to cleaning up the environment. Kazakhstan Kagazy has organized sites to accept paper for recycling in Kazakhstan, which accept more than 100 tons of secondary raw paper material per month. The production department for corrugated containers at the complex is working most intensively. The main customers of this product are manufacturers of the food industry (Almaty tea, the confectionery factory Rakhat, etc). However, Kazakhstan Kagazy will not only focus on the food industry. Good-quality paper and cardboard are required virtually in every sector from the media to the manufacture of monitors.
Export prospects and competition Approximately 5,000 tons of wallpaper will be made at Kazakhstan Kagazy every year. The Brif Market Consult company has conducted research into the paper and cardboard market of Kazakhstan. According to market specialists’ estimates, Kazakhstan Kagazy is able not only to supersede imports but also to arrange export of paper production to neighbouring countries, where the need for paper is also satisfied basically by expensive imported products. Thus, Kazakhstan Kagazy can satisfy not only requirements of the home market in corrugated paper
162
Market Potential
and supersede imports from the market but also provide stable currency receipts in the country by exporting. There are not many manufacturers of paper in Kazakhstan and they can hardly compete with Kazakhstan Kagazy, since they experience a number of standard difficulties, such as problems with working capital, out-of-date equipment, lack of experts, etc. Kazakhstan Kagazy’s prospects are far more impressive. A closed technology loop, starting with gathering paper for recycling right up to the output of production, will allow the company to lower considerably its cost of production, giving price advantages over competitors. Even a number of foreign manufacturers (mainly Russian) cannot compete with Kazakhstan Kagazy at the technological level. PPM-1 and PPM-2 allow production (of top-liners, chromesubstitute, etc) whose quality surpasses by far similar products by Russian manufacturers. For example, presently, CIS chromesubstitute is produced only in the Leningrad complex. But the chromesubstitute manufactured there is much lower quality than the same product manufactured at Kazakhstan Kagazy. Hence, besides the domestic and the Central Asian market, Kazakhstan Kagazy will sell its products in the Russian market as well. Among other enterprises of the paper branch one should note the Pavlodar cardboard-roofing factory. Basically the factory makes raw paper for roofing material and egg packaging. It has a rather powerful piece of equipment for cardboard manufacturing, but it is standing idle. According to experts from Papcell, US $2.4 million is needed for reconstruction. There is also a paper factory in the Kzyl-Orda region. However, it has not manufactured paper and cardboard since 1997. The factory’s capital equipment has been taken outside the country – some has been sold to China as scrap metal. Apart from Kazakhstan Kagazy, several other enterprises make containers and packing products of corrugated cardboard in the Republic. They are Switex, Kazger and Kapoligraf. However, these companies import the basic raw material – fluting, of which internal corrugated layer and liner are made. Also, there are some other enterprises, engaged in manufacturing of corrugated boxes, including Alpamak, Kazakhstan Stock Service and Kazakhstan’s Society of the Blind. Even the total production of these companies does not satisfy a need for corrugated material in Kazakhstan. Absence of their own producing lines for corrugated cardboard manufacturing (fluting and liner) makes it hard for them to compete with Russian manufacturers. It is worth mentioning a planned manufacture of corrugated cardboard at the Bayan-Sulu confectionery factory in Kostanai. However, manufacture here is not a closed-loop process and is focused on
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importing the Russian raw material (fluting and liner) which it uses to produce the containers. Moreover, this project has a local character and is focused on satisfying only the factory’s internal needs, with the objective of reducing the cost of its own production – production is not intended for widespread sale to other enterprises. Thus, the paper industry of Kazakhstan still represents a developing, but insufficiently advanced sector of the economy. And its prospects grow along with the strengthening of the national economy and general industrial growth.
2.12
Healthcare Services BISNIS
Overview Continuous reform of the healthcare industry in Kazakhstan and its central executive body has led to the decentralization and partial loss of control of the healthcare system. Every region within Kazakhstan has its own healthcare development model, sometimes different from the central government’s concept of the development of this sector. Limited public financing does not cover the basic needs of the population in healthcare services. In 2000, government expenditures amounted to 2.0 per cent of Kazakhstan’s GDP, or about US $24 per capita for the population of 15 million. The number of public facilities has been shrinking, as well as the number of beds in public hospitals. As a result, part of the population of Kazakhstan does not have access to primary healthcare services and to qualified medical assistance. Kazakhs often must pay out of pocket for qualified medical assistance. The poor state of the public healthcare system has led to a rise in the number of private healthcare facilities. In 2000, the number of private hospitals increased by 30.5 per cent, and private outpatient facilities increased by 15.7 per cent. The most widespread diseases include respiratory infections and tuberculosis and cardiovascular diseases. The number of HIV infections is on the rise, too.
Market highlights and best prospects Market profile According to the Healthcare Agency of Kazakhstan, government healthcare expenditures in Kazakhstan reached an estimated US $359.7 million, or about US $24 per capita in 2000. Total healthcare expenditures amounted to 2 per cent of Kazakhstan’s gross domestic product (GDP) in 2000. Expenditures in 2001 were estimated at US
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165
$340 million, which is about 1.7 per cent of Kazakhstan’s GDP in 2001. In 1990, before the collapse of the Soviet Union, healthcare expenditures totalled US $98.2 million or US $5.90 per capita. Health expenditures grew steadily up to 1996, when they reached the highest level in the past 10 years, US $500.5 million. Since then, they have dropped steadily. In 2000, 77 per cent of the total population of 15 million visited the doctor with an illness. The pattern of illnesses has been the same for the past 10 years. In first place are respiratory diseases, second are cardiovascular ailments, third, genito-urinary diseases, and then digestive problems, skin problems, and infectious diseases. The highest public health concern of the country is a rising incidence of tuberculosis, especially its drug-resistant forms. The fight against TB consumes a large proportion of a limited state budget. The number of TB-infected people reached 152.6 for every 100,000 people in 2000. Among children, acute respiratory infections and childhood diarrhoea diseases are the main causes of death. This area requires significant investment of resources and development of effective intervention programmes. The healthcare services industry in Kazakhstan consists of public and private healthcare providers. They include hospitals, offices and clinics of medical doctors, other specialized healthcare facilities, and health insurance providers. There appears to be a trend toward rationalization of hospital care in the face of increasingly expensive inpatient care. The result has been a substantial reduction in the number of hospital beds, together with the growth of small outpatient facilities (so-called family healthcare units). According to the Healthcare Agency of Kazakhstan, the number of public hospitals was reduced by 11.6 per cent in 2000 against 1998, and included 735 facilities in 2000 with about 95,000 beds, or 63.8 beds for every 10,000 inhabitants. Accordingly, the network of outpatient facilities included 1,752 facilities in 2000, an increase of 1.7 per cent over 1998. Growth in the costs of providing medical services and limited budgets encouraged the Government to focus on the preventive, as opposed to curative, approaches to assuring the health of the population of the country. This type of strategy emphasizes healthcare education and altering harmful behaviours such as smoking, drinking, and poor nutrition, and promoting regular medical check-ups and vaccination of infants and new-born babies. Budgetary constraints have led the Government of Kazakhstan to take steps to allow a more significant role for private healthcare delivery and insurance. The private sector in Kazakhstan is represented by 2,500 private companies and private entrepreneurs engaged in medical practice. More than 600 public facilities were privatized.
166
Market Potential
From 1998, the number of private hospitals increased by 30.5 per cent, and private outpatient facilities increased by 15.7 per cent. The number of beds in private hospitals increased to 4,300 in 2000 from 3,300 in 1999. More than half of private clinics and hospitals concluded contracts with regional healthcare departments to provide certain medical services to be paid from regional state budgets.
Brief statistics Kazakhstan’s GDP rose 9.6 per cent in 2000 and 13.2 per cent in 2001. Industrial production rose 14 per cent from 1999 to 2000 and 13.5 per cent from 2000 to 2001. Healthcare statistics are given in Tables 2.12.1 and 2.12.2. Table 2.12.1 Number of registered healthcare personnel in Kazakhstan 1999
Registered doctors Registered nurses
2000
public
private
public
private
43,910 99,188
4,978 7,577
42,711 98,499
5,507 6,080
Table 2.12.2 Healthcare institutions in Kazakhstan 1999 Public hospitals 766 (97,801 beds) Private hospitals 85 (3,322 beds) Public polyclinics (outpatient facilities) 1758 Private outpatient clinics 369
2000 735 (95,356 beds) 105 (4,299 beds) 1752 396
Best prospects Due to growing oil exports, the welfare of Kazakhstan’s people is expected to improve in the next five years. The concentration of population in Almaty, Astana, Atyrau, and Aksay, in the west of Kazakhstan, and increasing inflows of capital and people to those regions, will create growing demand for healthcare services. Several major oil companies, of which most are US oil giants, have been asked by the Government of Kazakhstan to earmark certain funds for development of social infrastructure, including healthcare facilities in the oil-rich regions of Kazakhstan. Trade sources think there are good prospects for a project to construct a full-service hospital of about 100 beds in Almaty, which is
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intended to provide Western standard high-quality medical care. Almaty is the business and financial capital of Kazakhstan with a population of more than 1 million people, and the presence of more than 100 US companies. The expatriate community is estimated to be about 5,000 people, including families. The hospital may serve the small population of wealthier citizens, foreigners, and tourists. USAID contractors and local private healthcare providers are involved in the organization of a training medical centre for family practitioners, with US medical specialists coming every two to three months. The centre will provide continuing education for family doctors. Family care outpatient facilities started to emerge two to three years ago in Kazakhstan as a new programme introduced by the Government. Currently, the country has a severe lack of family practice doctors, since local medical universities have only started to train them since 2000. Further opportunities should emerge in telemedicine services. Kazakhstan’s doctors have started to use new services such as teleconsulting through the Internet. One good prospect for foreign medical institutions is partnership with local medical clinics. The growing demand for high-quality medical care, qualified surgical procedures and post-curative care represent good potential for sending some Kazakh people to the United States and European Union to receive care which is impossible to get in-country.
Competitive situation Domestic services Domestic service providers account for 99 per cent of healthcare providers in the Kazakh market. They fall under the following categories: state or public facilities, and private facilities, including private medical offices. State healthcare facilities are divided into two groups: state medical organizations fully supported by the state budget, and public medical enterprises reimbursed by the Government for a certain amount of medical services provided to the public, but allowed to render fee-forservice care as well. State medical organizations include specialized facilities such as TB hospitals and dispensaries, psychiatric clinics, ambulance service, emergency clinics, blood transfusion stations, and sanitary epidemiological stations. Public medical enterprises include hospitals and outpatient facilities for primary, secondary, and tertiary care. Hospitals are paid for every patient visit on the basis of diagnostic-related groups. Specialized polyclinics that provide specialized outpatient care are paid for each patient visit according to established fees. They are also allowed to render fee-for-service care. Prices for these services range from US $1–5 for a visit to the medical doctor,
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US $1–4 for one ultrasonic sonography, and from US $50–200 for surgical operations. Primary healthcare units are mostly represented by the FGPs (family group practices) and receive a monthly flat fee of an average of US $0.20 per person from the regional healthcare budget. As of mid-2001, there are 2,500 private medical facilities and private medical doctors registered in Kazakhstan. About 700 of them are registered in the biggest city, Almaty. Dental clinics comprise 44 per cent of the private facilities, multi-functional facilities comprise 30 per cent, and others are doctors with private practice. In 2000, the total number of visits to doctors in Almaty totalled one million. Among them 11.3 per cent were to the private sector. Private medical facilities are more competitive than public facilities as they provide higher quality service and use state-of-the-art technologies and equipment. Republican Diagnostic Center in Almaty is the biggest in the country. Medical equipment is mostly Japanese. Many doctors received training in Japan, Austria, and Portugal. The centre is a public facility. Services for a limited quantity of patients are paid from the state budget. In 2000, the centre was reimbursed from the state budget for servicing 148 thousand patients. The centre has the only MRI laboratory in Kazakhstan. The MRI equipment was purchased by a grant from the Japanese government. The cost of a test using the MRI equipment is about US $40. The centre also uses telemedicine services to consult on some patients from other cities of Kazakhstan. Utilizing the UNESCO telemedicine programme, medical specialists of the centre may consult with doctors from Portugal.
Medical insurance Obligatory medical insurance was launched in Kazakhstan by the Government in 1995, but the failure of the system in 1998 proved that the scheme was not properly thought out. The Fund for Obligatory Medical Insurance (FOMS) received transfers from employers. The experiment turned into a fiasco when the managers of the fund embezzled vast sums. The Kazakh Government plans the reintroduction of a mandatory medical insurance programme. It believes that it is the best way to deal with the chronic problems of financing the public healthcare system.
Third-country participation There are a few international clinics in Kazakhstan. International SOS or AEA (Asian Emergency Assistance) clinic is owned and operated by AEA, a multinational healthcare and medevac company with offices across Asia and headquarters located in Singapore. In Almaty, English-speaking Western-trained physicians run the AEA
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clinic. AEA clients are mostly major international corporations and Western companies. The Center of Israeli Medicine (CIM) located in Almaty and Astana is an outpatient facility with a number of specialists in endocrinology, urology, neurology, cardiology, allergology, gynaecology and obstetrics. To patients who need surgical or any special medical assistance, the centre offers inpatient hospital service in healthcare clinics in Israel. All medical doctors working in the CIM have been trained in Israel. Clients of the CIM are mostly big Kazakh corporations and wealthy Kazakhstani citizens. The most successful private medical insurance company is Interteach, established in 1996 as a joint venture with German health providers. In 1999, Interteach opened MSCA clinic (Medical Services in Central Asia). Most Western companies and embassies in Almaty signed agreements with them to provide medical insurance coverage for their local employees. Due to increased oil industry profits potential, the Kazakh Government effectively attracts foreign investment into the healthcare industry. Implementing an anti-TB programme scheduled for 2001, the Government signed a US $2.7 million loan from the KFW bank of Germany for purchase of medical equipment and medicines. The Saudi Fund for Development gave a US $40 million loan to the Almaty Cardiological Center. US $10 million is scheduled for 2002, and US $30 million is scheduled for 2003. In January 2001, the Government of Kazakhstan and Japan signed an agreement for a grant from the Japanese government worth YEN 648 MM (about US $6 MM) to be used to purchase medical equipment for the Semipalatinsk diagnostic centre and regional oncology centre. The implementation of this project would ease the suffering of residents of a region that was a former Soviet nuclear testing site.
End-user analysis According to the State Statistics Agency, the population of Kazakhstan stood at 14,841,900 on 1 January 2001. Urban residents comprise 55.8 per cent and rural residents comprise 44.2 per cent of the total population. The Statistics Agency predicts that the Republic’s population will increase to 16.6 million in the next 15 years. The forecast of a considerable increase in the birth rate in the next 10 years is based on the current predominance of women of reproductive age among the population. The average life span in Kazakhstan is 65 years: for men 60.5 and for women 71.5. The average age of the population is 31 years. Data for 2000 follows: • Birth rate: 14.7 births/1,000 population.
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• Death rate: 10.0 deaths/1,000 population. • Infant mortality rate: 19.6 deaths/1,000 live births. Average monthly salary of employed people in Kazakhstan is US $150, and average monthly pension of retired people is US $25. The wealthy population, with earnings of more than US $1,000 per month, comprises about 1 per cent of Kazakhstan’s population. Western companies employ 2–3 per cent of employed Kazakhs. Businesses are mostly concentrated in Almaty, Astana, and West Kazakhstan (Tengiz and Kashagan oil fields).
Market access Authorities and regulations The main supervising and regulatory body is the Healthcare Agency of Kazakhstan. Kazakhstan is divided into regions called oblasts. Every oblast has a Healthcare Department adjacent to the Oblast Administration (Akimat), an oblast’s highest administrative body. The Oblast Healthcare Department receives funds from the oblast budget and has sole responsibility for distributing them to healthcare facilities in the oblast. Also, it is responsible for licensing and supervising all the healthcare providers in the oblast. The Department also organizes procurement of drugs, medical equipment and supplies for public medical facilities through government tenders. The Government of Kazakhstan plans to re-establish a Ministry of Health in the near future. The move is intended to help public health officials deal with complex problems confronting the healthcare sector of Kazakhstan. All medical services providers in Kazakhstan have to obtain a licence from the regional healthcare administration. The licence is given for an unlimited period. Terms and conditions of getting licences for foreign entities is the same as for local entities. Providers of healthcare services do not pay value-added tax. According to provisions in the investment law, a Kazakh content requirement for Kazakhstan goods and services is mandatory for all companies. Foreign companies interested in providing healthcare services and training in Kazakhstan should be aware of an existing foreign labour quota established by the Kazakh Government. To address both these concerns, foreign companies might consider establishment of joint ventures with local partners.
Distribution/local marketing assistance Well-established major Kazakh companies actively participate in various tenders announced by the Government and major private
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sector firms. Potential suppliers might want to consider local distributorships as a more cost-effective alternative to a wholly owned office. Healthcare companies interested in opening their representation in Kazakhstan are encouraged to consult with Almaty-based foreign law firms. A major problem for foreign suppliers of goods and services is that most local medical staff cannot communicate in English. Names of drugs are very different from those that are used by the international medical community. Hospital infrastructure is completely different from the Western standard.
Financing As a developing country, Kazakhstan depends on foreign aid and international donors for imports of medical devices, products, and services. Employers pay a so-called social tax on their profits and they are not obliged to provide any medical insurance for the employees. Major national companies, big foreign companies, and a few private businesses provide medical insurance to their employees by signing contracts with private insurance companies. Financing from international institutions, such as the World Bank, IFC, EBRD, and ADB, is available for certain government tenders, as well as for private sector projects. Terms and conditions of payment vary depending on the agreement between the parties. In May 1999, Kazakhstan and the World Bank signed an agreement for a US $42.5 million loan to support the reform of the medical care system. The loan is to be used for the acquisition of special medical equipment, education of medical professionals, and the reconstruction of some medical facilities. This was the phase one loan of a US $160 million programme approved for Kazakhstan. During the first phase, which is to be implemented over four years, four project components will be implemented at the national level: • TB control programme; • health promotion; • health policy evaluation; • establishment of Clinical Training Centres for general practitioners. Three oblast-level components will be initially implemented in two oblasts, Almaty and East Kazakhstan. They are: primary healthcare strengthening; facilities rationalization and rehabilitation; and financial management strengthening. Kazakhstan has received US $525 million for various projects from the Asian Development Bank (ADB), a multilateral development bank dedicated to the economic development of Asia. Of ADB’s total current
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lending to Kazakhstan, US $65 million went to social infrastructure. Most of ADB’s lending in this sector has been focused on education and training; however, healthcare is an important priority in ADB’s lending. The current three-year lending programme (2001–03) includes US $600,000 in technical assistance for a project called ‘Early Childhood and Women’s Development in Rural Areas’ scheduled for 2001. For this project, ADB will engage healthcare consultants to carry out the technical assistance. In turn, the project will lay the basis for an ADB loan scheduled for processing in 2002. The loan amount is estimated at US $10 million. The loan will very likely include components for healthcare development. At least 80 per cent of ADB loans are used to procure the goods and services for which the loan has been designed. In March 2000, Kazakhstan signed an agreement to join the Islamic Corporation for Development of the private sector (ICD). This will allow Kazakhstan to obtain privileged loans for small- and mediumsized businesses without state guarantees. The ICD has agreed that Kazakhstan will receive grants and interest-free loans for the construction of healthcare institutions in rural areas. The Caspian Finance Center provides US Government support for US businesses in the region. The Export-Imports Bank of the United States (Ex-Im Bank), the Overseas Private Investment Corporation (OPIC), and the US Trade and Development Agency (TDA) each have a senior representative. Working together with the US Commercial Service, the Center’s efforts also focus on maximizing US commercial interests in the ancillary infrastructure that will be built as a result of the pipelines, economic reform, and privatization programmes.
2.13
The Medical Equipment Market BISNIS
Overview The Kazakhstan market for medical equipment and devices, including dental equipment and supplies, was estimated to have grown about 20 per cent in 2001 compared with 2000. The market in Kazakhstan is dominated by imports, which account for 98 per cent of the total market. The United States supplies 14 per cent of total imports of medical equipment and devices in Kazakhstan. The share of imports from the United States in 2001 will expand to an estimated 16 per cent of the market. Other major suppliers of medical equipment and devices to Kazakhstan are Russia, Germany, and Japan. Total local production of medical equipment and supplies in Kazakhstan accounted for 2 per cent of the total market in 2000 and expanded in 2001 and succeeding years. There were about 80 local medical equipment producers in 2001, most of them small and medium-sized. The biggest company, Aktoberentgen, has one plant in northern Kazakhstan producing X-ray equipment, some of it exported to Russia. A number of local small businesses produce surgical supplies and sell their products in the northern and southern regions of Kazakhstan, but their output falls far short of covering the demand for medical disposables. Most of the technology, production equipment and spare parts are imported by manufacturers from Russia. Local producers are actively seeking investments in the form of technology and capital equipment from Western countries, and present a number of joint-venture opportunities for foreign suppliers. There are about 30 major importers and distributors of medical equipment to Kazakhstan. Many of them also provide technical support and maintenance services for the imported equipment. Kazakhstan lacks experienced technical personnel to service new medical equipment, and hospitals usually do not allocate funds for
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service contracts. Hospital managers prefer for installation, warranty, and training of service personnel to be provided by the manufacturer. Due to the lack of engineers and technical staff, some of the new equipment purchased by public hospitals is installed incorrectly, is out of order or has simply been left uninstalled. According to the 1997 inventory of the Ministry of Health, medical equipment in all medical institutions in Kazakhstan amounted to around US $55 million, and 59.5 per cent of this equipment was not in working condition. Officials contacted at the time of writing claim that this situation continues. In Kazakhstan, 83 per cent of the existing 3,000 hospitals and clinics are public. The majority of hospital purchases are aimed at replacing out-of-date equipment and purchasing basic supplies. The situation is different with private clinics, including dental clinics (which are popular because of higher profit margins) that purchase high-quality equipment and supplies. The poor state of the public healthcare system has led to a rise in the number of private healthcare facilities. In 2000, the number of private hospitals increased by 30.5 per cent, and private outpatient facilities increased by 15.7 per cent over 1999. The market is very receptive to foreign medical devices, due to their higher quality as compared to cheaper medical devices from Russia. Options for after-purchase service and training for users of medical equipment can considerably influence end user purchasing decisions. Certain types of devices must be adapted for Russian-language users and for the 220V electrical system. Imported equipment must be registered with the Ministry of Health of Kazakhstan and receive a certificate of compliance from the relevant certification body in Kazakhstan. Customs duty for most imported medical equipment and supplies is zero, and value added tax in also not applicable. In 2002, the Government planned to introduce customs duties for some medical devices and supplies produced in Kazakhstan.
The most promising sub-sectors The best sales potential for foreign medical equipment in the coming years is expected to be in the following areas: • electro-medical diagnostic and therapy equipment; • diagnostic imaging with the special emphasis on X-ray equipment and supplies; • dental equipment and supplies; • test kits and laboratory equipment; • medical furniture.
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Methods of procurement The Kazakhstan market for medical equipment is not very open and transparent in the public sector. According to national procurement legislation, companies registered in Kazakhstan have a preference over others in the tender process. Tenders are announced in local newspapers one to two months before the closing date. All bidding documentation must be in Russian or Kazakh (new language laws will gradually increase the requirement for documentation in the Kazakh language). International companies are advised to have a local distributor or agent who has good contacts in the government, can monitor tender announcements through the local press and participate in government tenders. Tenders may be held by the Healthcare Ministry of Kazakhstan or by Regional Healthcare Departments in provincial and city governments. Procurement practices within the private sector vary according to the type of ownership of the independent organization. Most private hospitals and clinics buy from local distributors, although some have direct partnership ties with foreign hospitals or companies.
Means of financing procurements According to the Healthcare Agency of Kazakhstan, government healthcare expenditures in Kazakhstan reached an estimated US $359.7 million, or about US $24 per capita in 2000. Total healthcare expenditures amounted to 2 per cent of Kazakhstan’s GDP in 2000. Expenditures in 2001 were planned to reach US $340 million, or about 1.7 per cent of Kazakhstan’s 2001 GDP. A very small portion of these expenditures, less than 7 per cent, goes towards procurement of medical equipment for public institutions. As a developing country, Kazakhstan still depends on foreign aid and international donors for imports of medical devices and products. Financing from international institutions, such as the World Bank, IFC, EBRD, and ADB, is available for certain government tenders, as well as for private sector projects. In May 1999, Kazakhstan and the World Bank signed an agreement for a US $42.5 million loan to support reform of the medical care system. The loan is to be used for the acquisition of special medical equipment, education of medical professionals, and the reconstruction of some medical facilities. Kazakhstan has received US $65 million for social infrastructure projects from the Asian Development Bank (ADB), a multilateral development bank dedicated to the economic development of Asia. Most of ADB’s lending in this sector has been focused on education and training; however, healthcare is also an important priority in their lending. The current three-year lending programme (2001–03) included US $600,000 in technical assistance for a project called ‘Early
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Childhood and Women’s Development in Rural Areas’. For this project, ADB was to have engaged healthcare consultants to carry out technical assistance. This project will in turn lay the groundwork for an ADB loan scheduled for processing in 2002. The loan amount is estimated at US $10 million, and will likely include components for healthcare development. The ICD (Islamic Corporation for Development in the private sector) has agreed that Kazakhstan will receive grants and interest-free loans for the construction of healthcare institutions in rural areas. In the private sector, procurements are financed by the individual organization.
Medical equipment Table 2.13.1
1999 2000 2001
Total market size (US $ millions)
Imports, total (US $ millions)*
34 41 49
34.4 42.9 51.2
Imports from the United States (US $ millions) 3.6 5.5 7.2
* Imports are larger than total market due to re-exports, primarily to Kyrgyzstan and Uzbekistan.
Some estimated average annual growth rates follow: • Estimated average annual growth rate of the market in 1999–2001 was about 20.5 per cent. • Estimated average annual growth rate of total imports in 1999–2001 was about 22 per cent. • Estimated average annual growth rate of imports from the United States in 1999–2001 was 42 per cent.
Evaluation of sector – medical equipment and infrastructure development Priority for medical equipment sectors, 1 (low) to 5 (high) i) electro-medical equipment: 5 ii) diagnostic equipment: 5 iii) medical lasers: 4 iv) endoscopes and laser instruments: 5 v) dental equipment: 5
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Receptivity to US equipment, services and alliances, 1 (low) to 5 (high) i) electro-medical equipment: 5 ii) diagnostic equipment: 5 iii) medical lasers: 5 iv) endoscopes and laser instruments: 5 v) dental equipment: 5 Competition for US firms from local domestic suppliers, 1 (heavy) to 5 (little) i) electro-medical equipment: 5 ii) diagnostic equipment: 5 iii) medical lasers: 5 iv) endoscopes and laser instruments: 5 v) dental equipment: 5 Competition for US firms from third-country suppliers, 1 (heavy) to 5 (light) i) electro-medical equipment: 2 ii) diagnostic equipment: 1 iii) medical lasers: 2 iv) endoscopes and laser instruments: 2 v) dental equipment: 2 Overall effect of trade/technical barriers on US exports of equipment and services, 1 (severe) to 5 (little) i) electro-medical equipment: 3 ii) diagnostic equipment: 3 iii) medical lasers: 3 iv) endoscopes and laser instruments: 3 v) dental equipment: 3
Summary The medical industry in Kazakhstan has developed at a fast pace over the last five years. However, Kazakhstan is still heavily dependent on
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imports of medical equipment: current production meets only 2 per cent of the total supply of medical equipment in the country. Kazakhstan’s medical equipment and supplies market is expected to rebound sharply during 2001–03. This is the result of pent-up demand in the country after many years of inadequate healthcare budgets. The country’s economic recovery, based largely on a growing stream of oilrelated revenue, will undoubtedly present new opportunities in a sector that in the past has depended largely on imports financed by foreign aid and international donor organizations.
2.14
The Agro-Industrial Complex of Kazakhstan Seimar Investment Company
Introduction Kazakhstan is a country of a size similar to that of Western Europe. In this regard the role that agriculture plays in the Kazakhstan economy cannot be overestimated. Even taking into account the country’s mainly ‘oil image’, the republic remains an agrarian one in many respects. Rural population accounts for almost 50 per cent of the overall Kazakhstan population. In spite of some problems related to the transitional period from centralized to market economy, agriculture in Kazakhstan is gradually reviving and becoming one of the most promising and dynamically developing sectors. The number of privately owned enterprises in agriculture grew from 9,200 in 1991 to 100,000 in 2001. Number of farms increased from 3,000 to 95,000. Only 79 enterprises remain in state hands whereas there were 2,200 state-owned enterprises in 1992. The non-state property constituted 99.9 per cent of all property in 2001. GDP growth in 2002 was nearly 7.9 per cent on a year-to-year basis, amounting to $24.4 billion. Additional stimulus to the agro-industrial complex was added by further development of the food processing sub-sector. Preliminary estimates of the gross output of agriculture in the Republic
total 555.5 billion tenge and in current prices that is 2.8 per cent penetration on a year-to-year basis. Table 2.14.1 Kazakhstan agro-industrial production volumes
GDP, US billion Agriculture Gross agro-output Crop production, % Stock-breeding, %
2001
2002
22.15 8.7 533.6 61 39
24.4 7.9 555.5 58 42
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Agro-geography of Kazakhstan Kazakhstan has traditionally had huge potential in the agrarian sector, featuring newly-ploughed virgin soil, the most developed agrarian school, and the infrastructure of the former Soviet Union. There are great areas of fertile land, traditions of cattle breeding and farming, especially in the south, and farms remaining from Soviet times (battery farms, grain elevators, bills, etc). Kazakhstan’s advantageous geographical location is also an important factor. Being situated between Russia, Central Asian republics, and China – vast markets all – Kazakhstan has significant advantages over competitors in developing its industry, and agriculture in particular. It is worth mentioning developments that could back up the economy of Kazakhstan. There are huge Afghani market openings that could raise export demand for grain and other agro-production. Among the supporting factors are the speeding up of the economic programmes of the Eurasian Economic Community, the Shanghai Cooperation Organization and other regional intergovernmental organizations. President of Kazakhstan, Nursultan Nazarbayev, maintains that ‘agriculture has overcome its painful critical point’ and that ‘reforms in the agrarian sector will become the second most powerful reform which will tow the country’s economy’.
Background The main issues facing the agriculture sector in Kazakhstan are tied to the effects of moving from the planned administrative system of the Soviet period to a market-oriented system as an independent country. This transition has been taking place in the context of a major contraction of budgetary transfers to the agriculture sector, declining internal demand for production, due to both income and price effects, and deterioration in the terms of trade faced by farms. Agricultural production dropped by roughly 40 per cent between the late 1980s and the late 1990s. Much of the marginal arable land (marginal primarily in terms of precipitation) has fallen out of production during this period and employment in the sector has declined. For those left in rural areas, income levels have dropped, with many transactions now paid in kind, and social services that were earlier provided through the large farming collectives have deteriorated. Most of these adverse effects were inevitable on the route to the new market-based relations in the agricultural and food producing sectors. Production technologies have shifted to reflect higher prices for inputs and capital, and the efficiency of input use has increased significantly. Nascent markets have developed for major agricultural commodities, which can serve as a basis for recovery of the sector. Efforts to restructure farm enterprises have been made, but interest in establishing private family farms has been limited, with nearly 20 per cent of arable land now accounted for by such farms. The major part of arable land is accounted for by larger farm enterprises. These enterprises have their origins in the state and collective farms of the Soviet period, but continue to undergo structural and management changes as a result of the increasing influence of market forces.
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Particularly in the rain-fed grain areas in the north, de facto control of arable land is being concentrated in the hands of those who are able to meet working capital needs of the farms. However, capital flow to the sector remains very constrained reflecting the continued limited profitability of the sector and the continued limited presence of the financial sector in the rural economy.
Problems and solutions There are some problems currently facing the agrarian sector, which are inherent to the post-Soviet economy. They include migration to urban areas, unemployment, absence of due infrastructure (roads, communications etc), lack of circulating assets and modern technical equipment for farms and enterprises, deterioration of fixed assets, poor water supply and desertification. In this regard the Kazakh Government is keen to promote further economic reforms in agriculture. One of the most important developments in this area is the eventual adoption, in June 2003, of a long debated new Land Code (two years ago the attempt failed as the Parliament would not pass it), which fixed private ownership on land for agricultural use. It is expected that the move will boost agro-industrial development. The Code stipulates the mechanisms of transfer of the specified lands in a private property at which the existing institute of the right of land tenure is kept. The Code determines legal rules to regulate land relations and aims to improve a legal platform of land ownership, fertility of the land for agricultural use and aims to maintain the appropriate protection by increasing responsibility for failure to comply with the land legislation. For the first time, there is a possibility of selling farm land so that it can be privatized by citizens and legal entities for farming purposes. The Land Code has been drafted in the interests of those who use the land regularly or permanently. The adoption of the law will raise confidence among farmers, stabilize the migratory situation and boost the land market. The Government has announced agriculture a top priority and declared that 2003 to 2005 will be the years of agriculture, by adopting a special programme of rural development. US $1 billion will be allocated from the state budget for the programme over this period. As a result of this, the changes in manufacturing and land attitudes, liberalization of pricing and a credit system, a competitive market infrastructure is being created. Taking into account these changes, agriculture has now become more attractive for potential investors. To date approximately US $11.2 million of direct foreign investments have been directed into this sector over the last three years. About US $600 million was invested in agricultural production processing. The most promising sub-sectors for investing are considered vegetable oil, milk, grain and sugar production, poultry farming and pig breeding. Human resources and migratory problems in line with low levels of management skills remain among the most urgent problems for Kazakhstan. As a rule, skilled specialists work in urban areas and are employed by key companies. After graduation from university young people rarely go back to villages. So, in most cases, farmers do not have any economic background and that is an important element in agro-business.
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It comes as no surprise that only mainly large companies engaged in agricultural production, that were able to attract capital and to hire skilled employees, could persevere through the hardest times when the sector was virtually dying. A trend for agro-business enterprises to become larger is being observed. As competition in other branches of the economy toughens, especially in the oil and mining sectors (where all the niches have been already shared and fixed), growing numbers of companies are showing an interest in entering agro-business. There are indications already of growing demand for skilled agrarian specialists. The Kazakhstan Agrarian University for instance is committed to supply around 200 graduates to companies wishing to hire graduates for agro-business activity.
Government strategy The strategy of the Ministry of Agriculture for development of agriculture focuses on recovery of production but in the context of the new economic realities facing the sector. The Ministry is attempting to identify both general sector-wide steps to be adopted that could boost efficiency as well as output, and region-specific interventions to improve Kazakhstan competitiveness relative to foreign producers. Priorities of the state's support of agriculture for the period 2003 to 2005 are enhancement of security of the country's food supply, formation of an efficient system of agribusiness, growth of the competitiveness of domestic products and growth of the volume of sales both on internal and external markets, reduction of the level of imported foodstuffs, rational measures of state support for agricultural production, optimization of state control over the agro-production complex. With the purpose of maintaining and updating the material and technical potential, Kazakhstan's engineering businesses are carrying out individual projects on manufacturing agricultural machinery. The agricultural machine building companies have substantial industrial capacities, longterm experience of manufacturing tractors, sowing and soil cultivating machinery and other equipment. The Ministry of Agriculture of Kazakhstan proposes implementing the following measures with the aim of strengthening the material and technical base: • setting up production of scarce spare parts (regional placement of orders according to the needs of agricultural farms) against bank loans of the second grade; • subsidizing part of interest payments on loans issued by Kazakh banks of the second grade to processing enterprises; • expanding the volume of the leased agricultural and processing machinery supply; • organizing a technical service network with the state's participation; • implementation of the international standards ISO 9000;
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• organizing the production of individual units of agricultural machinery on loans from Kazakhstan's Development Bank; and • placing a state order to develop technical characteristics and models of agricultural machinery, components and units for new highly efficient, universal, multi-operational agricultural machinery, which ensures introduction of modern agricultural technology. Among the sector-wide activities identified are phytosanitary and veterinary services, establishment of a market information system, improved functioning of the scientific research system, mechanisms for increased capital flows to the sector, and financial assistance to farms through rescheduling and writing off some of the existing farms’ debt and through changes in current tax policy. The Government is also seeking ways to deal with the marginal arable lands that have fallen out of crop production, and the broader spectrum of social and land management issues that have arisen as part of the transition to a market system. In addition to the Land Code, the Government have also adopted Forestry and Water Codes. The Water Code regulates the rights of water use, the competence of the state agencies in the field of usage and protection of the water fund, the rights of water users, and other issues. The Forestry Code establishes the new system of government control over forestry. The institute for state forest inspection will control conditions of forestry usage, protection of forests and forest planting. During the years of support for agriculture (2003–05), the Government plans to spend 40.7 billion tenge (US $ 270 million) implementing programmes aimed at agriculture revival and development. By 2005 this figure will rise to 55 billion tenge (US $ 360 million). The budgetary financing of agriculture has been increased by 10 billion tenge and the number of staterun programmes has grown from 39 in 2002 to 77 in 2003. The aim of the subsidizing and granting of loans to agricultural producers in 2003 is to create better conditions for those entities in the agricultural industry that are capable of working efficiently and skilfully, using the best practices, knowledge and skills. Apart from traditional programmes of subsidizing the preservation and development of elite seed-growing production and stockbreeding as well as procurement by agricultural producers of mineral fertilizers, subsidizing of the cost of water supply services to water users is also envisaged. Moreover, the Ministry of Agriculture acquired functions on state regulation of agricultural products' processing, and in this connection a new programme on leasing machinery and equipment for the enterprises of agricultural product processing as well as reimbursement of interest payments on such types of leasing has been introduced into the budget.
Measures of the food programme aimed at the development of farms in the country The share of farms in the production of agricultural products is increasing year by year. The efficiency of their economic activities is also on the rise. Nowadays, Kazakhstan's farmers produce almost 25 per cent of gross output in agriculture. They enjoy certain tax privileges and pay an unified land tax which is 0.1 per cent of the value of the land on lease.
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The State Agricultural Food Programme envisages: continuing the practice of lending money through a system of rural loan societies; subsidizing seed-growing production and stockbreeding; creating storage places on procurement of livestock products. With the purpose of creating a multi-channel lending system for the agricultural industry with a high level of loan return the plan is: to develop a network of loan societies; to subsidize the local budgets through loans to ensure spring-field and harvest works if necessary by crediting to cover cash breaks; to expand the futures of purchasing grain and livestock products.
Scientific and information support for the development of agriculture Recently, substantial changes have been introduced into Kazakhstan's agrarian science. The implementation of scheduled scientific programmes has been examined, scientific research institutes have been strengthened, and work on specifying scientific research is being conducted. Emphasis is to be put on the introduction of scientific inventions and achievements into production. Active work on introducing an informational and marketing system is being conducted with the purpose of a brisk exchange of the analytical marketing information between the agribusinessmen, state bodies, and other market participants, as well as having the purpose of ensuring efficient regulation of the sector's development and formation of a national system of agribusiness. Work on the programme of development of rural territories has started, which will include the basic directions of the state policy in social and economic development of rural areas and assistance to form a social and engineering infrastructure in rural areas. The programme includes the development of a social sphere: growth and optimization of education and health care services, improvement of the road network, etc. With the aim of reducing poverty among the population the following basic priorities were defined: realization of the regional policy on development of prospective regions and creation of conditions for realization of labour potential. Table 2.14.2 Government agriculture support programmes in 2003 Programme support area
Allocation (billion tenge)
Combating agricultural pests and animal diseases Farming support Stock breeding Agro-machinery production Alternative systems for providing agro-business credit Agricultural production-processing enterprises Other
6.38 15.0 2.34 3.47 2.4 0.935 5.0
At the same time the state does not intend to take upon itself functions of the main investor or sponsor of the agro-industrial complex. It will only
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create conditions for development and problem solving by legislative and other measures. According to the Minister of Agriculture Akhmetzhan Esimov: ‘If we want to help the farmers, it is necessary to bring to their attention objective information about the essence of state support of agriculture, in order to prevent them from creating illusions that everything will go the old way.’ One of the most persistent problems for agrarians is the problem of short supply of fuel and seeds, especially during the sowing and harvesting seasons. The other problem is the absence of adequate demand for agricultural products. The point is that under conditions of liberalization of trade, agriculture has remained unprotected from industry monopolies. There is also still no viable infrastructure for agro-business. Pricing tactics used by numerous mediators frequently reduce the proportion of final retail price seen by producers. In general, harvest is a time of intensive work for farmers who are short of fuel, turnover capital, transport and time. Lacking skills in the process of buying and selling, many fail to seek out the best buyer, and are compelled to sell their production to dealers at a reduced price. In order to solve this problem a state-run company, the Food Corporation, has been created. It buys grain at a fixed price, but this does not help farms with fuel and seed supplies. Every year many farmers confront the problem of artificially low prices for grain and unjustifiably expensive fuel. The authorities have not found a universal solution to this but do usually ban the export of diesel during sowing and harvesting.
Crops and animal production In 2003 the sown area will be reduced by 580 thousand hectares, particularly for spring wheat, oil-bearing (sunflowers) and feed (annual grasses) crops and constitutes 13.7 million hectares. Land for corn will be reduced by 103.9 hectares, oil-bearing crops by 381.3 hectares, and sugar beet by 21.8 hectares. Meanwhile, this year the lands for rice will be expanded to 71.6 hectares, oat, millet, buckwheat. According to the World Bank grain production has increased on average by 46 per cent per year during 1998–2002. Wheat production in 2002 reached 18 million tons, a level which is probably not far from the country's sustainable potential. This year Kazakh farmers broke the record of 17 million tons of harvested grain, due to the recent introduction of private land ownership which creates favourable conditions for future growth. This is the first harvest of a three-year programme promoting intensive agricultural development. As announced in Paris by the World Grain Council (which is conducting monitoring of the world grain market in 2003–2004) Kazakhstan will export 5.5 million tons of grain in comparison with 4.4 million in the previous year. Thus Kazakhstan will enter the top five leading grain suppliers to world markets. Orders for purchase of Kazakhstan's grain have already been made by countries of the European Union, Northern Africa and Central Asia.
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Recovery in other crops and in the livestock sector has been much slower. As compared with previous years the crop capacity of millet has increased by 17 per cent, maize by 12 per cent, rice and oats by 6 per cent. At the same time there was a decrease in the crop capacity of buckwheat, wheat and barley. The highest crop capacity of grain per 1 hectare is observed in Kzyl-Orda – 280 kg compared with 271 kg last year. It is followed by the South Kazakhstan Oblast with 246 kg per hectare as against 161 kg last year; the Almaty Oblast with 226 kg per hectare compared with 166 kg in 2001; and Zhambyl with 207 kg as against 134 kg. There has been an increase in farming cattle and poultry. Production of meat grew by 3.1 per cent, milk by 5 per cent and eggs by 13.3 per cent. This growth occurred mainly on private sector farms. Since 1 January 2002, farmers of all the oblasts of Kazakhstan increased the number of cattle, sheep and goats. In 13 oblasts the number of pigs and horses increased and farmers in 11 oblasts account for poultry production growth.
Food processing The value of goods produced in 2002 Kazakhstan’s industrial enterprises (including small and subsidiary enterprises, housekeeping sector) account for 2.3 trillion tenge. A marked growth in food industry is of prime importance for the development of agriculture. In 2002 rural food production (including beverages) grew by 10.8 per cent. Table 2.14.4 gives production volumes broken down by product. Table 2.14.3 Food production, 2001–02
Flour Sugar Pasteurized milk and cream Macaroni and flour products Cooked meats Butter
Volume, 2001 (000 tons)
Volume, 2002 (000 tons)
1662.9 346.5 92.9 40.2 10.71 6.043
1882.6 395 109 54.8 12.13 9.240
A threefold increase of ploughs and disc harrows production in the agromachinery sector is also significant. It is worth noting that not only is agricultural production growing but export of the sector’s products is also increasing. Between 1 January 2002 and 31 October 2002 Kazakhstan exported 3.4 million tons of soft wheat, mainly grade 3 and 4, to 32 countries. Some details are given in Figure 2.14.1. Small volumes of Kazakhstani wheat are exported to the European Union, Baltics, Africa and the Persian Gulf countries.
The Agro-Industrial Complex of Kazakhstan
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165
Kyrgyzstan
174 177 193 195
Turkey Turkey Uzbekistan Tunisia Tunisia Tajikistan
272
Russia Russia
Thou.tons Thou. tons
400
Azerbaijan
776
Iran Iran
0
200
400
600
800
Thou. tons
Figure 2.14.1 Export of Kazakhstan Soft Wheat to selected countries (Jan.–Oct. 2002)
Trends The following trends in agriculture in Kazakhstan are apparent: • The economy is maturing. GDP is expected to rise. • There will be further involvement of the local financial institutions in the agro sector and food industry financing. • Competition in agriculture and food processing sectors will increase. • The sector is gaining wider Government support and attention. • The agro-industrial complex is increasingly attracting investors’ attention. • Adoption of the new Land Code to allow private property on land will make Kazakhstan more attractive for investors. • Major leading companies will dominate in the agro-industrial complex. These companies are able to streamline the influx of capital and technical modernization. They can solve vital business issues by means of lobbying and the NGOs. These companies will be instrumental in solving significant problems such as migration, loss of farming personnel from villages and unemployment. Overall, according to the World Bank, the awareness of the Kazakh authorities of the need to strengthen the process of agricultural development has been good. Balancing short-term cost recovery policies from irrigation services to small farmers, with longer term sustainability and affordability requirements also poses a particular challenge. The Government is, however, highly committed to working on broader rural development issues, and is interested in pursuing options for small-scale rural finance.
2.15
The Kazakhstan Insurance Market: Emergence and Development Aon Kazakhstan
Overview Kazakhstan’s insurance market shows stable positive trends and is developing rapidly. Following the implementation of the policy on insurance market regulation by the National Bank of Kazakhstan (NBK) the level of financial security and solvency of insurance companies is increasing. Both the role of and confidence in insurance has increased. In approximately the last two years the establishment of a modern infrastructure for a national insurance sector has became evident. The Kazakh Actuarial Center was created. At present, there are 26 professional actuaries operating in Kazakhstan and five insurance brokers licensed for brokerage activity. Work on determining the types of compulsory insurance is close to completion and the foundation has been laid for development of pension annuities. According to the NBK as at 1 January 2003 there are 33 insurance companies licensed to operate in Kazakhstan. In 2002 there were 42 licensed insurance companies, in 2001: 38, 2000: 42, 1999: 70. Among those companies one company is partly state owned, four companies have foreign participation and there is one licensed life insurer. The majority of insurance organizations are based in Almaty. The NBK, as a supervisory authority for the insurance industry, stands for transparency of insurance operations and solvency of the local insurers. In the last two years or so, stricter supervision of the local insurance market has led to significant reduction in the number of insurance companies. The result has been further concentration of capital with fewer insurers. For instance, six insurance companies provide about 60 per cent of the total insurance premiums generated in the country. Kazakh government sources suggest that this figure is even higher, and that the six companies presently account for as much as 79 per cent of the total insurance premiums generated in the country. The six companies and their respective percentages of total insurance premium are as follows: CJSC
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Kazakhinstrakh (19.5 per cent); JSC ‘SK’ BTA (19.1 per cent); the Petroleum Insurance Company (17.8 per cent); JSC KazCommerce Polis (10.3 per cent); CJSC AIG (6.1 per cent); and JSC KBS Garant (6.1 per cent). (Source: National Bank of Kazakhstan). Total premium income in 2002 increased by 61 per cent from 20011. The share of insurance premiums to GDP in 2002 was 0.57 per cent, as against 0.38 per cent in 2001. Owned capital of insurance companies increased in comparison to 2001 by 22.2 per cent. The volume of technical provisions increased in comparison with 2001 by 32.7 per cent. It is believed that the projected establishment of the Insurance Payments Guarantee Fund in 2003 for personal insurances should increase public confidence and the level of protection of individual policyholders. The draft law prepared by the NBK is under consideration by Parliament. The Kazakhstan insurance sector is developing rapidly, but local insurance market capitalization is slow and insignificant. Local insurers are short of additional capital for reinsurance in the form of obligatory agreements. Most of the risks are reinsured optionally.
Local insurance of energy risks The retention level of local insurance companies does not exceed US $500,000 per single risk, so they rely on reinsurance even for relatively small risks. For medium and large risks, local insurance companies usually provide fronting services according to the terms and conditions and the prices established by the leading reinsurance underwriters. Insurance policies may also include a claims-control clause and a cutthrough clause. Most viable insurance companies in Kazakhstan are directly or indirectly affiliated to certain large local banks and/or financial and industrial groups that also could influence the choice of the local provider of insurance services.
Review of Kazakhstan insurance legislation Legal base Kazakh insurance legislation is based upon the Civil Code of the Republic of Kazakhstan, the Law of the Republic of Kazakhstan ‘On Insurance’, and other legislative acts and legal regulations acts of the President, the Government of the Republic of Kazakhstan and the NBK (which is the insurance supervisory authority). 1 Kazakh government sources suggest that this figure is even higher, increasing by 68.7% and totalling 22.6 billion tenge (in comparison to 13.4 billion tenge in 2001). Some 81.3% of this percentage growth came from premiums in voluntary property related insurance. The average sum of insurance premium per head of population totalled 1,506.6 tenge in 2002. The share of insurance premiums to GDP in 2002 may have been as high as 0.67% according to the National Bank of Kazakhstan, as opposed to 0.57%.
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At present, this legislation has made compulsory the following types of insurance: • • • • •
motor owners’ third-party liability; passenger liability of carriers; third-party liability of notaries; insurance for judges and their property; agricultural insurance.
Apart from the various legislative and legal regulations mentioned above, Acts have made some other types of insurance compulsory. These include: • • • •
employer’s liability insurance; certain oil operations’ insurance; general third-party liability insurance; environmental insurance.
Arranging a local policy It is a requirement for all companies resident in Kazakhstan, ie registered as legal entities in the Republic of Kazakhstan, to have their policy issued by a locally licensed insurer. This is also considered compulsory for nonresident companies and contractors, although difficult to enforce. Despite this it is believed that there are benefits to having a local policy. Firstly, insurance premiums for most commercial policies are a taxdeductible expense. Secondly, there are provisions within the legislation, for example the Law on Oil and Contracts for Sub-Soil Use/Production Sharing Agreements, that contain compulsory requirements for insurance to be purchased by oil and gas sector companies and their contractors. Various state bodies supervise compliance with the above rules and therefore it is believed that a local policy would be preferable to avoid any dispute with the authorities on this issue. One can also see that according to the Kazakh Tax Code it is more advantageous to have a local policy in terms of withholding tax rates. The rate of withholding tax on direct insurance is 10 per cent on gross premium, while on reinsurance it is 5 per cent (see article 180 of the Tax Code). There are of course local fronting costs but these can be maintained within economically viable levels. One should not forget the currency transfer risk involved, since the premiums paid by big companies can well exceed the capitalization of a local carrier. This issue can be managed by a broker in conjunction with its locally licensed subsidiary. Introduction of claims-control clauses and cut-through clauses within the reinsurance agreements properly managed by a broker further ensures that the client will not be affected by local policy ownership. It is necessary to emphasize that both national and international companies investing in Kazakhstan would benefit from partnership with the local insurers, including licensed insurers of foreign origin, in order to allow continued growth and professional development of the local market.
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Currency issues Residential companies are obliged to have insurance contracts and pay insurance premiums in local currency (tenge). However, a licensed insurance broker may provide verification (certificate) of insurance where limits and deductibles are calculated in US dollars or other hard currency. Cut-through clauses in the insurance contract allow the receipt of claim payments directly from the international reinsurance market in hard currency while only the small portion of risk retained by a local insurer has to be received in tenge. Local insurance contracts also make certain provision for indexation, so the insurance buyer is fully protected from local currency devaluation. However, it makes sense to do the arrangements through a broker to protect the clients’ interests. Non-residents may have insurance contracts and pay the premiums in any currency they choose.
Use of captives Tightening up of the insurance market has led to active use of captives by oil and other companies. However, if such captive does not have the appropriate credit rating (BB+ of Standard&Poors, Baa3 of Moody’s, BBB- of Fitch, B+ of AMBest or A+ of Expert RA for Russian insurance companies) then it may create certain difficulties in arranging such insurance. Kazakhstan insurance legislation does not have special provision for captives, so they are considered as reinsures involved in transborder insurance, and the general rating requirement is applied. When the parent company of the captive does not have international credit rating, the fronting reinsurance arrangement is required. The largest Kazakh oil and gas companies are now also investigating the opportunity of utilizing a captive insurance company to assist in managing the total cost of insurance for their operations, and thereby reducing the cost of external risk transfer to the international marketplace. This may become a basis for discussions with a supervisory body on new regulation for captives.
Compulsory insurance Third-party liability including pollution liability This insurance requirement is stipulated by a number of laws and regulations. The State Committee on Emergencies closely monitors compliance with this rule. It is particularly strictly enforced in East Kazakhstan (Atyrau) and Aktyubinsk oblasts where Akims (local governors) issue Special Decrees in respect of third-party liability insurance. This requirement is compulsory for all companies working in Kazakhstan, resident and non-resident, the ‘operations of which involve risks of natural and man-caused emergency situations’. The Government also plans to submit to Parliament the new Law on Compulsory Ecological Insurance. Employer’s liability in respect of local workers This insurance is stipulated by the Law on Labour and the Law on Protection of Public Health in the Republic of Kazakhstan. The employer is
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required to insure the risk of bodily injury to or death of employees whilst at work. The cover can vary but the usual limits are ten times annual salary in the event of death, five times annual salary in respect of qualified disability for groups 1 and 2, two times annual salary in respect of disability for group 3 and one times annual salary in respect of temporary disablement with no group of disability assigned. In order to cover medical expenses, companies additionally buy medical insurance (EL in respect of medical expenses). Some companies require cover for professional diseases as well. Both medical insurance and insurance of professional diseases are usually available only in the local market. Third-party car insurance It is prohibited to drive a car in the Republic of Kazakhstan without such insurance and the compulsory limit is approximately US $2,500. The tariffs are fixed for all local insurers.
Hydrocarbon operations compulsory insurance This type of insurance is stipulated within contracts concluded by companies with government authorities on subsoil use (including oil operations). Such contracts usually include the following areas: • property damage in respect of productive assets; • control of wells (control of wells in respect of offshore operations is stipulated by the Law on Oil); • third party liability; • employer’s liability; • cargo. Limits should be specified in the contracts; however, these are often not determined. Compliance with the requirements is monitored by the Ministry of Energy (the authorized body). To date, control over compliance with contract requirements in respect to insurance has not been strict; however, insurance requirements might be used as leverage over oil contractors. Such insurance is compulsory only for companies that have entered into contracts relating to hydrocarbon operations with the Government.
Conclusion and recommendations The commercial insurance market successfully resisted the negative consequences of the 11 September 2001 World Trade Center catastrophe. It will continue to offer viable risk transfer products. New capacity is entering the market at record speed to meet the demand. In the meantime clients and brokers are facing unprecedented challenges in view of the tightened insurance market. As a result, market negotiations require more time, high-quality market presentations are essential, and clients should consult in detail with the broker on how much exposure to retain and how much cover to purchase.
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Change in market dynamics is structural, not just cyclical. Insurers are (i) asking for much more risk and exposure information; (ii) being more selective about the accounts they accept; (iii) refusing cover for certain classes or certain risks; (iv) making risk improvements mandatory and imposing premium payments warranties; (v) charging a high price for the cover they do offer. Some markets accepting predominantly risks from the former Soviet Union and South-East Asia are less affected by the 11 September 2001 disaster and the latest large losses in Europe. They also increase prices for proposed cover due to increase in cost of reinsurance protection, but risk consideration is not dramatically changed. These markets could be preferable for Kazakhstan insurance risks and could be used to supplement global insurance programmes of international clients operating in Kazakhstan as well as in placement of long-standing insurance. Brokers proposing services to companies operating in Kazakhstan are required to have good knowledge of the local market operations and the legal environment in order to ensure full compliance with the statutory and regulatory framework and access to the international insurance market with the benefit of a strong market profile. Some clients may consider advising their corporate brokers to involve a broker having a strong presence and professional capacity in Kazakhstan, in order to be instrumental in local services and gain the full benefits of access to markets specializing in former Soviet Union risks. Over approximately the last two years the following positive changes in the insurance market of the Republic of Kazakhstan can be highlighted: • The legal framework for a better quality insurance system has been created. • Clear differentiation of activities between the market participants has been achieved. • Some of the issues regarding taxation have been resolved. • Key principles of interrelations between the local market and the international insurance (reinsurance) markets have been defined. • Measures to protect policyholders are being realized, as well as measures to increase solvency and profitability of the insurance market.
2.16
Almaty Office Market Overview Michael Rehm, PhD, Consulting Services Director, Scot Holland Estates
Introduction The City of Almaty, with a population of approximately 1.5 million people, continues to serve as the commercial heart of the Republic of Kazakhstan. Although the capital moved from this city to Astana in 1997, Almaty is where major embassies are located and remains the home of most multinational corporations active in Kazakhstan. In addition, nearly every foreign firm looking to enter the Kazakhstan market seeks its first office premises in Almaty. Therefore, this chapter is dedicated to this city’s office market, its current condition and the direction in which it’s heading. The Almaty real-estate market as a whole is expanding rapidly in all property categories catering to the higher end of the market. The amount of construction of new business centres and the upgrading of older Class C properties is significant but does not equal the incredible growth of Western retail space and elite residential units. (See the section below for details of office classification.) In all, the growing supply of Class A and B business centres is saturating the market, and simultaneously the numbers of potential tenants (mainly foreign companies and organizations) are growing at a much slower rate. Since the boom of the late 1990s, which saw flocks of foreign companies entering Kazakhstan, the inflow of new firms has reduced considerably. The recent arrivals are both fewer in number and smaller in their initial scope, and hence have smaller office space needs. In addition, some of the pioneering firms that have had a presence in Kazakhstan since the early days are beginning to elect to purchase or have built their own office buildings. A recent trend has also appeared that some oil-related firms are beginning to uproot their main Almaty-based offices and relocate to the oil cities in western
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Kazakhstan now that the infrastructure in these locations is sufficient for them to live and work there. These companies shall in turn leave behind a much smaller representative office. Lastly, the embassies of the United States, UK and other influential countries are under pressure from the Kazakhstan Government to relocate to Astana. With the US embassy likely taking the lead, this move will probably start in 2008. Although the embassies’ own moves will not greatly impact the demand for office property, there is a possibility that some foreign firms will either move their own offices to Astana or split their offices between the two cities. If the development of Astana continues at its aggressive pace this is a real possibility. Another important factor impacting the supply side of the office market is the explosion in ground floor commercial space within centrally located elite apartment projects. Although approximately 60 per cent of this space is used for retail, a healthy portion serves as office space for service and consumer-oriented companies. Since the supply of ground floor commercial space is primarily for sale to end users it does not directly impact the relationship between supply and demand for business centres, which have thus far been rental-only. Nevertheless, some of the business centre projects currently under construction are now offered for sale by floor. This concept of condominium offices is not entirely new to the market but projects marketed as for sale only is a new trend. Time will tell if this portion of supply will be mainly purchased by end users or by investors who will in turn rent out the space to rental tenants. Despite the approaching oversupply, there is a latent demand for Class B properties originating from foreign firms that are now occupying Class C space in the city centre and just off the centre. This phenomenon can be explained by the history of the office market. After the fall of the Soviet Union and before the creation of the first modern business centres in 1995 (immediately following mass privatization), foreign companies were forced to locate their offices in a handful of administrative buildings. The first such cluster of buildings was near the intersection of Abai and Rozabakiev Streets. Over time most of the initial tenants have upgraded to Class A or B space, but a considerable number of foreign tenants remain in such premises. As the rental rates for modern business centres continue to decline, it is likely that many of these Class C tenants will pay the slight premium and upgrade to Class B space.
Office classifications The office stock, particularly multi-tenant business centres, in the city of Almaty can be categorized into seven classifications ranging from Class A (modern, Western facilities) to Class C (cosmetically renovated Soviet-era administration buildings). In such a maturing market,
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these classifications will of course change over time, but at present these classes, defined by Scot Holland Estates, sufficiently organize the total supply. The text below defines each classification and offers an example of such a property in the Almaty market.
Class A: Samal Towers The market’s premium office stock comprises newly constructed business centres built to ‘international standards’, which generally entails highquality finishes, structural design to withstand significant seismic events, professional, experienced property management, covered reserved parking, and other on-site services and amenities such as 24-hour security, prompt maintenance and cleaning, and cafés or restaurants. Class A structures have central air conditioning, either two-pipe or fourpipe fan-coil systems. These premium business centres are in prime locations in close proximity to other Class A and B business centres. Although not on a par with most European or US Class A centres,Almaty’s top office buildings do offer more parking than their predecessors. The current Class A properties cater to high-profile multinational firms like Microsoft and ChevronTexaco, who acquire space in these properties upon market entry or upgrade from the previous generation of top-class office space. Including the service charge commonly applied to Class A and A– properties (typically US $5 per square metre per month), the rental rate for Almaty’s Class A office space is US $30–35 per square metre per month. It should be noted that all rental rates and lease agreement terms and conditions are negotiable, particularly for larger tenants (above 1,000 square metres). This is more the case in lower-class properties but is also readily practised in Class A properties.
Class A–: Prime business centres This segment of the market represents Almaty’s first generation of first-class office space. These properties offer nearly identical service and amenity packages as Class A business centres but are generally adaptive reuses of Soviet-era structures. The Hyatt Business Center is considered Class A–, mainly due to its slightly remote location and small floor plate of approximately 300 square metres. Low on-site parking capacity is also a factor. Tenants occupying Class A– properties generally fit the profile of Class A tenants but prefer the slight discount in rental rate (US $25–30 per square metre) over the added prestige and safety of the newest business centres.
Class B+: USKO business centres Entering the next level of office classes, Class B+ properties are generally of two different types. The first are smaller office buildings
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that can accommodate either one large tenant or several smaller ones, and the second type represent the initial wave of Western business centres constructed in Almaty. These structures are predominantly new constructions of the post-Soviet era rather than adaptive reuses. This class of property offers a narrower range of services and amenities usually without on-site professional property management. The airconditioning system is sometimes not central but rather a combination of radiated heating and split-unit air conditioners. Matching the modest entry lobbies of these properties, the tenants of Class B+ properties are lower profile multinational companies. The rental rates for this group of properties are approximately $20–25 per square metre.
Class B: Success business centres Like Class B+ properties, this segment includes both small office buildings and modest post-Soviet business centres. The quality of interior and exterior finishes is noticeably lower than Class A properties. These properties offer simple radiated heating systems and split-unit air conditioning, which is often the responsibility of the tenant to provide. Although these business centres are dominated by multi-national firms and foreign/local joint ventures, Class B properties also house some local companies willing to pay the US $15–20 per square metre monthly rental rate.
Class B–: Premier Alatau Hotel and Business Center The bottom segment of this portion of office stock, Class B–, can be simply defined as Soviet-era buildings that have been capitally renovated (mainly on the interior rather than exterior) or are inherently higher quality such as hotels that have converted some space to office use. The elevators are generally small, Soviet-type and the entrances are very simple and modest. No air conditioning is included and tenants are charged with installing split units as desired. Security is one of the few services provided and this is not of the highest quality. The range of tenants in Class B– centres are quite diverse but seem to centre around foreign firms of non-European or US origin. Local companies also occupy a fair share of this stock with the rental rate of US $10–15 per square metre.
Class C+: Sary-Arka Business Center A handful of cosmetically renovated Soviet-era administrative buildings deserve a category of their own due to prime location and a tenant mix that includes a large number of foreign organizations. These properties have changed relatively little since the fall of the
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Soviet Union, aside from the interior renovations made by tenants over the years. These structures are almost exclusively corridor-type. Since this category of properties was historically occupied by some of the first foreign organizations to enter Kazakhstan, many have remained in these centres and appreciate the low rental rates of US $8–12 per square metre. Of course many local firms that elect to rent rather than own office space occupy much of this segment.
Class C The remaining office space in the Almaty market consists of cosmetically renovated Soviet-era administrative buildings that generally accommodate the owner (eg research institute) with excess space rented to others. With low rental rates – below US $10 per square metre – this stock is predominantly occupied by local organizations. The map shown as Figure 2.16.1 graphically illustrates the size of the city’s business centres and indicates the multi-centric nature of Almaty’s business district. In terms of sheer size, the largest existing and upcoming business centres are Samal Towers, Ken Dala Business Center, CDC Center, and the Nurly Tau Business Center. Figures 2.16.2 and 2.16.3 indicate the growth patterns of Class A and B office supply in Almaty since the construction of the first ‘modern’ business centre, RENCO’s Arai Business Center, in 1995. Following a lull in construction during 2001, we estimate that the supply of Class A and B business centres will more than double between 2002 and the close of 2004. Unfortunately the new supply added to the market is not entirely meeting the needs of office users. One noteworthy deficiency is parking. In addition to growing fleets of company cars, each year more and more local office staff drive their cars to work. Hence, around each business centre can be found a chaotic sea of parking along adjacent streets. Some business centres have more generous parking capacity than others but it is very common for landlords to offer one reserved parking place per 100 square metres of office space. On the other hand, Almaty does have an excellent public transportation network and on-street parking is currently allowed along most streets.
Conclusion The Almaty office market is in step with the retail and high-end housing markets in that the rapid addition of supply is quickly
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overpowering the demand for such space. Each of these real-estate products will witness oversupply in the next 24 months and the gradual decline in office rental rates will quicken. Tenants, particularly Class A tenants, will be in a strong position to negotiate favourable terms and conditions in their upcoming lease agreements. Despite the
Gogolya
Seifulina
Tole Bi
ze v ira m Al -F ar ab
i
Ti
D
Dostyk
ov
os
nd
a zh
a Fumanov
Abaya
LEGEND Size in Square Metres Below 1,000 5,000–10,000 1,000–2,500 Above 10,000 2,500–5,000
Tramway Downtown Samal
0.15
0
0.5
1
Kilometres
Scot Holland Estates June 2003
Figure 2.16.1 Geographic distribution of Almaty business centres by size
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relentless optimism expressed by the market’s inexperienced developers and the wide availability of capital for real estate projects, the building boom will come to a halt in the near future. The strong, growing Kazakhstan economy will absorb the oversupply over time but in the interim, Almaty will be a buyer’s market.
40,000 35,000
Square Metres
30,000 25,000
Class A
20,000
Class B
15,000 10,000 5,000
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Figure 2.16.2 Annual additions of business centre supply by class
200,000 180,000 160,000
Square Metres
140,000 120,000 100,000 80,000 60,000 40,000 20,000
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Figure 2.16.3 Total supply to date of Class A and B business centres
2.17
Software Copyright Protection in the Republic of Kazakhstan Yuri A Bolotov and Saule D Kulzhambekova, Michael Wilson & Partners Ltd
Protection of computer programs Computer programs became eligible for protection in 1993, when the Principles of the Civil Legislation of the USSR and the Republics adopted in 1991 were in force and effect. The Law of the Republic of Kazakhstan ‘On Copyright and Related Rights’ of 1996 (the ‘Copyright Law’) as well as the Special Part of the Civil Code of Kazakhstan of 1999 also established computer programs as copyrightable matters. The Patent Law of 1999 also protects computer programs by patents provided that such computer programs form a part of an invention. It is also possible to claim protection for the name and trademarks that are used on software packages under the Law ‘On Trademarks, Service Marks and Appellations of Origin’ of 1999 (the ‘Trademark Law’) and relevant provisions of the Civil Code. Kazakhstan is party to international treaties such as the Berne Convention for the Protection of Literary and Artistic Works of 1886, the Universal Copyright Convention of 1952, and the Geneva Convention for the Protection of Producers of Phonograms against Unauthorised Duplication of their Phonograms of 1971. The current Copyright Law does not protect software as a literary work within the meaning of the Berne Convention, as specified in Article 10 of TRIPS; however, we hope that such provision will be introduced in the Copyright Law once Kazakhstan joins the WTO. Pursuant to the Declaration of the Republic of Kazakhstan of 1993 ‘On International Treaties on Industrial Property Protection’, Kazakhstan joined the Convention of 1967 establishing WIPO, the
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Paris Convention for the Protection of Industrial Property of 1988, the Patent Cooperation Treaty of 1970 and the Madrid Agreement Concerning the International Registration of Marks of 1967. Accordingly, in Kazakhstan software can be protected based on copyright, trademark and trade names, and patent legislation.
Copyright Any type of software in any language and form can be protected. An author of software can be an individual or group of individuals; a legal entity cannot be an author of a computer program. If an employee in the execution of his or her duties has created a copyright matter, the employer acquires the property rights to use such work only if the agreement between the employer and employee provides so. Also, under the Copyright Law, upon expiry of a 10-year period the right to exploit the work in any manner and receive remuneration with respect to the copyright shall belong to the author, regardless of the agreement with the employer. An author enjoys personal non-property rights (right of authorship, the right to the name and protection of reputation) at all times. A holder of (exclusive) property rights is permitted to use the work in any form and manner, to reproduce, distribute, import, show, perform and communicate the work to the public, to broadcast, transmit by cable, translate and alter such work. If lawfully published copies are put into circulation through sale, further distribution does not require the author’s consent. However, only those who have the right of authorship may lease the original or copy of a computer program or database regardless of the ownership to such copies. In Kazakhstan, as in most countries, authorship arises with the fact of a work’s creation. No registration or other special record of the work or compliance with any requirements is required for authorship to arise. However, it may be necessary to deposit the work with the Intellectual Property Committee of the Ministry of Justice of the Republic of Kazakhstan. Authors enjoy the right of authorship through their entire life and 50 years after their death. In case of joint authorship, the right of authorship can be enjoyed 50 years after the death of the last surviving author. The right of authorship, right to the name and reputation of the author are protected perpetually. The property rights to software as well as to other copyrightable matters may be transferred under an agreement to transfer exclusive and non-exclusive property or rights to be concluded in writing. Under the legislation, when selling or providing public access to copies of computer programs and databases, a special manner of entering into
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agreements specified in the laws and regulations of the Republic of Kazakhstan can be applied. Nevertheless, no such laws and regulations currently exist. It is also worth noting that the Instruction on State Registration of Licence Agreements to Use of the Works and Related Rights Objects is not consistent with the Copyright Law. It requires that licence agreements concluded between the Licensor and Licensee to use the works and related rights objects should be registered. Thus, the above Instruction obligates registration of licence agreements despite the fact that neither the Civil Code nor the Copyright Law contain such provisions. The Law specifies certain limitations of copyright. A person who lawfully possesses a copy of the software or database may, without the consent of the copyright holder and any consideration: • alter the program or database, and do any acts connected with the functioning of the program or database in accordance with its purpose, including record and store it (on an individual computer or one computer in a network), and correct any manifest errors; • copy a program or database for archives and in order to replace the original of the program or database that has been lawfully acquired and lost, destroyed or became unfit for use. The Copyright Law contains a clause on the decompiling of a computer program, which agrees in principle with Article 6 of the European Union Directive ‘On the Legal Protection of Computer Programs’: a lawful acquirer of a copy of a computer program may without the authorization of its copyright owner and free of charge reproduce and transform the code to sourcecode (to decompile the computer program) or instruct other persons to perform such acts, provided these are required to make a computer program designed by such person independently interoperable with other computer programs which can interact with the decompiled computer program, provided that the following conditions are met: • Information necessary to achieve interoperability has not previously been readily available to such person. • Acts are confined to the parts of the original program necessary to achieve interoperability. • Information obtained as a result of decompiling cannot be used for goals other than to achieve interoperability of the independently created computer program; be given to others, except when necessary for the interoperability of the independently created computer program; or be used for the development, production or marketing of a computer program substantially similar in its expression, or for any other act which infringes copyright.
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Under the Copyright Law the application of the above provisions may not interfere with a normal operation of a computer program or database or infringe the legitimate interests of the exclusive rights holder thereof; this agrees with Article 13 of the TRIPS Convention in relation to restrictions and limitations.
Protection of programs as inventions In some cases the protection of computer programs alone is not sufficient and satisfactory for the rightholder. In such a case computer programs can be protected by patent laws. The 1999 Patent Law does not recognize as inventions ‘computer programs and algorithms as such’. However, provided these are an integral part of the invention, protection can be granted as an element of an invention. For example, if a device incorporates an element, characterized at a functional level, and the described form of its implementation contemplates the use of a programmable (adjustable) multifunctional facility, the applicant is expected to produce evidence to prove that such facility is capable of performing the function attributable to it as an element of the device. The program will be patented as a component of a more general invention. In such a case the patent will protect the essence of the computer program, provided it is incorporated in the subject of invention together with other essential elements of claim. It is advisable to present a computing algorithm as a program flowchart, or as a mathematical expression, if possible. The shortcomings of the patent procedure are the considerable costs involved in the registration of a patent and keeping it valid, the short term of protection (20 years from the day of filing a patent application), and the protracted period of time it takes to obtain a patent.
Trademarks Virtually every computer program has its own name; many have trademarks. These can be protected under the Trademarks Law. The owner of a trademark has the exclusive right to use and dispose of his or her trademark. Where the name or a designation of a computer program is not protected, any person might use such a name for a program which without being identical to copyright-protected programs might confuse as to the program or its manufacturer. Apart from that, when programs which use trademarks are pirated the resultant products automatically infringe the right of a trademark owner. Also it should be noted that the name of a program as a trademark can be protected perpetually, as the registration of a trademark may be extended every 10 years.
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Protection of rights to software Any breach of intellectual property right entails civil, criminal or administrative liability.
Civil liability Unfortunately, legislation does not define actions which are deemed as a breach of copyright. However, the assumption is that a breach is any illegal use of the object of copyright, including software. Article 978 of the Civil Code of the Republic of Kazakhstan reads ‘the work shall be considered to be utilized, irrespective of whether it is realized in order to derive a profit, or the realization has not been directed to that’. Even though this provision reduces the concept of ‘utilization’ to that of ‘realization’, one can note that arising from this provision, being recognized as illegal can be both the illegal realization for a profit and the illegal realization without generating a profit, where copies of a copyrighted product are sold. Pursuant to Article 970 of the Civil Code of 1 July 1999 (Special Part), protection shall be granted to exclusive rights, including copyright, by the court using the methods stipulated for the protection of civil rights, including seizure of material objects created as a result of violation of such rights. The courts shall grant protection to copyrights, including to software, by way of issuing a judgement (i) to reimburse the losses incurred, including loss of profit, (ii) to recover the profit gained by the offender as a result of such rights violation, (iii) to pay a compensation in the case of a breach of rights of the authors of software or a database in the amount ranging from 500 to 50,000 the minimum wage (from US $17,000 to US $1,700,000), prescribed by the legislation of Kazakhstan. Prior to examining the case the judge may pass a judgement prohibiting the defendant manufacturing, reproducing, selling and utilizing copies of the author’s work which are allegedly fake. The judge may rule to seize and confiscate all copies of the allegedly pirated products, and the materials and equipment intended for manufacturing and producing thereof. Pursuant to a court judgement the seized pirated copies may be given to the copyright holder at his or her request or be destroyed. The materials and equipment intended for manufacturing thereof shall be destroyed or confiscated in favour of the state budget. The Patent Law does not specify the punishment for a breach of patent rights within the framework of civil liability, but refers to other laws of the Republic. Under the Trademarks Law a person illegally utilizing a trademark is obliged to stop infringing the right, to reimburse the losses incurred by the trademark owner, to remove the
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trademark from his or her goods, its packaging and documents and to destroy the copies of the trademark.
Administrative liability Pursuant to the 2001 Administrative Offence Code, the sale, hire or any other illegal use of a copyright shall be penalized by the imposition of a fine in the amount up to 10 monthly calculation indices (MCI) (up to US $52) in the case of individuals; up to 20 MCI (up to US $106) in the case of officials; up to 200 MCI (US $1,060) along with confiscation of the product copies in the case of legal entities, provided always that the aforesaid acts do not contain the elements of a criminal offence. The illegal use of an invention carries the following penalties: up to 20 MCI (US $106) in the case of individuals; up to 50 MCI (US $265) in the case of officials; up to 400 MCI (US $2,120) in the case of legal entities. The illegal use of a trademark or a similar mark carries the following penalties: 5 MCI (US $26) in the case of individuals; up to 15 MCI (US $78) in the case of officials; up to 100 MCI (US $530) in the case of legal entities, provided always that the aforesaid use did not cause heavy loss.
Criminal liability In accordance with Article 184 of the Criminal Code of the Republic, dated 16 July 1997, the illegal use of a copyright matter, as well as the illegal use of inventions, and the illegal appropriation of authorship or coercion to co-authorship may be punished by a penalty from 500 MCI to 800 MCI (from US $2,850 up to US $4,560), or equal to a monthly salary or other income of an offender for a period from five to nine months, or by detention for a period from four to six months, or by imprisonment for a period of up to five years with or without forfeiture of property. The illegal use of someone else’s trademark or similar marks shall be punished by detention for up to six months, or by correctional labour for up to two years.
Law enforcement practice Cases involving infringement of copyrights, including software rights, rights to trademarks and patents, are tried as follows: • as civil cases by courts; • as administrative offence cases: – by justice bodies and the Intellectual Property Committee as administrative offence cases where copyrights are infringed;
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– by finance police bodies and the Intellectual Property Committee, where trademark rights are infringed; – by the Intellectual Property Committee and justice bodies, where invention rights are infringed; • as criminal cases: – by the Republic of Kazakhstan’s internal affairs agencies, finance police bodies and courts, where copyrights and invention rights are breached; – by finance police agencies and courts, where trademarks are infringed. At present major violations detected in the field of copyright relate to audio and video recordings with most of these being dealt with by administrative methods. Spot checks conducted by the authorities are not always efficient and yield no intended effect, due to brief experience in the field. At present, given the forthcoming entry of Kazakhstan into the WTO, efforts are being made to amend a number of laws of the Republic of Kazakhstan to make them comply with TRIPS and other international conventions related to the protection of intellectual property objects.
2.18
Tourism and Travel Folke von Knobloch, CEO, Central Asia Tourism Corporation
In 1991 the Prime Minister of Singapore, Lee Kuan Yew, visited Almaty. He was one of the first heads of state to visit the new country Kazakhstan. Newspapers in Singapore reported extensively this journey to a former communist country. They quoted the Prime Minister as saying that apart from the mineral resources that Kazakhstan possesses, that would take some time to develop, it would be best to make use of the enormous possibilities of Kazakhstan to develop tourism that would fairly soon bring an income to a large number of Kazakhstan’s people. Tourism could and should be an important source of income and improved international relations for Kazakhstan. Unfortunately the Government of Kazakhstan did not follow this advice until recently. The Government appointed several ministers of tourism; at present the National Agency of Tourism and Sport is in charge. Several attempts to attract investment in tourism have been made but not sufficiently supported. In Almaty, Astana and Atyrau five-star hotels were built with international investment. But due to the cost of staying in these hotels, they cater for business people, not tourists. Some local hotels have been built, but mainly in the cities of international commercial interest like Atyrau and Aktau in the Caspian region. The majority of hotels from the Soviet area still need to be completely refurbished. Kazakhstan is part of the old Silk Road and can make use of its geographical position between Europe and Asia. It is the ideal gateway to China from Europe. Most visitors to Kazakhstan will be interested in combining their journey with a visit to Kyrgyzstan, Uzbekistan or Xinjiang. This could be made easier if the governments of these countries would cooperate closely in tourism, for example by having a common visa and common promotion. Tourism in Kazakhstan faces several problems, which can all be solved if the Government, the private sector and foreign investors cooperate.
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Visas Requiring that tourists have a visa is probably the greatest hindrance for a country that wants to promote tourism. Moreover, the difficulty and expense of getting a tourist visa is a major problem. In recent years the Government has made several improvements to the process – applications are now processed within five days and a visa can be obtained at Almaty and Astana airports. Further improvements are still necessary to attract international tourism in numbers; Western tourists are not used to facing red tape before going on a vacation. Kyrgyzstan, the neighbouring country, has recently stopped the requirement for a visa and OVIR registration after arrival for tourists of certain nationalities. The Government has promised to investigate how the situation in Kazakhstan may be improved.
Promotion of tourism A few local companies participated in the international tourist exhibitions like WTM in London and ITB in Berlin at their own expense – until 2000 no government funds were made available. With the financial assistance of Almaty’s sister city Phoenix, Arizona, KTA (Kazakh Tourist Association) had a stand at WTM, London, and the year after at ITB, Berlin, where the Agency for Tourism and Sport also participated. Since then these and a few other international tourist exhibitions have been attended. A domestic tourist exhibition is held annually in Almaty that also promotes travel to destinations within Kazakhstan. In 2002 a group of foreign travel journalists was invited. The Government has produced a few excellent booklets promoting tourism but they are too expensive to be distributed in large numbers. No posters have yet been printed. The Government must finance this kind of publicity, as is the case in all countries that promote tourism. If more interest by international developers is expressed to invest in tourism in Kazakhstan the Agency will get more funds to promote tourism. The possibilities to develop ecotourism in Kazakhstan are virtually unlimited, but unless there are attractions and facilities on offer it is difficult to persuade tourists to visit. Special rules for the import of equipment for tourism are needed. As tourism is not an industry that quickly pays for itself it is necessary to keep required investment costs as low as possible. Custom duties and value added tax for imports should be waived. Value added tax is not payable for services and tours sold to tourists. It has been said that this may be granted when actual projects are discussed.
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Lack of infrastructure In Almaty, Astana and Atyrau five-star hotels have been built but twoand three-star hotels are still needed. There is a particular need for tourist hotels in Almaty, although some have been built and others renovated. There is a demand for tourist hotels in all of Kazakhstan’s cities. In the national parks, not merely hotels but self-contained resorts are needed, offering everything required by international tourism, including restaurants, sport facilities, swimming pools and bars, as usually no outside facilities will be available. A few private local companies have developed tourism to Kazakhstan mainly concentrating on trekking, hiking, mountaineering, hunting and sport fishing. Travel agencies have purchased tents to offer tourist camps in summer. Some also purchased equipment like boats and bicycles. All worked without any government support, so the infrastructure is still limited, for instance there are no modern air-conditioned tourist buses except in Astana. The essential support of the Government with special tax incentives for investment in tourism is still only being discussed. An increased interest by foreign investors though would probably lead to these suggestions being implemented. A partial master-plan of which areas should be developed has been published but no real feasibility studies have been made. Training of hotel and tourist staff and guides is still lacking. Various foreign organizations have assisted in the development of tourism in Kazakhstan: several small grants have recently been given to improve existing sites in national parks and activity has included sending professional advisers to assess sites. Kazakhstan does not offer as many ancient cultural sites as Uzbekistan. Turkistan, in Southern Kazakhstan, which is a holy site for Central Asian Muslims, is the only exception. UNESCO has identified several cultural routes in Eastern Kazakhstan; a local agency has developed a route from Almaty to Balchash Lake, visiting ruins of Buddhist monasteries dating back to the Silk Road period. These tours require four-wheel drive cars. Most ancient sites were destroyed by the Mongols under Djingis Khan and only ruins remain. A more modern site of interest is Baikonur, the Russian rocket base. Kazakhstan has an abundance of natural beauty. At present tourists coming to Kazakhstan concentrate on the mountains near Almaty. This is a pity as many beautiful regions are in the Tien Shan, Alatau and Altai mountain ranges from Shymkent to Oskemen, more than 2,000 km from Almaty. These mountain ranges offer countless possibilities for resorts and camps in beautiful unspoiled valleys with lakes and forests. Not only should these mountain ranges attract tourists, but also the many national parks in the steppe and forest regions of
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Central Kazakhstan. Near Aktau at the Caspian Sea there are excellent beaches and the Mangistau National Park with unique geographical features and several historic sites. North of Astana is the ‘Lake District’ with a few Soviet-style sanatoriums and a deluxe resort, to the south west is a very interesting national park in a swampy area with many animals. Ecotourism is meant to support tourism in areas that are not urbanized and offer city dwellers the chance to experience real nature. At the same time ecotourism has a role in protecting the natural environment. This is easily possible in Kazakhstan. There are a large number of national parks and reserves. Many of them are suitable for tourist development, some have already started to attract tourists by offering limited accommodation and tour facilities, but all need further investment to be able to cater for international tourists. It is not enough to offer a beautiful environment and a range of wildlife when no proper accommodation, transportation, guides and other services like swimming pools, restaurants and bars are offered. Development of resorts in these regions would create employment in regions bypassed by the oil and gas development. These resorts should not be deluxe, provided they include the facilities mentioned – accommodation could be provided in Yurts where the Kazakh nomads used to live. This type of tourism is quite popular in Europe, especially in Germany, Austria and the Netherlands. Kazakhstan will never be a destination for mass tourism, but it will be able to attract a significant number of the target market for this kind of tourism. This is proven by the increase in the numbers of tourists visiting Scandinavia, Canada and Alaska – countries that offer similar scenery to Kazakhstan’s but with a better infrastructure. It is a question of investment and marketing to make tourism to Kazakhstan economically viable. The rich fauna of Kazakhstan is another attraction. Sport fishing, mainly for catfish, is being promoted in the Balchash Lake; sport fishing for sturgeon in the Caspian is banned at present but can be reintroduced when the regulations to protect the fish are altered. Tours for birdwatchers, especially from the UK, are offered, but they require better transportation facilities and accommodation. Hunting is being promoted. Quotas for most animals have been introduced to protect the wildlife. Some national parks though now realize that it is more profitable to have photograph hunters than those with rifles. At present the fees paid by hunters make it more attractive to kill the wildlife than to protect it. Winter sport is possible all year. In summer heli-skiing above 4,000 metres is offered. The slopes are excellent but better modern helicopters are required. In winter a few resorts are available, especially in the Almaty region, but none yet meets Western standards. Chimbulak, near Almaty, used to be one of the favourite winter sport resorts in the
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former Soviet Union. Medeo boasts one of the fastest ice-skating rinks in the world and is presently being renovated. More and better ski lifts are needed. The snow season normally lasts from December to March. These resorts can also be used as bases for hiking on foot or horse riding in the summer season. This makes it attractive for tourists and economically viable throughout the year. The mountains, which reach 7,800 metres, invite climbers; charges are much lower than in Nepal and excellent guides are available. These mountains also invite trekkers and hikers. At a lower level horses are available for short or long excursions. Bicycle tours of different grades are being offered; these could be improved if more and better bicycles were available. River rafting is another attraction and it also calls for the import of better equipment: several local agencies are trying to organize these type of tours but are short of capital to exploit this market. Local agents have purchased boats and bicycles but not in sufficient numbers and of the quality required. Kazakhstan is the largest of the former Soviet Republics. With its 2.7 million square kilometres it is larger than Western Europe. Uralsk, in the northwest, is closer to Helsinki than to Almaty. In the southeast, Almaty is the main entry point for Kazakhstan. British Airways, KLM, Lufthansa and Turkish airlines serve the country regularly. Air Kazakhstan has flights from Almaty, Astana and some northern cities like Okumen-Ust Kamenogorsk and Aktobe-Aktubinsk to Germany and to Seoul. The Caspian region is internationally served only by charter operators on behalf of the oil companies, although this should change in October 2003. Airfares are quite high, but if tourism traffic increases fares will come down, especially if the second national carrier, Air Astana, starts to operate to Europe as is planned for 2004. Kazakhstan has several international airports. All must be updated and improved, especially Almaty and Atyrau. The airport in Astana is being improved, mainly with Japanese grant funding. With the development of Air Astana, offering a reliable and safe transport system within Kazakhstan, one major problem for foreign tourists travelling within the country is being solved. Air Astana uses new modern Boeings (737–700 and 800) and by the end of 2003 intends to purchase a Boeing 757. Further smaller aircraft will be required to serve smaller cities within Kazakhstan. The Spanish train Talgo has started a regular service from Almaty to Astana; and it is expected to run on additional routes in due course. Unfortunately the existing tracks do not allow the Talgo to travel at its full speed. At present Kazakh trains offer quite a good service, especially in first class. Due to the extreme distances train journeys are very long: a train from Uralsk to Almaty takes three days. Overland roads are still rather bad. The roads from Almaty to Astana and Almaty to Chimkent are being rebuilt as well as several other main roads.
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EBRD and other organizations have allocated funds to improve the international route network. As distances in Kazakhstan are large – Almaty to Astana is 1,300 kilometres by road – road travel for tourists is not an option. Investment in transportation is required in all sectors. For tourism, the main requirement is for tourist buses of various sizes, with airconditioning and toilets. Cars are sufficiently available as Hertz and National Cars have just opened branches and are importing more cars. The domestic air network requires better and more modern aircraft for short- and medium-range travel. Air Astana needs smaller aircraft and the various airports need improving. Helicopters of Soviet vintage are available but need replacing by more modern and safer equipment. In the Almaty region there are many tourist sites that can best be reached by helicopter, like the Charyn Canyon and Kapchigay Lake that has an Italian-financed water sport centre. In the mountains heliskiing, mountaineering and trekking need helicopters. Tourism in Kazakhstan does not depend exclusively on foreign tourists. A developing middle class is a big source of domestic tourists. A recent survey shows that a large percentage of the local population is interested in ecotourism and is actually already spending vacations in the different national parks. Tourists are also coming from Russia and other CIS countries, especially in winter. In 2000, 20,600 travellers from non-CIS countries visited Kazakhstan. Only a very few were tourists. The number of visitors is constantly increasing, as is the number of tourists, but there is a lot of room for improvement and investment. KAZINVEST and the National Agency of Tourism and Sport are very interested in assisting any developer in tourism as well as a number of private companies who need additional capital or equipment to improve their tours. Tourism investment will come; the possibilities for tourist development in Kazakhstan are virtually unlimited and the present is probably the best time to start investing in the tourist future of this country.
Part Three Getting Established: The Taxation and Legal Environment
3.1
The Legal Framework for International Business Aigoul Kenjebayeva, Anthony Cioni and Abai Shaikenov, Salans
The legal system and the rights of foreign businesses Kazakhstan’s legal system is based on European-style codes, which are supported and supplemented by ancillary legislation. Most civil legal relations are governed by the Civil Code of the Republic of Kazakhstan, the general part of which was enacted in 1994, followed by the enactment of a specific part to the Civil Code in 1999. The Civil Code was modelled on the Civil Code of the Russian Federation, which itself was inspired by the Dutch Civil Code. Without a doubt it represents a very progressive framework for civil law relations. The Civil Code broadly recognizes, inter alia, the rights of foreign companies and citizens both to enter into transactions and to own property in Kazakhstan. These rights are enshrined in the Constitution and may be limited only by those restrictions set forth in the legislation of Kazakhstan. The Kazakhstan legal system has well-developed legislation on companies, securities, land and property rights, natural resources, banking and creditors’ rights. In addition to laws of general application which apply to foreign investors, there are a number of bilateral and multilateral treaties in force to which Kazakhstan is a party which affect foreign investment and broad commercial issues. They deal with a wide variety of investment issues, from double taxation to dispute resolution. Although the current legal system comprises most of the key legislation to enable normal business activity, the regulation of business and commerce in Kazakhstan continues to be influenced to some
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degree by historical notions of government control and regulation. This legacy, coupled with state institutions and a judicial system in which many foreign investors still lack confidence, presents a challenging environment in which to do business.
Basic forms of business organization When establishing a business in Kazakhstan, foreign investors generally opt to create: (a) a branch of a foreign entity; or (b) a subsidiary, either wholly-owned or established as a joint-venture company in conjunction with a local or foreign partner, and in most cases organized as either a limited liability partnership (LLP) or a joint-stock company (JSC). There are no limitations on the percentage of ownership held by a foreign company in a Kazakhstan subsidiary, and no nationality restrictions apply with respect to designated members of the board and the management of such entities.
Branches Under Kazakhstan law, a branch is characterized as a subdivision of the company it represents and not as a separate legal entity. In short, a branch is an office physically situated outside of the principal company’s geographic locale and carries on all or part of the principal company’s business in such area. As a branch is not a separate legal entity, it acts on behalf of the principal company rather than in its own name and may not itself be held liable independently from the principal company.
Subsidiaries (LLPs and JSCs) A subsidiary differs from a branch in that it is a separate legal entity, thereby providing its founders with limited liability. A subsidiary is expressly not responsible for the debts of its parent company. However, a parent company may be liable for its subsidiary in very limited cases provided under Kazakhstan legislation, such as in the event that its actions cause the bankruptcy of the subsidiary. In general terms, the LLP and JSC are the most common types of organizations selected by investors for use in joint ventures or for wholly-owned subsidiaries. These two business forms are quite similar, especially with respect to issues of corporate governance and state registration. Between the two, the JSC is more complex and costly due to corporate formalities and share registration and minimum capital requirements. The principal difference between these two forms is that the ownership of a JSC is evidenced by shares issued to shareholders,
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while the ownership of an LLP is evidenced by uncertificated participation interests held by the participants in the LLP. Another significant difference relates to the minimum capital requirements for JSCs, which is currently 500 times higher than the minimum requirement for LLPs.
Taxes The tax consequences of opening a branch or a subsidiary may depend upon the nature of the activity and the provisions of any doubletaxation avoidance treaty in effect between Kazakhstan and the home country of the investor. Kazakhstan tax legislation divides foreign entities into entities with or without a permanent establishment in Kazakhstan. A foreign entity with a permanent establishment is treated as a resident, whereas a foreign entity without such an establishment is treated as a non-resident. If a foreign entity is a non-resident of Kazakhstan having Kazakhstan-source income in the absence of a permanent establishment, then corporate income tax, at a rate of 20 per cent, normally must be withheld at the source by the entity transferring such income to the non-resident. In this case the non-resident would be unable to deduct expenses incurred in connection with such income. Kazakhstan-source corporate income tax applies to foreign entities deemed resident in Kazakhstan and must be paid at a rate of 30 per cent in Kazakhstan directly by such resident. The existence of a subsidiary does not lead to residency on the part of a non-resident parent company for taxation purposes, because it is treated as a separate taxpayer. Under the Tax Code, the basic rate for the taxation of a subsidiary, like that of any resident legal entity, is 30 per cent on all income from sources within or outside Kazakhstan. Any dividends paid to the shareholders of a subsidiary are further subject to a 15 per cent withholding tax upon distribution. As a resident office of a foreign legal entity, a branch is also taxed at a rate of 30 per cent on all income from Kazakhstan sources. In addition, a 15 per cent tax is assessed on the net income of the permanent establishment. In this respect, the taxable base for the above two taxes is calculated differently. All but a few exempt categories of services and imported goods are subject to a value added tax (VAT) of 16 per cent, and imported capital goods are not an exempt category. The VAT is paid if the place of sale of goods (services, works) is Kazakhstan. Generally speaking, export items are subject to VAT, but at a zero rate. Entities in Kazakhstan are also subject to various other types of taxes and mandatory duties in certain cases, such as property tax, vehicle tax and special taxes for subsoil users.
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Despite these regulations, qualifying foreign investors may be able to secure limited exemptions from various taxes under the ambit of specialized investment contracts negotiated with the authorized agency of the Republic. The granting of exemptions and preferences to foreign investors is commented on below. The taxation of foreign businesses in Kazakhstan is also subject to bilateral treaties on the avoidance of double taxation. Kazakhstan has concluded such treaties with nearly 40 countries and has started, or is preparing for, negotiations with an additional 23 countries. There are currently over 30 bilateral treaties on the avoidance of double taxation in effect, among them with the United States, Italy, Canada, Germany, France, and Switzerland.
Investment protections and incentives In early 2003, Kazakhstan adopted a new Investment Law, which coincided with the repeal of the 1994 Law on Foreign Investments and the 1997 Law on State Support for Direct Investments, both of which provided foreign investors far greater protections and opportunities to obtain investment preferences. Under the new law, investment preferences may be granted to investors engaged in listed priority types of activity through the negotiation and conclusion of an investment contract with the State Investment Committee and the proper fulfilment of the investment programme set out in such contract. In May 2003 the Government of Kazakhstan promulgated a list of the priority types of activity, along with a model form investment contract. The investment incentives may vary from contract to contract, but may specifically include tax preferences, exemption from customs duties, in each case within defined limits, and grants in kind by the Republic. Although the guarantees provided under the new Investment Law apply generally to foreign and domestic investors who direct their investments to entrepreneurial activities, the procurement of investment preferences under the law requires an investment in a Kazakhstan legal entity. In this respect, qualifying foreign investors who conduct business through a subsidiary may have an advantage over those acting through a branch. The impact of the new Investment Law has created considerable debate within Kazakhstan’s foreign investment community, which was disappointed with the repeal of the 1994 foreign investment law. Although some of the original protections found in the 1994 law remain, others have been watered down considerably, and some have been completely eliminated. For the most part, the protections that were affected the most by the repeal of the 1994 law are found in other
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pieces of Kazakhstan legislation, though they may not be so clearly stated. In addition, many foreign investors will benefit from similar protections set out in bilateral investment protection treaties concluded between their governments and Kazakhstan.
Right to import and export goods Under Kazakhstan Law, legal entities have the right to import or export goods to or from Kazakhstan. Arguably, both branches and subsidiaries have equal rights in this regard. The state may impose import–export restrictions by law, Presidential decree or Government resolution. At the present time, there are two types of legal restrictions on the importation of goods into Kazakhstan: (a) protective measures (ie protective duties and special import quotas); and (b) licensing procedures. It is important to note that these restrictions may apply concurrently. With respect to licensing matters, the Government determines which goods, services or works must be licensed. The state also determines the procedure for issuing and documenting licences for commission of export and import transactions.
Banking, currency controls and payments For the purposes of currency regulation, branches are considered nonresidents of Kazakhstan. Foreign investors operating through branches may open tenge or hard currency accounts in Kazakhstan or foreign banks, although a licence from the National Bank may apply to the latter category. Branches may make payments in hard currency both to residents and non-residents and may pay their employees in hard currency. Non-residents may withdraw cash in foreign currency from authorized banks only for payment of their employees’ salaries and business travel expenses. Under the currency regulations, subsidiaries are treated as residents for currency purposes. They are only permitted to make payments in hard currency to non-residents. All payments to residents of Kazakhstan, including employees, must be made in tenge. Subsidiaries may open tenge and hard currency bank accounts in Kazakhstan. Certain limitations on hard currency transactions arise from subsidiaries’ status as residents, such as restrictions on a subsidiary’s ability: • to obtain foreign currency in Kazakhstan for the purposes of repaying foreign currency loans to non-residents; • to open credit or bank accounts abroad without a licence from the National Bank;
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• to carry out certain capital movement transactions that transfer hard currency assets (cash or securities valued in hard currency) from residents to non-residents, without the prior approval of, registration with, or licence from, the National Bank.
Rights of foreign citizens to own or lease property The Land Code recognizes the rights of foreign companies to acquire land plots: (a) for future construction development (eg the acquisition of land for the purposes of building a new office tower); or (b) which have already been developed and support existing buildings, structures and facilities (eg the acquisition of a land plot with an existing building for the purposes of renovating the same for commercial office space). Foreign companies also have the right to lease land in Kazakhstan without regard to the foregoing restrictions. Despite these facts, the ownership or lease of agricultural land is still tightly controlled. Under the Land Code, Kazakhstan citizens and Kazakhstan legal entities may now hold legal title to agricultural land (in this respect the Land Code does not restrict the foreign ownership component of such Kazakhstan companies). However, the Land Code prohibits direct foreign ownership of agricultural land. Under Kazakhstan law, foreign citizens and legal entities may lease agricultural land for farming and agricultural production for a period of 10 years or less.
Work-permit regime Foreign investors must be mindful of their obligations under the Kazakhstan Labour Code, as well as administrative requirements that apply to the engagement of foreign employees. Both branches and subsidiaries must obtain work permits prior to hiring foreign employees. Upon receipt of a work permit, the employer must conclude an individual employment agreement with each expatriate employee. There are limited exceptions to the work-permit rule for branch directors in certain sectors of the economy, which are not applicable to subsidiaries.
Choice of law for contracts There are a number of provisions in the Civil Code regulating the choice of law applicable to contracts involving foreign entities. In Kazakhstan, applicable law of a contract is determined on the basis of the Civil Code, international agreements to which Kazakhstan is a signatory and recognized international customs.
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Unless prohibited by legislation, contracts to be performed in Kazakhstan may be governed by the law chosen by the parties. However, foreign investors should note that there are a number of exceptions to this rule. For example, contractual rights and obligations relating to immovable property, or to the management of assets, must be governed by the law of the country where the subject property is located.
Dispute resolution Kazakhstan has an operating system of courts and accompanying procedural legislation. The resolution of economic disputes of both citizens and legal entities is governed by the Civil Procedure Code. The Civil Procedure Code states that foreign citizens and legal entities have rights equal to Kazakhstan citizens and legal entities. Kazakhstan courts have exclusive jurisdiction over, amongst others, the following issues: (a) rights to immovable property located in Kazakhstan; (b) the legality of resolutions of administrative agencies and their officials; (c) the legality of resolutions and decisions of state agencies, bodies of the local self-government, public entities and state officials in their official capacity; and (d) the legality of normative legislative acts. Except as detailed above, if a lawsuit filed in Kazakhstan relates to the same subject matter as that being reviewed by a foreign court, then a Kazakhstan court must forego jurisdiction. Decisions of foreign courts may be recognized and enforced in Kazakhstan if an international agreement on reciprocal enforcement of judgements exists between Kazakhstan and the state in which the judgement was rendered. Court judgements and international arbitral awards are subject to enforcement by a bailiff. Every court in Kazakhstan, with the exception of the Supreme Court, has a bailiff having the authority to enforce judgements by any of the following methods: freezing funds, attaching or confiscating property, seizing deeds, sealing premises, prohibiting a creditor from taking certain actions, and other measures. When provided by international agreement, bailiffs will also enforce judgements of foreign courts and arbitration tribunals. In general, concerns remain among foreign investors regarding the impartiality of Kazakhstan courts. Therefore, it is common practice for foreign investors to provide for the resolution of disputes through international arbitration. In addition to Kazakhstan legislation on the topic, the enforcement of foreign arbitral awards in Kazakhstan is subject to: (a) the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and (b) the Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (the ICSID Convention).
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The foregoing treaties and relevant Kazakhstan legislation provide the legal basis for the enforcement of foreign arbitral awards in Kazakhstan. However, in 2002, the Constitutional Council adopted decrees supporting the constitutional right of every Kazakh citizen and legal entity to bring suit in the courts of Kazakhstan. These decrees appeared to restrict the right of a party to an arbitration to enforce an award that had been validly granted by an international arbitral body in accordance with an agreed arbitration clause. They also may give rise to jurisdictional problems between international arbitral tribunals and Kazakhstan courts. Some have taken the view that the decrees stand for the proposition that Kazakhstan courts have jurisdiction over all disputes, even when the parties have an arbitration clause or when a tribunal has issued an arbitral award. However, many jurists and lawyers in Kazakhstan, including a number of state officials, are completely opposed to this reasoning, arguing that it would result in the violation of a number of international treaties to which Kazakhstan is a party. Although the Constitutional Court decrees were suspended pending the enactment by Kazakhstan of forthcoming legislation on international commercial arbitration, much concern remains. It is not clear what position will ultimately be taken by the Government when it adopts this legislation.
Conclusion The basic legislative framework for international business is well established in Kazakhstan, and within this framework foreign investors are relatively free to pursue business activity in the country in any of a number of standard forms, including through branches and wholly-owned subsidiaries. Foreign legal entities may own property, hire employees and enter into transactions with only minor legal restrictions. The environment for foreign investment has become less friendly in the past few years, notably with the repeal of the muchlauded 1994 Law on Foreign Investment and the recent uncertainty concerning the right to dispute resolution by international arbitration. All the same, Kazakhstan remains a market where foreign investors can succeed, so long as they protect themselves through carefully considered contractual provisions and strict adherence to requirements under Kazakhstan legislation.
3.2
Corporate Forms of Doing Business Denton Wilde Sapte
Introduction The laws of Kazakhstan provide for several different corporate forms including legal entities, representative offices and branches, all of which must be registered with the Ministry of Justice or its local departments. The laws also provide for general partnerships (a consortium being a subset) which are not legal entities and cannot be registered. The legal entity may act and own property in its own name whereas a representative office or a branch act and own property in the name of its founder. The appropriate corporate form for any investor will depend on the nature and scale of the business involved. The law provides for two main categories of legal entities: commercial or noncommercial organizations. Forms of commercial organizations (business partnerships) are: • full partnerships owned by participants who are jointly and severally liable in the amount of their personal property; • special (Kommandit) partnerships having both partners with full liability and partners with limited liability; • additional liability partnership whose participants have liability limited to some multiple of their charter capital contributions; • limited liability partnerships (LLPs); • joint-stock companies (JSCs); • production cooperatives; • state enterprises. Most foreign investors choosing to conduct business in Kazakhstan establish a branch or a Kazakhstan legal entity in the form of an LLP or a JSC. An LLP may be reorganized into a JSC and vice versa.
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The Civil Code (General Part) of the Republic of Kazakhstan dated 27 December 1994, as amended, establishes general regulations applicable to legal entities and all forms of commercial and non-commercial organizations. In addition, there are specific laws which regulate the activities of a number of forms of commercial organizations. Most important among these are the Law on Joint-Stock Companies and the Law on Limited and Additional Liability Partnerships.
Liability exposure A representative office and branch are not themselves a separate legal entity but merely a part of the legal entity, either foreign or domestic, that establishes the representative office or branch. Any contract entered into or tort committed by the representative office or branch and their tax liabilities are the responsibility not only of the representative office or branch but also of the legal entity of which it is a part. Liability exposure may be limited if a foreign investor establishes a special purpose corporate entity abroad – in the home country or in a third country – which then establishes the representative office or branch. Both the LLP and JSC are liable to third parties up to the value of their assets. Their owners, ie the participants (partners) or shareholders, have limited liability. They will not normally be liable beyond the value of their interest unit or shares. Article 44.3 of the Civil Code (General Part) provides that founders (eg participants in the case of an LLP or shareholders in a JSC) may be held additionally liable if their actions cause the company’s bankruptcy and the company has insufficient funds to cover creditor demands. The founders of an LLP are jointly and severally liable for the obligations related to the formation of the company and incurred prior to its registration as a legal entity. The LLP is liable for such obligations if the general meeting of participants subsequently ratifies the actions of such persons. A similar procedure is applicable to a JSC.
Representative office and branch The activities of a representative office are limited to protecting and representing the interests of the foreign legal entity, for example by undertaking market research, signing contracts and such other activities. It cannot conduct commercial activities. A branch may engage in entrepreneurial activity in Kazakhstan and may carry out all or part of the functions of the legal entity of which it is a part. Both a representative office and a branch are considered permanent
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establishments of the founding company but are non-residents for tax purposes. The advantages to operating in Kazakhstan through a branch as compared with a Kazakhstan legal entity primarily involve currency issues. Though (as noted below) many of the same advantages apply to a representative office, when choosing the form of entity it is important to keep in mind that it is not permissible for a representative office to engage in commercial activities. Representative offices and branches are permitted to pay all employees – local employees as well as expatriates – in foreign currency. Legal entities such as LLPs and JSCs, on the other hand, are not permitted to pay local employees salaries in foreign currency. Furthermore, representative offices and branches may operate in foreign currency whereas Kazakhstan legal entities must ordinarily operate in Kazakhstan tenge. For conducting commercial activities in Kazakhstan this means that a branch may invoice in foreign currency compared with a Kazakhstan legal entity which must invoice other Kazakhstan legal entities or individuals in tenge. As a resident of Kazakhstan, a legal entity is restricted from holding offshore bank accounts without a licence from the National Bank of Kazakhstan (NBK). A representative office or a branch does not have the same restriction as it can use the offshore bank accounts established by its founding company.
Management of representative offices and branches The activities of a representative office and a branch are governed by their regulations, which are equivalent to by-laws and which must be approved by the founder company. The head of a representative office or a branch must be appointed by the founder company and acts on the basis of the regulations and a power of attorney.
Limited liability partnership (LLP) In accordance with the Law On Limited and Additional Liability Partnerships dated 22 April 1998, as amended (the LLP Law), participants in an LLP may be either individuals or legal entities. To create an LLP, foundation documents (a foundation agreement or resolution of the sole founder and a charter) outlining the relations between the participants and the activities of the company must be executed by the founders. An LLP may consist of a single participant but in that case the single participant cannot be a partnership which is in turn owned by a single individual or legal entity. The number of participants in an LLP is not limited. If an LLP consists of 100 or more participants, it must keep a register of its participants with an independent licensed
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registrar. An excerpt from the register confirms the right of ownership of an interest unit in the charter capital. The charter capital of an LLP is formed from the contributions of its founders (participants). Interest units in the charter capital of an LLP are not considered securities and are not subject to securities laws relating to the issuance of shares, which are mandatory for a JSC. Usually, each participant’s ownership percentage is defined by the amount of its contribution to the charter capital. However, the participants may agree in their foundation documents that the ownership percentages (and consequently the voting rights of the participants) are not proportionate to the contributions, though profits must be distributed in accordance with the ownership percentage. The minimum charter capital for an LLP is 100 monthly calculation indices (approximately US $600 in 2003). The monthly calculation index (MCI) is a figure set in the annual budget law of Kazakhstan. In 2003, the MCI is 872 tenge. The charter capital must be paid in full within a year of the date of registration. One or more founders must pay not less than 25 per cent of the charter capital prior to the registration of an LLP.
Management of an LLP The management structure may be quite simple: the highest body (ie the general meeting of participants) and an executive body (a single general director or a management board or Pravlenie). The chairman heads the management board. The charter of the LLP may provide for its management by two or more directors acting individually on behalf of the LLP without a power of attorney. The LLP may, but is not required to, create a supervisory body (supervisory council) to supervise generally the performance of the executive body and a controlling body (audit commission or individual auditor) to audit internally the business and financial activity of the LLP. The LLP Law allows a company to establish additional corporate bodies.
Transfer of interest units In the event of the alienation of an interest unit or any part of it for consideration, the non-selling participants have a pre-emptive right to purchase such interest unit or part. The assignment of the pre-emptive right is not permitted. Unless otherwise agreed by the participants in writing, participants have the right to purchase the interest unit being sold in proportion to the amount of interest units they hold in the LLP. After the non-selling participants have exercised or refused to exercise their pre-emptive rights the LLP itself may also exercise a pre-emptive right to purchase any remaining units being sold.
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The foundation documents may provide for prohibition or restrictions on the sale of interest units by a participant to third parties, eg the sale to a limited number of third parties. If the prohibition or restrictions cannot be complied with for reasons outside the control of the participant, it is entitled to demand that the LLP purchase the interest unit or permit its sale to a third party. In that case, the participants may exercise their pre-emptive rights if the LLP permits the sale of an interest unit to a third party. The procedure for the sale of an interest unit in an LLP with 100 or more participants must be provided for in the charter. The participants of an LLP do not have the right to withdraw from the LLP other than by the sale, exchange or other transfer of their interest units.
Joint-stock company The rules governing these entities are found in the Law On Joint-Stock Companies dated 13 May 2003 (the JSC Law) which replaced the Joint-Stock Company Law adopted in 1998. The most significant change in the JSC Law from all previous legislation applicable to JSCs dating back to the Law On Business Partnerships and Joint-Stock Companies of 21 June 1991 is the elimination of the differentiation of JSCs into ‘closed’ and ‘open’ JSCs. The shareholders in a JSC may be either individuals or legal entities. A JSC may consist of a single shareholder. The law does not limit the number of shareholders. As with the LLP, the foundation documents of a JSC are a foundation agreement (resolution in the case of a sole founder) and a charter. The foundation agreement of a JSC will terminate upon registration of the first issuance of its shares. Shareholders may execute a shareholder agreement to deal with any continuing agreements among them. Ownership of a JSC is divided into shares which constitute securities subject to registration and regulation by the National Bank. Shares determine the amount of control and number of votes of each shareholder. A JSC must have a minimum charter capital of 50,000 times the MCI (which is slightly less than US $300,000 in 2003). A public or a ‘narodny’ joint-stock company is a JSC that has at least 500 shareholders and whose equity is at least 1 million times the MCI (approximately US $5.8 million). Shares distributed among the founders of a JSC must be paid in full within 30 days of registration of the company. The JSC Law distinguishes declared (authorized) shares and placed (issued) shares. Shares of a JSC may be publicly traded subject to the listing rules of the Kazakhstan Stock Exchange. A JSC which intends to place its shares or other securities convertible into shares must first offer them to its shareholders. A JSC may issue preferred shares, a
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‘golden share’ and options. The owner of a ‘golden share’ has the right of veto decisions of the management bodies as specified in the charter. A golden shareholder’s right of veto is not transferable. A JSC is prohibited from issuing options which require it to purchase its issued shares (put options) except in cases specified by legislation. Limits for carrying out transactions with the shares, the maximum amount of shares that may be owned by one shareholder and the maximum number of votes that one shareholder may have may be established by law, though such limits do not currently exist. The right to pledge securities of a JSC cannot be restricted or excluded by the charter. Unless otherwise provided by the terms of pledge, the shareholder is entitled to vote and receive dividends on pledged shares. Shares are issued in non-documentary form only. A JSC must have an independent licensed registrar to maintain its shareholder register. A JSC must comply with cumbersome approval and publication requirements when entering into major transactions or transactions with interested parties (mainly affiliates). If the rules related to these transactions are violated, interested persons may appeal to the courts to invalidate such transactions. A JSC must conduct an audit of its annual financial statements and must publish its annual balance sheet, profit and loss account and cash flow report. A public JSC must publish its quarterly financial statements and submit annual financial statements to the authorized state body.
Management of a JSC The management structure of a JSC is more elaborate than that of an LLP. It includes the highest body (the general meeting of shareholders), a management body (the board of directors), and an executive body (consisting of single general director or a management board Pravlenie). If the voting shares in a JSC belong to one shareholder the company may operate without a board of directors. An internal audit service (commission) is mandatory only for public JSCs. The JSC Law allows a company to establish additional corporate bodies. Unlike an LLP, the general meeting of shareholders must take place at the registered address of a JSC specified in its charter. Members of the board of directors can only be individuals who are elected by cumulative voting. Not less than 30 per cent of members of the board of directors in a public JSC must be independent directors.
Transfer of shares A shareholder can freely sell its shares to a third party without first offering the shares to the other shareholders and the company itself. The shareholder is not required to notify either the company or the other shareholders when it intends to sell its shares.
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An investor, including its affiliates, who acquires 30 per cent or more of the shares of a JSC is required to publish an offer to purchase the remaining shares. If the investor fails to make such an offer, the investor is required to dispose of the excess shares over 29 per cent. If a JSC is in arrears on taxes or other mandatory payments to the state budget for three months or longer, the tax authorities may limit the disposal of authorized shares or a court can force the company to issue new shares. Proceeds from the sale of the new shares are to be used to pay off the debt to the budget, thus diluting the value of existing shares. Such shares may be sold at a public auction or become state property if the company is engaged in business in a strategic sector of the economy, eg production and processing of fuel and energy minerals (coal, gas, oil, uranium), metal ores, or engineering machinery; the chemical industry; transport and communications; or production and distribution of electricity. In this case the state becomes the shareholder and is represented by the State Property Committee.
3.3
Corporate Tax and VAT Ward Jones, KPMG
The Republic of Kazakhstan boasts great oil and gas reserves that attract significant international attention to the country. As Kazakhstan works to create a favourable business environment that will stimulate investment and economic growth, it has introduced a number of legislative reforms, including changes and improvements to tax law. In the years since Kazakhstan gained its independence from the Soviet Union, it has reduced the number of taxes from dozens to a much more manageable handful. It has also gone from having a separate law for each tax to incorporating all of its current taxes in a single unified tax code that is a model for the Commonwealth of Independent States. Kazakhstan’s tax law continues to evolve over time, which requires taxpayers to stay well informed about the changes that occur every year. The tax law also leaves a lot to interpretation, which leads to conflicts between taxpayers and tax collectors. However, changes are usually for the better, and Kazakhstan increasingly follows international practice, with the result that its tax law is converging in style and effect towards that of more developed countries. Corporate income tax and VAT are the two largest tax revenue generators in Kazakhstan. This chapter provides an overview of these two taxes as of 1 August 2003.
Corporate income tax Income tax is one of the principal taxes on domestic companies and branches of foreign companies. Most legal entities pay income tax at a flat rate of 30 per cent of net income. This rate applies equally to both domestic companies and branches of foreign entities. Legal entities for which land is the principal production asset are subject to tax at the rate of 10 per cent of net income derived from the direct utilization of land. Representative offices do not generally pay income tax, because they are not allowed to engage in business activity and do not earn any
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income. However, tax law now stipulates that representational activity constitutes a taxable permanent establishment, so tax authorities may start imputing income for representative offices of some companies. Foreign companies that are residents of a country that has a tax treaty in effect with Kazakhstan should be protected from such treatment, because the tax treaty would not regard such limited activities as representing a permanent establishment. However, representative offices of companies with no treaty protection may increasingly find themselves the object of scrutiny.
Taxation of domestic entities Domestic entities are classified as tax residents of Kazakhstan and are subject to income tax on their worldwide income. Domestic entities measure their taxable income as gross worldwide income minus ‘expenses connected with the generation of income’. However, this broad definition of deductible expenses is constrained. Deductible expenses include wages and salaries, costs of goods sold, service fees, research and development costs, depreciation charges, repair expenses, taxes, and other expenses attributable to income-producing activity, but not all these costs are fully deductible. Deductions are limited for a number of types of expenses. Interest, business travel allowances, entertainment expenses, and insurance premiums are deductible, but only within established norms. For tax purposes, taxpayers must compute depreciation charges by using the declining balance method. Assets are grouped into categories, and taxpayers must compute the depreciation on the balance of an entire category, not on individual assets. Taxpayers may use any depreciation rate that does not exceed the maximum rate specified by tax law for each asset category. During the first year of use of certain business assets, such as new machines and equipment, depreciation charges may be doubled, provided that such property will be used in production for at least three years. Repair expenses are limited to 15 per cent of the balance of the asset category to which the repairs relate. Hence, taxpayers are not able to deduct expenses to repair assets acquired through an operating lease unless they also own the same type of asset, because without ownership of the same type of asset, they would report no balance for that asset category. Deductible taxes include land tax, property tax, vehicle tax, business registration fees, securities registration fees, fees for the right to conduct certain activities, bonuses, royalties, and social taxes. Expenditures that a subsoil user incurs to train staff and/or to develop public assets are deductible in the amounts stipulated in the subsoil user’s contract with the Government. A subsoil user also has
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the right to deduct allocations to reserves established for repairing damage that the subsoil user causes to the environment. In addition to deducting current-period expenses, legal entities may carry forward and deduct operating losses for up to three years following the year when the operating loss arose. Operating losses incurred in connection with activities conducted under subsoil use contracts may be carried forward for up to seven years. Losses cannot be carried back to prior tax periods. Filing and payment requirements Companies must make monthly advance payments of income tax. Early in the year they must submit a statement of the advance tax payments that they will make during the course of the year. Payments must then be in accordance with the reported amounts. Domestic legislation provides for substantial penalties for underpayment of advance taxes. Taxes in Kazakhstan, including corporate income tax, are levied by self-assessment. However, tax audits for every tax year are nearly automatic for all taxpayers, though they are not always performed every year. In many cases the tax officials let a few years elapse without auditing a particular taxpayer and then visit that taxpayer to audit a number of tax years in one audit. The statute of limitations period is five years, so taxpayers must retain tax documents for this period, and the tax authorities may review tax assessments during this same five-year period. Taxpayers must submit an annual tax return after the close of the tax year, which is the calendar year. No other fiscal year is permitted for tax purposes. No consolidated tax reporting is permitted for group companies, and in fact, subsoil users operating under more than one contract may not consolidate the financial results of their multiple projects. Final settlements of tax due after taking into account advance tax payments are due after the deadline for submitting tax returns. The tax authorities assess interest for late paid tax and a penalty of 50 per cent of the underpaid tax for underreporting tax. When assessing the penalty for underreporting a tax, they do not distinguish between a wilful intent to understate tax, an unintentional error, or a taxpayer interpretation of tax law that differs from the tax authorities’ interpretation.
Taxation of foreign entities Foreign legal entities are regarded as non-residents for tax purposes and are taxable in Kazakhstan only on their Kazakh-source income. As a general rule, Kazakh-source income is viewed as payments from Kazakh residents or from activities carried out within Kazakhstan.
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However, income earned for certain types of services represents income from a Kazakh source, regardless of where the services are performed. The ‘tainted’ services that result in Kazakh-source income irrespective of place of service are management, financial, consulting, audit, marketing, and legal services. The tax treatment of a foreign company’s income from Kazakh sources depends on whether the foreign entity has a permanent establishment in Kazakhstan. A permanent establishment is defined as: • a fixed place of activity used to perform business activities in Kazakhstan; • a construction, assembly, or installation site; • an installation or construction of a drilling rig or vessel used for the extraction of natural resources; • the provision of services through personnel in Kazakhstan for more than 90 continuous days in any 12-month period; • participation in a consortium established in Kazakhstan. When a foreign entity has a permanent establishment in Kazakhstan, it must register the permanent establishment with various state authorities. The tax authorities may seize all revenues earned from unregistered activities. If a foreign company conducts commercial activity in Kazakhstan, it should register a branch office. If it engages in solely a representational activity, it may choose to register only a representative office. A registered permanent establishment (branch) of a foreign entity in Kazakhstan is subject to all Kazakhstan taxes discussed above for domestic entities, plus an additional branch profit tax of 15 per cent on its net after-tax income, which brings its total effective income tax rate to 40.5 per cent of taxable income. If a foreign entity does not have a permanent establishment in Kazakhstan, it is subject to income tax at the source of payment on its gross income from sources in Kazakhstan. The Kazakhstan payer, which is responsible for remitting the tax to the State budget, must withhold the tax. The amount of tax withheld depends on the nature of the services for which income is paid to the non-resident company. Dividend and interest income is subject to a 15 per cent tax rate. Income from insurance services is taxed at 10 per cent. Income from reinsurance or international freight services is taxed at 5 per cent. Other types of income are taxable at a rate of 20 per cent. A non-resident company may pursue relief available under a double tax treaty between Kazakhstan and the company’s country of residence. Kazakhstan has tax treaties in effect with more than 30 countries, and
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these tax treaties may provide for reduced rates of tax withheld at the source of payment or may exempt a company from income tax on its business profits if it does not have a permanent establishment in Kazakhstan, as defined in the applicable tax treaty rather than in domestic tax law. Payments in cross-border transactions or in transactions related to cross-border operations may be subject to a transfer price review and possible price adjustment if they involve any of the following: • affiliated parties; • entities registered in jurisdictions regarded as tax havens by the Government of Kazakhstan; • barter operations; • a Kazakh entity that has incurred tax losses within the three years prior to the transaction; • a Kazakh entity operating under a special tax regime; • a price that deviates by more than 10 per cent from ‘market price’.
VAT VAT is essentially a tax on consumption that is borne by the end user of a product or service. The uniform VAT rate in Kazakhstan is 16 per cent (though it will drop to 15 per cent as of 1 January 2004) and applies to turnover derived from the sale of goods or services within Kazakhstan and to the importation of goods into Kazakhstan. Tax law specifies where certain types of services are deemed performed. Often this is the place where either the buyer or the seller of the services conducts its commercial activity and does not depend on where the services are physically performed. Consulting, audit, engineering, legal, accounting, and agency services are a few examples of services regarded as supplied where the buyer of the services conducts its commercial activity. All business entities and individuals that perform business activity in the country must register for VAT purposes if their turnover subject to VAT exceeds an amount equal to approximately £45,000 in any 12month period. This is true for both domestic companies and branches of foreign companies. VAT registration is optional for taxpayers with revenues less than this amount. Registered VAT payers must charge VAT on their sales and may claim a credit for input VAT that they pay to suppliers. Hence, businesses that expect to exceed the stipulated revenue threshold at some point in the future may choose to register as VAT payers as soon as they start their business, in order to start benefiting from a credit for their input VAT immediately.
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Certain activities are exempt from VAT. The list of VAT exemptions includes, among others, lease or sale of residential property (except for first-time sales of residential property, sale or lease of hotel property, and the provision of hotel accommodations), sale of land and land use rights (except when land is used for parking lots), financial services, insurance services, contributions to a legal entity’s charter capital, geological survey and exploration activities, educational and medical services, and sales of a company or an independently functioning part of a company. Exports and international transportation activities are subject to VAT at a rate of 0 per cent. The difference between sales that are exempt from VAT and sales subject to VAT at a rate of 0 per cent is that input VAT incurred with respect to zero-rated output is creditable and refundable, while input VAT incurred with respect to VAT-exempt output is not creditable and can only be deducted as a business expense. Registered VAT payers are required to charge themselves VAT on purchases they make from unregistered non-residents that sell goods or provide services in Kazakhstan. They may subsequently claim a credit for this self-charged VAT. The VAT base for imported goods includes the customs value of the goods and any excise duties and customs duties paid on the goods. VAT is payable by the importer on the date when the customs declaration is completed. VAT exemptions at the time of import are available for certain types of equipment, pharmaceuticals, raw materials and spare parts. Normally, taxpayers should pay and report VAT monthly, unless their average monthly VAT liability is less than approximately £3,750, in which case they may pay and report VAT quarterly. A taxpayer’s VAT liability is the difference between the amount of output VAT charged and the amount of input and/or import VAT paid to suppliers.
3.4
Personal Income Tax and Other Taxes Ward Jones, KPMG
The Republic of Kazakhstan has whittled down the number of taxes it imposes, and the vast majority of taxpayers are now subject to fewer than 10 taxes. This has helped make Kazakhstan a more businessfriendly environment than many of its neighbours. Nonetheless, despite the reduced number of taxes, the tax compliance burden can be substantial, because there are frequent reporting deadlines, and in some cases taxpayers may be required to file tax declarations for taxes for which they are not liable. Companies and individuals operating in Kazakhstan or contemplating entry into this market need to be well informed about the taxes that taxpayers face in Kazakhstan, because although the calculation and administration of most of the taxes in Kazakhstan are relatively straightforward, the penalties for stepping foul of the law can be severe. This chapter provides an overview of personal income tax and other taxes in Kazakhstan as of 1 August 2003. Nearly all of the taxes are self-assessed, but taxpayers should anticipate nearly automatic tax audits of all taxes that they pay in Kazakhstan. Taxpayers who report an operating loss, enjoy a profit-tax holiday, or operate through a nontaxable representative office and consequently pay no profit tax may experience greater scrutiny with respect to the taxes covered in this chapter.
Corporate taxes Property tax Legal entities and individual entrepreneurs owning or using fixed assets and intangible assets in Kazakhstan, other than vehicles and land used in business activities, must pay property tax on such assets.
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Property tax applies without regard to whether profit is derived from the use of the assets. The property tax rate is 1 per cent and applies to the average annual net book value of the assets. The tax is prorated for assets that a taxpayer owns or uses in Kazakhstan for only a part of a tax year. At the start of the tax year taxpayers must submit a statement of the property tax prepayments that they will make during the year. An amended statement must be submitted each time a taxpayer acquires or disposes of assets subject to property tax during the tax year. Property tax payments are due in equal quarterly instalments, and taxpayers must submit an annual property tax return after the close of the year. Any property tax liability that is outstanding at the end of the year is due after the tax return filing deadline. Taxpayers must file a property tax declaration even if they have no taxable property, in which case they are liable for a nil tax declaration reporting no tax liability.
Vehicle tax Individuals who own vehicles registered in Kazakhstan and legal entities that own or use vehicles registered in Kazakhstan are subject to vehicle tax. The tax rate varies, depending on the vehicle’s engine capacity, age and country of origin. If a taxpayer owns a vehicle for only part of the tax year, the tax applies only for the months or fractions thereof during which the taxpayer owns the vehicle. Vehicle tax is due in a single payment by 1 July of the reporting year, or by the date of vehicle registration if the taxpayer acquires the vehicle after 1 July. Legal entity taxpayers must file an annual vehicle tax declaration after the close of the tax year.
Land tax A new law now permits private ownership of land in Kazakhstan. Legal entities and individuals who own or use land are subject to a land tax. If taxpayers acquire or dispose of land during the tax year, they are liable for the tax only for the portion of the year during which they held the land. The tax rate for land used for agricultural purposes depends on the land quality, and the tax rate for land used for residential purposes depends on the geographical location of the land. The land tax is established as a fixed annual payment per unit of land, and the rate can be adjusted by as much as 50 per cent by the local authorities. Land tax prepayments are due quarterly. Taxpayers must submit an annual land tax return after the close of the tax year, and any final tax settlement is due after the tax return filing deadline. Legal entity taxpayers must file a property tax declaration even if they have no
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land, in which case they are liable for a nil tax declaration reporting no tax liability.
Taxes on subsoil users Business entities extracting minerals or hydrocarbons are subject to the tax regime specified in their contract with the Government. In more recent contracts the tax regime reflects the tax regime that current tax law stipulates for subsoil users. Older contracts may provide for a tax regime substantially different from that indicated in current law. Taxpayers may be required to pay excess profits taxes, a subscription bonus, commercial discovery bonuses, royalties, and/or the Republic of Kazakhstan’s share of production under a production sharing agreement (PSA), depending on the specifics of a subsoil user’s contract. Kazakhstan’s tax legislation stipulates two models of contract for subsoil use. The first model provides that a subsurface user must pay all taxes and obligatory payments stipulated by Kazakhstan tax legislation. The second model provides that a subsurface user must pay to the State its share of production under a PSA, plus all other taxes except for land tax, property tax, excess profits tax and excise tax. Excess profits tax is a surtax that takes effect when a project’s internal rate of return exceeds a specified threshold. A subscription bonus is a payment due to the State at the time of conclusion of a subsoil use contract, and a commercial discovery bonus is a subsequent payment to the State triggered by discovery of minerals or hydrocarbons in quantities sufficient to be commercially developed. Royalties are measured as a certain percentage of the value of extracted minerals or hydrocarbons. Changes are expected to the taxes that will apply under future subsoil use contracts with the Government, as the Government may introduce a new tax to replace the cumbersome excess profits tax, which often proves difficult to administer.
Excise tax Excise tax applies to importation and manufacture of all kinds of spirits and alcoholic beverages, caviar and salmon roe, tobacco products, jewellery, cars, gasoline, diesel fuel, crude oil, gas condensate and firearms. In addition, gambling and lotteries are subject to excise taxes. Excise tax does not apply to exports of excise goods. Legal entities and individual entrepreneurs who manufacture, sell or import excise goods or engage in activities subject to excise taxes must pay the tax. Excise tax is based on the customs value or quantity of imported goods, depending on the type of goods, and on the selling price of goods manufactured in Kazakhstan. Excise tax rates are expressed as a
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percentage of the value of the goods or as a fixed amount per quantity of the excise goods. Taxpayers must report excise tax monthly. Payments are due monthly and thrice-monthly for certain types of excise goods.
Customs duties Kazakhstan has more than a dozen different customs regimes, and not all of them require the payment of customs duties. Exemptions or partial payments are prescribed under some of the customs regimes. When full customs duties apply, they vary between 0 per cent and 30 per cent and are imposed on the transaction value of the imported goods (in other words, the price of the goods plus all the associated costs, such as transportation, insurance, etc). A customs processing fee in the amount of 0.2 per cent of the customs value of the goods is also charged, but this is expected to change soon to a flat fee of 50 euros for the principal page of a customs declaration and 20 euros per additional page. Kazakhstan law allows importers of goods originating in and imported from certain countries, as well as certain foreign and domestic investors, to import goods and property duty free or at reduced duty rates. Goods originating in and imported from less developed countries may also be imported duty free, while goods from developing countries can be imported at 75 per cent of the regular customs rates. In addition, goods originating in and imported from other Customs Union members (Russia, Belarus, Kyrgyzstan, and Tajikistan) may be imported duty free, with the exception of certain food and tobacco products. Customs privileges are provided to diplomatic and consular representatives of foreign states and international organizations and their employees. Foreign investors are eligible for exemptions from customs duties for equipment and spare parts imported as their contribution to the charter capital of an enterprise with foreign participation. In addition, all goods that are imported for the purposes of a subsoil use contract by either the operator or its subcontractors are generally exempt from customs tariffs. Customs duties may also be reduced or waived for contracts entered into with State authorities for investment in specified priority sectors of the economy.
Miscellaneous fees and levies Various other fees and levies may apply to certain types of activities in Kazakhstan. The following are some of the more common assessments. Fees for state registration of legal businesses Fees are required for registration or re-registration of legal entities. The fees are measured as some multiple of a governmental index (less
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than £100 in total) and are due before an application is submitted to the authorities. Fees for state registration of individual entrepreneurs Individuals are required to pay a fee in order to register as an entrepreneur. The nominal fee is due before the application for registration is submitted to the authorities. Charge for environmental pollution Legal entities and individuals who conduct activities that pollute the environment must pay an environmental protection fee to compensate for the pollution.
Payroll taxes Personal income tax Residency Personal income taxation in Kazakhstan depends on an individual’s residency status. Residents of Kazakhstan are subject to income tax in Kazakhstan on their worldwide income, while non-residents are taxable only on their income from sources in Kazakhstan. Kazakhsource income includes all income earned for employment or work in Kazakhstan, irrespective of where the salary is paid. An individual’s residence status is determined by the duration of the individual’s stay in Kazakhstan. Individuals are regarded as tax residents of Kazakhstan if they spend more than 183 days in Kazakhstan in any period of three consecutive years. In determining the number of days spent in Kazakhstan, days in the current tax year are counted in full, while days in the prior tax year are counted as one-third of a full day and days in the tax year two years prior to the current year are counted as one-sixth of a full day. To illustrate, an individual spending 90 days in Kazakhstan in the prior year would be treated as having spent 30 days in Kazakhstan for purposes of determining the total number of days that the individual spent in Kazakhstan during the three most recent years, and an individual spending 90 days in Kazakhstan in the year two years prior to the current year would be treated as having spent 15 days in Kazakhstan when calculating total days in Kazakhstan. These totals would then be added to the actual number of days spent in Kazakhstan in the current year. If they add up to more than 183 days, the individual is regarded as a tax resident for the current year. Regardless of their residency status, all working individuals must register as taxpayers and obtain a taxpayer registration number.
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Tax rate and tax base Personal income tax rates currently range from 5 per cent to 30 per cent of taxable income. Starting in 2004, the maximum rate will be 20 per cent. Taxable elements of compensation include base salaries plus all fringe benefits such as housing, education fees, medical coverage, bonuses, cost of living adjustments, foreign service premiums, and taxes paid by the employer on the employee’s behalf. Filing and payment requirements If an employee in Kazakhstan receives salary from an employer with a registered presence in Kazakhstan, the employer should withhold income tax and remit it to the state budget. Employers must withhold and remit personal income tax for each month in which they pay salary. They must report personal income tax quarterly. If the employer has no registered presence in Kazakhstan, the employee is responsible for paying his or her own taxes. Any individual responsible for paying his or her own taxes should make monthly advance payments of personal income tax. At the start of the year, prior to making the payments, the individual must submit a report of the monthly tax payments that he or she will make during the year. Non-resident employees must file an annual tax declaration if they receive Kazakh-source income that is not taxed at the source of payment or if they work in Kazakhstan for more than 30 days in the tax year and earn Kazakh-source income in an amount exceeding approximately £1,800 during the tax year. Employees who are tax residents must file an annual tax declaration if they receive income from which no tax is withheld in Kazakhstan, have a bank account outside of Kazakhstan, or make a major purchase during the tax year (with a value over approximately £7,500). Final settlements of personal income tax are due after the tax return filing deadline.
Social tax Through 2003 all employers are required to pay social tax at a flat rate of 21 per cent on their gross payroll for local nationals (net of required pension fund contributions) and for foreign labourers. The social tax rate is a flat 11 per cent for foreign employees in administrative, managerial, engineering or technical positions. This tax is borne entirely by the employer, and no portion of the tax is withheld from employees’ salaries. Starting in 2003 the flat 21 per cent social tax rate will be replaced by regressive rates with a maximum rate of 20 per cent and a minimum rate of 7 per cent. The 11 per cent rate for foreign nationals will become regressive rates from 11 per cent to 5 per cent. Employers must pay social tax monthly and report the tax quarterly.
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Pension fund contributions Local nationals are required to make contributions to pension funds. Their employer must withhold 10 per cent of their gross salary and contribute it to a designated pension fund. This withheld amount reduces the employee’s taxable income on which personal tax and social tax are assessed. The entire amount of this mandatory pension fund contribution is withheld from the employee’s salary, and no part is paid by the employer. Employers must withhold and remit pension fund contributions each time that they pay salary. They must report pension fund contributions quarterly.
3.5
Development of the Audit Practice in Kazakhstan Yermek Kudabaev, Audit Manager, Ernst & Young Kazakhstan
The transition to business practices according to the rules of a market economy, the creation of a private sector, and the interest of both foreign and Kazakh companies in investing in various projects in the territory of the Republic of Kazakhstan are some of the key factors which have inevitably led to the development of audit and accounting practices. Major reforms were primarily due to the fact that the system of accounting in existence during Soviet times was no longer applicable under the conditions of a market economy. This year, auditors in Kazakhstan mark 10 years of audit practice. The President of the Republic of Kazakhstan, N A Nazarbaev, signed the Law Concerning Audit Activities in the Republic of Kazakhstan on 18 October 1993. This law was the first legislation to regulate audit activities in the country. To date, no significant amendments have been made. Over the past 10 years, auditors have made a significant contribution to the development of the country, especially in areas that led to the resolution of issues related to privatization and the attraction of foreign investments. Nevertheless, the Republic of Kazakhstan is still on a path of further reforms that will have a direct impact on the development of audit and accounting practices.
Transfer to International Standards on Auditing (ISA) In March 2000, during an annual conference of Kazakhstan auditors, a decision was taken to adopt the International Standards on Auditing
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(ISA) as the national standards. This was due to a developing economy and the fact that previous standards did not cover all aspects of financial services that auditors provided to the new economy. Since then, all auditors in Kazakhstan have made an effort to implement internationally accepted standards in their work. Also, starting from 1 January 2004, companies in Kazakhstan should transfer to accounting records kept in accordance with the International Accounting Standards (IAS). Both of these initiatives are attempts to ensure the submission of transparent information on the financial position of companies by using uniform audit and accounting principles recognized at an international level. The transfer to IAS is a new stage in the development of accounting in the Republic of Kazakhstan, which, in turn, presents new challenges to both accountants and auditors in the Republic. Unfortunately, only a small number of auditors in Kazakh audit companies have experience in working with IAS. The Chamber of Professional Accountants and Auditors of the Republic of Kazakhstan, together with USAID, have actively participated to develop the Certified International Professional Accountant (CIPA) programme for certification of professional accountants in the CIS. This programme fully complies with the requirements of the International Federation of Accountants. The aim of the CIPA programme is to increase the quality of the accountancy and audit profession in CIS countries, as well as to increase the level of trust in the accounting and audit profession. To date, more than 500 auditors and accountants in Kazakhstan have received the Certified Accountant Practitioner certificate, which is the first level of the CIPA programme. International audit companies have also made a significant contribution in assisting local companies to transition their accounting practices to IAS through advice and providing the actual service, as well as through training programmes. For example, Ernst & Young Kazakhstan has a Professional Education Centre, which has since its conception trained many Kazakh accountants in IAS.
Current audit requirements At present, the following types of organizations are required to submit audited annual financial statements: • banks; • national companies; • companies with an ‘A’ listing on the Kazakhstan Stock Exchange.
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Corporate governance and privatization of state companies Nowadays, an increase in the level of trust in the accounting and audit profession is extremely necessary. Due to a series of scandals relating to the financial statements of certain large companies in the United States an increase in requirements have been made on accountants and auditors worldwide. In 2002, the Securities and Exchanges Commission of the United States of America (SEC) published the Sarbanes-Oxley Act, which extends to all companies with shares or debt securities registered with the SEC. Certain aspects of the Sarbanes-Oxley Act, which in the future may be reflected in the legislation of the Republic of Kazakhstan in relation to companies listed on the Kazakhstan Stock Exchange, are discussed below. The Sarbanes-Oxley Act, in general, does not deal with external audit matters, but matters of corporate governance, which is considered the key factor in achieving the transparency of the financial statements of companies. The Sarbanes-Oxley Act states that responsibility for controlling the work of external auditors lies directly with the Internal Audit Committee. This committee is specifically responsible for appointing, paying for the services of and controlling the work of external auditors. Members of an Internal Audit Committee should be a part of the board of directors of a company. ISA also requires the Internal Audit Committee to be independent and impartial in carrying out reviews. In order to ensure the independence of the members of an audit committee, they are forbidden from accepting any type of payment from the company for consultation, and also from having any other relations with the company, with the exception of those relating to their functions as the members of a board of directors. In accordance with the Sarbanes-Oxley Act, an Internal Audit Committee shall: • introduce a procedure for the receipt and review of appeals regarding accounting and internal control and audit matters; • provide employees of the company with a means of expressing their doubts in relation to accounting and audit matters on a confidential basis; • be authorized to engage, when necessary, independent legal and other consultants to work with the committee in fulfilling its functions; • possess adequate financing in the capacity of a committee in order to pay for audit services and any other consultants engaged by the Internal Audit Committee.
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The Sarbanes-Oxley Act also establishes an additional requirement in relation to the presence of a financial expert in an Internal Audit Committee. In order to assess a specialist’s conformity with the criteria of a ‘financial expert’, his or her knowledge of the general standards of accounting and financial statements, experience in the field of the preparation or audit of financial statements and the application of the principles of accounting in the company needs to be taken into account. In accordance with the already existing requirements of the standards of the listings of the New York Stock Exchange, the members of an Internal Audit Committee in the listed company should have knowledge of financial matters, and in this respect an Internal Audit Committee should possess at least one accounting or financial management specialist. The goals, rights and responsibilities of an Internal Audit Committee should be defined in the charter of a company and approved by a board of directors. An Internal Audit Committee should have at least three independent non-executive directors. Reports prepared by internal auditors, which indicate insufficiencies and recommendations to eradicate these insufficiencies, should be addressed not only to department managers of a company (mid-level), but also to the relevant Internal Audit Committee (higher-level). In their work, internal auditors are obliged to be governed by the ethical standards established for external auditors in terms of: • honesty;
• confidentiality;
• objectivity;
• professional behaviour;
• professional competency;
• professional standards.
Currently, very few Kazakh organizations have an Internal Audit Committee. The establishment of independent Internal Audit Committees in organizations operating in Kazakhstan, in our opinion, is a crucial measure to ensure transparency in financial reporting. In accordance with the Sarbanes-Oxley Act, the manager and financial director of a company are obliged to confirm that they have conducted an evaluation of the effectiveness of the procedure for the disclosure of financial and non-financial information and of the relevant means of control. They are also required to present reports containing conclusions of the evaluation. An external auditor of a company is also obliged to present, as an audit conclusion or in the form of a separate report, all results of the above evaluation, and an assessment as to whether the structure and procedures of internal control ensure the following. Firstly, that accounts have been kept accurately, reliably and are sufficiently detailed in order to reflect transactions and the disposal of the assets of the company. Secondly, that sufficient confidence in the fact that transactions have been recorded in
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the manner required in order to be able to prepare financial statements in accordance with the generally accepted principles of accounting, and that the receipts and expenses of the company have taken place exclusively with the sanction of its manager and directors. Corporate governance is a system of management and control of a company, which covers relations between shareholders, management, employees, consumers, suppliers of the company, and also society as a whole. The correct structure of corporate governance should not only force but also give company management an interest in the transparency of the activities of companies, in order to attract investments as well as gain the trust of investors, creditors, state authorities and the public. In December 2002, Ernst & Young Kazakhstan together with the National Bank of Kazakhstan (NBK) held a seminar in Astana dedicated to the development of corporate governance. During the seminar, companies operating in Kazakhstan indicated a considerable interest in the development of corporate governance. In this respect, significant progress has already been made in the banking system. An example of this is the fact that second level banks have started to actively engage external auditors to assess their system of risk management. Nevertheless, in many other Kazakh companies, the situation regarding corporate governance is still a long way from the established norms, as not all companies understand the basic aims of corporate governance and that the ability of a company to effectively manage strategic and financial risks increases its value. We would also like to point out the support the process of development of corporate governance has received from the Government of the Republic of Kazakhstan. On 7 August 2003, at a session of the Government, the President of the Republic of Kazakhstan, N A Nazarbaev, emphasized the necessity for the restructuring of companies, including natural monopolies. ‘We need to objectively investigate national companies: who is the owner, and who is the hired manager?’ (Kazakhstanskaya Pravda, no. 227 (24167) 8 August 2003.) The issue of corporate governance is frequently under discussion in countries with a developed market. In the Republic of Kazakhstan, corporate governance is just starting and is directly related to the development of the stock market and the processes of privatization of state companies.
Development of the stock exchange The President of the Republic of Kazakhstan, N A Nazarbaev, pointed out the requirement to accelerate the development of financial institutions, where one of the features for the development of financial institutions is to improve financial standards on the basis of those in
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Europe and to develop legislation regarding the stimulation of financial institutes (Kazakhstanskaya Pravda, no. 227 (24167) dated 8 August 2003). Amendments to the Law of the Republic of Kazakhstan Concerning Joint-Stock Companies, the development of a three-tier system of crediting and the development of an insurance market have been implemented to safeguard the rights and interests of investors on the securities market, and to assist the transition of the Kazakhstan financial market to world standards. Only some of the specific details for the development of the Republic’s market economy have been mentioned above. The development of each of these processes will create additional professional requirements for auditors in Kazakhstan.
3.6
Kazakhstan and International Accounting Standards Darmen Jakishev, Senior Manager, Ernst & Young Kazakhstan
Since Kazakhstan’s independence in 1991, continuous efforts have been made to develop a market economy. One of the main areas of development has included building a modern financial system and national accounting standards. In this regard, large leaps have been taken by Kazakhstan, beginning with abandoning Soviet accounting rules in favour of International Accounting Standards (IAS). The accounting system in the Republic of Kazakhstan is determined by the Law on Accounting which stipulates that all entities operating in Kazakhstan maintain accounts according to Kazakh Accounting Standards (KAS). Specific accounting standards also exist for various industries, for example standards for the oil and gas industry, which define the specifics of accounting and compiling financial statements relevant to activities linked with exploration and extraction of oil and gas. The Ministry of Finance of the Republic of Kazakhstan is the primary source of accounting principles which issues standards, instructions, and interpretations pertinent to accounting. The National Bank regulates accounting rules for financial institutions. Bookkeeping and accounting requirements in Kazakhstan are now much more than a mere statistical tool, which was their prime function in the Soviet era. The post-Soviet accounting standards in Kazakhstan were first implemented in 1997, and while developing them in 1996, the Government used IAS as a guideline. Principal changes to the old accounting system were made within the conceptual framework of accounting. Prior to 1997, companies operating in Kazakhstan applied accounting rules that used cash basis accounting principles. Apart from adopting accrual basis accounting, the new Kazakh Accounting
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Standards also adopted certain other IAS conceptual principles, such as going concern, understandability, relevance, materiality, neutrality, prudence and comparability. As the basic concepts of accounting changed dramatically, many companies operating in Kazakhstan experienced difficulties in implementing the new standards. Not only was it necessary to accept a new concept that required expenses to be accrued before the actual expense was paid, but also many issues were raised related to the interpretation of standards and their implementation in practice. Areas such as preparation of consolidated financial statements, preparation of cash flow statements, accounting for investments and deferred income taxes, and accounting in the sphere of oil and gas required detailed explanations and clarifications prior to proper implementation. The transition process, for most companies, lasted two to three years. At present, there are 31 accounting standards in Kazakhstan, most of which were adopted in 1997. The changes to date have not been significant. Although KAS are consistent with IAS, certain important examples of IAS are not fully included in KAS at this stage, such as IAS 22 – Business Combination, IAS 14 – Segment Reporting, IAS 29 – Financial Reporting in Hyperinflationary Economies, IAS 36 – Impairment of Assets and IAS 39 – Financial Instruments. Lack of convergence is particularly obvious in certain accounting and financial reporting issues, such as: • the recognition and measurement of financial assets and derivative financial instruments; • impairment losses; • provisions; • income taxes; • accounting for business combinations; • disclosure of segment information. Currently, there are global needs and efforts have been made to move from national accounting standards to IAS. Differences between the national standards and IAS are therefore a common issue for many countries around the world. From Asia to Latin America, national governments, regulators and accountancy professionals are actively considering how their national accounting standards differ from IAS and how to reconcile those differences. This process will lead to a significant improvement in financial reporting, transparency and comparability. It is a process which will undoubtedly require efforts from many stakeholders, but the ultimate benefit will be worth the effort. In many countries, this process has started, but it may take some years for
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actual results to materialize as the strategy for convergence varies widely. An important consideration that needs to be taken into account is the development of IAS themselves. As countries struggle to make the discrepancies between their national standards and IAS smaller, IAS are being developed to react to an ever-changing financial environment. Therefore, gradual introduction of standards into national systems may not always be the best solution. One national response to the potential of differences between national and IAS requirements growing further apart would be to abandon domestic requirements and adopt IAS fully. It seems that the Government of Kazakhstan decided to follow this approach. In 2002, in accordance with the amendments of the Law on Accounting issued on 24 June 2002, and effective from 1 January 2003, IAS should be implemented by certain companies, the activities of which are regulated by the National Bank of Kazakhstan. Effective on 1 January 2004, all entities will also be obliged to replace KAS with IAS. The decision of the Government of Kazakhstan to replace national standards with IAS is conducive with a global intention to harmonize accounting standards. Harmonization of the financial accounting and reporting standards on which financial statements are based is an important area on which great focus is and will continue to be placed around the globe. Economies everywhere are facing a future in which cashflows across borders will grow. Harmonization of accounting standards will become a necessity in order to respond to capital markets of today. Accounting and financial reporting is an important element of evolving business activity that can support or undermine the efficiency of markets. The globalization of capital markets brings a new significance to the need for comparable and transparent financial reporting. It requires companies, investors, creditors and auditors to think in a new way about which financial information companies should publish and how best to communicate it. The present lack of common accounting requirements around the world serves as a significant impediment to the globalization of capital markets by restricting an investor’s ability to make informed decisions about investment alternatives. For investors and other users to compare investment opportunities and, indeed, for a company to benchmark itself against its competitors, a common accounting and financial reporting framework is needed. International consistency will provide greater transparency and comparability of the financial information used in investment decisions, and thereby contribute to financial market stability and economic growth around the globe. The view of harmonization of accounting standards was one of the driving forces behind the proposed changes in Kazakhstan. Such an approach is consistent with those of other developed countries. For example, the EU will also
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require EU-listed companies to prepare their consolidated financial statements in accordance with IAS from 2005 onwards. The implementation of IAS in Kazakhstan and globalization of IAS in general will bring many benefits to companies operating in Kazakhstan as well as to current and potential investors who are seeking business opportunities in the country. IAS will improve the ability of investors to make informed financial decisions, thereby leading to a reduction in risks and, ultimately, to a reduction in the cost of capital. Equally important, IAS can improve access to capital markets and reduce the cost and complexity of doing business abroad for Kazakh companies by eliminating some of the multiple reporting obligations. Companies will save both time and costs by being able to report all financial information under the same set of accounting and reporting requirements as companies in other countries. Together, these benefits of improved access to capital markets, reduced costs of capital and reduced internal costs will reward companies that improve their financial reporting and will reward economies in general, delivering greater investment opportunities. However, the benefits that Kazakhstan will receive from the implementation of IAS will not be without challenges. These challenges will face all involved during the transition period from KAS to IAS. The approach to replace national standards by IAS poses a much greater threat to quality of application in the short term compared with an approach to manage these changes gradually over a period of time. There is a great deal of uncertainty as to how many companies are prepared for these changes. The ‘revolutionary’ approach taken by Kazakhstan will require urgent measures to develop and implement educational, professional and regulatory infrastructures; financial accounting and reporting information system modifications; and translations of IAS from English into Russian and Kazakh languages. Changing the requirements will be difficult enough, but it will be more difficult still to ensure a high quality of implementation. Accountants and auditors must be trained, enforcement mechanisms must be improved, and users must be informed. At the moment, there is a lack of experienced personnel who would lead the process of implementing IAS in their companies. This issue also relates to most of the local audit firms which currently have little or no experience in dealing with IAS. We believe that one of the primary steps which need to be taken as quickly as possible is to develop educational centres to provide the necessary theoretical base for accountants and auditors at all levels prior to the implementation of IAS. A more evolutionary approach to implementation of IAS in Kazakhstan could perhaps start immediately by focusing on those areas where the discrepancies between KAS and IAS are the greatest. Another step in achieving full convergence, we believe, should be for companies to identify and quantify differences
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between their current accounting practices and IAS requirements. Quantification of the impact should also be an urgent priority, even if only for a company’s internal management purposes. A requirement to present a numerical reconciliation to IAS could also help to prepare the users of financial statements for the forthcoming change. It is clear that the Government has taken on a great responsibility and that significant actions must be undertaken to ensure that the transition process runs as efficiently as possible. Kazakhstan is one of the first countries to take the decision to implement IAS as its national standards. The intention of the Government to implement such an advanced system at such pace is ambitious and worthy of praise. It is proof of a commitment to go forward and apply transparent principles which will, along with other efforts in legislature, enhance a favourable investment climate. The accounting profession in Kazakhstan will live through interesting and challenging times.
3.7
Regulation of the Banking Sector Alexander V Barsukov, McGuireWoods Kazakhstan LLP
Introduction The banking sector in the Republic of Kazakhstan has two tiers. The National Bank of Kazakhstan (NBK) is the central bank and the supreme banking authority of the country and represents the first tier of the banking sector. The NBK is an institution that develops and pursues the State’s monetary and credit policy, issues the national currency (the tenge, or KZT), maintains Kazakhstan’s foreign currency and gold reserves, regulates and supervises Kazakhstani banking and insurance sectors, carries out foreign exchange control and regulation, and issues licences. The NBK also regulates the stock market (assuming the functions and authorities of the recently abolished National Securities Commission) and issues securities, organizes and monitors the functioning of the payments system, and manages the assets of the National Fund of Kazakhstan. The NBK is accountable to the President of Kazakhstan and it coordinates its activities with the Government of Kazakhstan, but it is not strictly speaking a part of the Government or subordinate to it. The power and control over all the country’s most important financial institutions, such as banks, insurance companies, pension funds, securities dealers and brokers, asset managers, custodians, registrars, is concentrated in its hands. The banking sector in Kazakhstan is today one of the most stable and rapidly developing financial sectors anywhere in the CIS. It has enjoyed not only growth in its performance, but also improvement in the quality and variety of its services and an increasing number of modern bank instruments. The adherence of Kazakhstan’s banking sector to the international standards of banking business and to the Core Principles for Effective Banking Supervision of the Basel
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Committee on Banking Supervision has enabled the NBK to sustain the financial stability of Kazakhstan’s banking sector, as well as to procure its further growth and stable development.
Current status of the Kazakhstan banking sector The second tier of the Kazakhstan banking sector is the 35 commercial banks, including 15 established by foreign banks. This represents a substantial decrease in the number of commercial banks since 1995, when the new Law on Banks and Banking (the Banking Law) was passed. Many banks failed to meet the rigid, prudential standards subsequently imposed by the NBK. By comparison, in 1995 there were 200 banks in Kazakhstan. As of 1 June 2003, the three largest banks represented 63.8 per cent of the total commercial bank assets of the country. They are Kazkommertsbank, which is the only Kazakh bank that is ranked among the top 1,000 banks worldwide, TuranAlem Bank, and Halyk Bank of Kazakhstan. The formation of a bank with foreign participation is governed by the Banking Law and NBK regulations. The charter capital of a newly established bank may not be less than 2 billion tenge, or approximately US $13.65 million at the current applicable exchange rate. A foreign bank that has a credit rating from one of the international rating agencies, namely Standard & Poor’s, Fitch, or Moody’s Investor Services, that is not less than a sovereign credit rating of the Republic of Kazakhstan, may be a parent of a subsidiary bank in Kazakhstan. The same rule applies to foreign corporate entities that wish to acquire a 10 per cent or larger interest in a Kazakh bank. A foreign bank has the right to apply to the NBK for a permit to open a subsidiary in Kazakhstan after the foreign bank’s representative office has operated in Kazakhstan for one year. That requirement also applies in cases where a foreign bank seeks to acquire more than 50 per cent of the shares in a Kazakh bank. This provision did not apply to such cases before 1999, when the Banking Law was amended. The Banking Law also provides, however, that the total registered charter capital of banks with foreign participation may not exceed 50 per cent of the total registered charter capital of all Kazakh banks, except in cases permitted by the NBK. It should be noted that when the Banking Law was introduced in 1995 this amount was set at only 25 per cent and the development of banking sector and overall economic growth of the country have enabled the NBK to increase it to 50 per cent. Under the Banking Law, at least one member of the Board of a bank with foreign participation must be a citizen of Kazakhstan and not less
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than 70 per cent of the employees of such a bank must be Kazakhstani citizens. The Banking Law gives the NBK power to establish the list of domestic assets in which a bank with foreign participation is obligated to invest its funds. Under the Banking Law, the NBK is also entitled to impose additional requirements on banks with foreign interest with respect to the membership of their bodies, the range of their banking operations, the applicable prudential standards, the procedure for reporting and other norms and limits.
National currency and currency control legislation The Kazakh tenge (the national currency of the Republic) was introduced in 1993, two years after independence. It is not yet freely convertible. Until recently, banks, corporations and individuals often preferred to keep their assets and savings and to receive their income in US dollars or other hard currencies, rather than in tenge. Confidence in the tenge is growing, however, due to the NBK’s rigid monetary and credit policies, the decreasing rate of inflation, and the overall growth of the national economy. Kazakh currency control legislation has long been one of the most liberal in the CIS, but there are still certain restrictions in the exchange control regulations. As a general rule, all payments in transactions with Kazakhstan’s residents must be conducted in tenge. Foreign currency received by residents as a result of export operations or as a loan must be debited to bank accounts in so-called authorized banks, ie Kazakh banks that have a licence issued by the NBK for foreign currency operations. Furthermore, under the Currency Regulation Law, in order to fulfil international obligations and in emergency situations, the President of Kazakhstan has the right to restrict or suspend any currency operation, and the NBK is entitled to establish restrictions on the currency of payment for export operations by residents and the compulsory sale of foreign currency revenues from export operations. Such operations as foreign currency transactions by banks and exchange offices, retail trade involving payment by foreign currency in cash, opening by Kazakh residents of accounts with foreign banks and financial institutions, and foreign currency transactions involving the transfer of capital from residents to non-residents are all subject to licensing by the NBK. Thus residents’ investments abroad, transfers from residents to non-residents in payment for real estate and associated rights, residents’ payments related to crediting non-residents for export–import transactions and residents’ loans to non-residents for a period exceeding 120 days are all subject to such licensing. Pursuant to
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recent amendments to the Licensing Law, however, these licensing requirements shall not apply to opening bank accounts by resident banks or individuals in banks or financial institutions of countries that are members of the Organization for Economic Cooperation and Development and that have a minimum required credit rating from one of the international rating agencies which are subject to registration by the NBK. They also do not apply to the operations of banks with regard to residents’ investments abroad, or to investments of residents in foreign securities that meet certain requirements which are yet to be established by currency and banking legislation of the Republic of Kazakhstan. All of the following foreign currency transactions are subject to registration with the NBK: transactions involving the transfer of capital from non-residents to residents in the amount of US $100,000 or an equivalent in other foreign currencies; crediting by non-residents of import–export resident transactions; non-resident loans for a period exceeding 180 days; direct and portfolio non-resident investments in Kazakhstan; payments for intellectual property items and for real estate located in Kazakhstan. The NBK registration is not required in the case of: non-resident investments into state securities; Kazakh depository receipts; sale by non-residents to residents of shares and participatory interest in resident companies and acquisition of securities through Kazakhstan’s licensed brokers; and non-resident reinvestment operations. Pursuant to the Currency Law, the authorized banks act as the Government’s agents in that they are required to control compliance with the currency control requirements for residents and non-residents in foreign currency transactions.
Bank lending The NBK regulates the lending operations of banks by promulgating prudential standards that are mandatory for all banks and by fixing the official refinancing rate that banks must use to determine interest rates in their lending operations. The Banking Law requires banks to conduct their lending operations in accordance with Internal Credit Policy Regulations that shall have been approved by the bank’s Board of Directors. They should provide for terms and conditions of lending, lending limits, procedure for approval of loans, etc. It is interesting to note that lately the share of foreign currency loans in banks’ loan portfolios is gradually decreasing, while the share of loans in tenge is increasing. This has happened at the same time that interest rates have been decreasing. That obviously reflects a growing confidence of banks in the national currency and in the prospects of the Kazakh economy.
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Investment banking The Kazakhstan stock market is still at a fairly early stage in its development, despite recent efforts by the NBK to stimulate it. Recently the NBK initiated adoption of a number of important laws governing investments and the stock market. Kazakh banks are not legally divided into investment banks and commercial banks. The Banking Law provides that banks may engage in the following types of securities transactions: brokerage and dealership with state securities, with securities that have a minimum required rating of one of the international rating agencies and with certain derivative securities; assets management; clearing; and custodianship. As a practical matter, most of the major banks are big players in the Kazakh stock market, whether directly or through their investment affiliates. Under the recent amendments to the Banking Law, however, banks will be prohibited from engaging in securities clearing operations as of 1 January 2004. As a general rule, banks may not invest in the charter capital or acquire an interest in corporate entities. This does not apply to banks’ participation in the charter capital of: • pension funds and pension asset-management companies; • investment funds; • insurance and leasing companies; • companies whose shares are included in ‘A’ listing of a Kazakh stock exchange in an amount not exceeding 15 per cent of the total number of shares in each company. The Banking Law also permits banks to participate in the capital of financial market infrastructure companies and the capital of professional participants of the stock market (ie brokers, dealers, custodians, registrars, etc). The bank may also trade bonds issued by companies whose shares are included in ‘A’ listing of a Kazakh stock exchange.
Retail banking The retail banking market in Kazakhstan is heavily dominated by the three largest local banks mentioned above. These attract more than 70 per cent of individuals’ deposits. Some of the subsidiaries of international banks operating in Kazakhstan, such as HSBC and ABN AMRO Bank, also offer private banking for individuals, while Citibank offers such services only for employees of its corporate clients. Similar to the
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trend for increased loans in tenge, the size and number of deposits in tenge have increased recently compared with foreign currency deposits. In 1999 the National Bank introduced the System of Obligatory Collective Guaranteeing (Insurance) of Individuals’ Deposits (SOCGID). Currently 22 banks that account for 90 per cent of individuals’ deposits are members of SOCGID. For the purpose of implementation of SOCGID, the NBK established a joint-stock company: Kazakhstan Fund of Guaranteeing (Insurance) of Individuals’ Deposits (the Fund), with a charter capital of 1 billion tenge, or approximately US $6.8 million. The assets of the Fund comprise the contributions by the bank members of portions of their individuals’ deposits that are to be used for partial compensation of individuals’ deposits in the case of a bankruptcy or forced liquidation of a particular bank member. The Fund may invest its assets only in Government securities and the NBK’s deposits. Only deposits in tenge, US dollars and euros are subject to compensation. The maximum amount of compensation is 400,000 tenge, or approximately US $2,730 (at the exchange rate at the time of writing) for tenge deposits, and 90 per cent of that, 360,000 tenge or US $2,450, for deposits in US dollars and euros.
Mortgage financing Mortgage financing is more advanced in Kazakhstan than in the other CIS countries. The development of mortgage financing is driven by the 1995 Law on Mortgage of Immovable Property and by the 2000 Government Concept of Long-Term Financing of Housing Construction and Development of the System of Mortgage Financing in the Republic of Kazakhstan. They provide a regulatory framework for mortgage financing. The NBK’s continuous efforts to develop a Kazakh mortgage financing market has resulted in the increasing creditworthiness of Kazakhstan’s population. In order to facilitate this process, the NBK, with the support of commercial banks, established a wholly-owned subsidiary, Kazakhstan Mortgage Company (KMC). The primary objective of KMC is to attract long-term refinancing of Kazakh banks by purchasing their mortgage loans and subsequently issuing mortgage bonds to attract the available funds of institutional investors, eg banks, insurance companies and pension funds, that will be used for further development of mortgage financing. KMC provides mortgage financing only in tenge for up to 85 per cent of the value of the real estate to be financed. The maximum maturity of mortgage financing by KMC is 10 years, while some banks provide financing for up to 15 years.
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Plans for reform and further developments In July 2003 the Parliament of Kazakhstan adopted a new Law on State Regulation and Supervision of the Financial Market and Financial Organizations (the New Law). It also made numerous amendments to various existing Laws governing the financial market and institutions (the Amendments Law) that will be effective as of 1 January 2004. The New Law provides for establishment of an Authorized State Agency (the ASA) reporting to the President of Kazakhstan, that will regulate and supervise financial markets and various financial institutions, including banks, and that will also protect investors’ rights and interests. Pursuant to the Amendments Law, the ASA will assume a significant part of the NBK’s current functions and authorities involving bank regulation, supervision and control. In particular, it is envisaged that the ASA will grant permits for formation of a bank, will issue most banking licences and will be in charge of promulgating prudential standards for prudent management and other norms and limits that will be mandatory for banks. The Amendments Law provides that as of 1 January 2004 only banks that are members of the SOCGID will have a right to attract individuals’ deposits and pension funds assets. The NBK is also planning to establish a company for insurance of mortgage financing. The Amendments Law directs the NBK to complete by the year 2007 a liberalization of currency control regulations. The goals are to relax the requirements for residents’ investments in non-resident securities, to stimulate direct investments abroad, and to eliminate various bureaucratic barriers in foreign trade operations. The NBK will also continue its work on the application of risk management systems to banks, on increasing the level of their transparency for investors, customers and regulating agencies, and on improving methods of bank supervision.
3.8
Regulation of the Securities Market in the Republic of Kazakhstan Bracewell & Patterson LLP1
Overview Although still in the formative stage, Kazakhstan has made significant strides towards a well functioning, efficient and transparent securities market. Trading volume on the Kazakhstan Stock Exchange (KASE) in the first half of 1999 exceeded the total for 1998 by 900 per cent.2 This was largely due to investment from pension funds, the strengthened role of KASE, and improved functioning of the market. The market’s development is also reflective of the successful economic development of the country. Kazakhstan is committed to establishing a comprehensive body of laws to regulate the activities of the securities market. The initial reforms date back to the early 1990s when, as part of its privatization reforms, Kazakhstan adopted some rudimentary laws to regulate circulation of securities. In the mid- and late 1990s such laws were replaced with more elaborate laws and regulations. One of the significant developments was the establishment in 1995 of the National Securities Commission (the Commission), a regulatory body responsible for supervision and control of the securities market and the activities of professional participants of this market. The Commission set standards and adopted rules and procedures to effectuate securities transactions, including procedures for settlement, clearing and registration of securities transactions. In 2001, the Commission was 1
Summary written by Steven Sedberry and Elya Duisemaliyeva – attorneys with the firm of Bracewell & Patterson LLP. 2 See US/Kazakhstan Business Association Web site, available at http://www.uskba.net/ about_economy.htm.
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dissolved and the Department of Securities Market Regulation of the National Bank Kazakhstan, central banking regulatory body (NBK), assumed responsibilities for regulation, supervision and control of the activities of the securities market. As part of its most recent efforts to stimulate this market’s activities, NBK initiated various more sophisticated changes to the existing securities laws and regulations, the majority of which were adopted in the beginning of 2003.
Sources of law The first tier of laws regulating securities activities comprise the Civil Code, 27 December 1994, as amended (the Civil Code), Law on JointStock Companies, no. 415–II, 16 May 2003 (the JSC Law), and Law on the Securities Market, no. 461–II, 2 July 2003 (the Securities Law). The second tier comprises the specific laws regulating activities of market participants and securities regulations and rules of the Commission and NBK, such as, for example, Law on National Bank of the Republic of Kazakhstan, no. 2155, 30 March 1995, as amended, Law on Banks and Banking Activities, no. 2444, 31 August 1995, as amended, Law on Investment Funds, no. 82–1, 6 March 1997, as amended, Rules on State Registration of Share Issues, Assignment of the National Identification Numbers to the Share Issues Not Subject to Registration, Reviewing the Report on Results of Issue and Placement of Shares and Cancellation of the Share Issues promulgated by the Resolution of the Management Board of NBK, no. 304, 2 August 2002, Rules on Registration of the Bond Issues and Repayments promulgated by the Resolution of the Commission, no. 156, 20 December 1996, as amended. In addition, the laws and regulations of general application covering officers’ and agents’ liabilities, tax, bankruptcy issues, financial reporting standards etc are applicable to the securities activities. These include, among others, the Code on Taxes and Other Mandatory Payments to the Budget, no. 209–II, 12 June 2001, as amended (the Tax Code), Law on Accounting and Financial Reporting, no. 2732, 26 December 1995, as amended (the Accounting Law), Law on Bankruptcy, no. 67–1, 21 January 1997, as amended, Law on Pension Provision, no. 136–1, 20 June 1997, as amended. JSC Law and Securities Law were only recently enacted to replace the old Law on Joint-Stock Companies, no. 281–1, 10 July 1998, as amended, and Law on the Securities Market, no. 67–1, 5 March 1997, and as such, their full success cannot be fully gauged at this time. However, the progress can be seen by the growth of the market and by the enactment of these new laws.
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What constitutes ‘security’ The Civil Code defines ‘security’ as a combination of formal records and other symbols evidencing proprietary rights, and recognizes shares and bonds as securities. The Securities Law contains a definition of security similar to one in the Civil Code and further grants NBK broad authority to determine if any financial instrument that falls in the definition of the security is a security for regulatory purposes in Kazakhstan. The Civil Code and Securities Law differentiate between fungible securities (emissioniye), for example shares and bonds, and nonfungible securities (neemissioniye), for example grain receipts and banking depository certificates.3 The Civil Code further provides that the securities can be documentary and non-documentary and be issued in bearer, registered and order forms. It also specifies that the shares and bonds can be in registered form only. The main issuers of securities are joint-stock companies. The JSC Law allows joint stock companies to issue shares (common and preferred), bonds, derivative securities, convertible securities and other securities allowed by the laws of Kazakhstan. Other issuers include state enterprises. State entities are governmental entities and differ from joint-stock companies owned by the state in that the latter qualify as a form of private ownership. The state enterprises by definition are not allowed to issue shares. However, they are not prohibited from issuing bonds. Limited liability partnerships or limited partnerships by definition are not allowed to issue shares and with cancellation in 2000 of the Resolution on Issues of Bonds by Limited Liability Partnerships and Limited Partnerships, no. 152, 18 September 1998, it became unclear if limited liability partnerships and limited partnerships are allowed to issue bonds. The Securities Law limits the ability of the resident issuers to issue their securities overseas unless such issuer has securities issued domestically and listed on KASE.
Registration requirements No offer or sale of the securities can be made unless the securities are registered with or otherwise admitted for circulation by NBK. Registration of the securities involves submission of the prospectus to NBK. Specific regulations set out requirements for the content of the prospectus which shall include, among others, description of the issuer’s business, description of various investment considerations, 3
In this summary all references to ‘securities’ are to fungible securities only.
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terms of the securities issued, and audited annual financials. NBK is authorized to request any other information not disclosed in the prospectus. Upon registration of the prospectus, NBK issues a registration certificate confirming registration and assigning the securities the national identification number in the unified state register of the securities maintained by NBK. The Securities Law allows shelf registration, where the issuer is required to receive national identification numbers for each tranche of securities issued. Shelf registrations are available to joint-stock companies only. The already issued securities of non-resident issuers can be admitted by NBK for circulation within the territory of Kazakhstan provided they comply with certain requirements of NBK. A nonresident has to have a resident broker-dealer apply for such admission and file the registration statement, prospectus or any other similar documents prepared in accordance with the requirements of the country of original issue. NBK may at its own discretion request any other information.
Disclosure requirements In addition to mandated disclosure at the time of filing the prospectus for registration of the security issue with NBK, the Securities Law contains provisions requiring continuing disclosure by the issuers. The issuers are required to notify NBK within 15 days of occurrence of any of the following: changes in the corporate governance bodies; changes in the shareholders of the issuer holding 10 per cent or more of the issued shares (5 per cent for public companies); reorganization of the issuer or its subsidiaries; arrest of the property; receipt, suspension or termination of any of the licences or changes in holding by the issuer in other companies of 10 per cent or more. The issuers also have an obligation to notify the holders of any securities of the issuer by publishing such information in a local newspaper. In an effort to unify the disclosure standards, NBK initiated certain changes to the Accounting Law, which were adopted in early 2003 and require all banks and other financial institutions, including professional participants of the securities market which are regulated by NBK, to prepare their financials in accordance with International Financial Reporting Standards (IFRS), former IAS. Starting from 1 January 2004 all of the legal entities in Kazakhstan, with certain exceptions beyond the scope of this summary, will be required to prepare their financials in accordance with IFRS. In addition, KASE has its own disclosure standards. The issuer which securities are listed on KASE are required to notify KASE in the
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following manner: within three days of changes in the corporate governance bodies or commencement of any legal procedures against the issuer; not later than 30 days prior to repayment of any debt for an amount exceeding 10 per cent of balance sheets value of the issuer’s assets; prior to making any public announcements about new issues of securities, proposed reorganization, or sale of shares of 5 or more per cent of authorized charter capital.
Tax considerations Dividends payments and payments of interest on the debt securities to residents of Kazakhstan, except for banks resident in Kazakhstan and Kazakhstani accumulative pension funds, are subject to a withholding tax at a rate of 15 per cent. Government securities are exempt from withholding tax. The Tax Code contains certain incentives for development of securities trading activities at KASE. Capital gains realized by holders of the shares and bonds from the disposal, sale, exchange or transfer of the shares and bonds are exempt from Kazakhstani withholding tax if such shares or bonds are included in the ‘A’ or ‘B’ lists of the KASE. Otherwise, such gains are subject to Kazakhstan income tax at a rate of 30 per cent.
Professional participants The Securities Law recognizes the following as professional participants at the securities market: broker-dealers, registrars, investments managers, pension assets managers, custodians, transfer agents and depositors. A licence from NBK is required to perform any of such professional activities. The activities of professional participants are heavily regulated by NBK, including strict prudential and reporting requirements.
Kazakhstan Stock Exchange (KASE) KASE has been in continuous operation since 1997. It is a self-regulatory organization with 55 members.4 The corporate securities market is the most rapidly developing segment of KASE, although it still remains a small portion of the overall market. Trading in government securities and foreign currencies represent the overwhelming majority of KASE activity. According to NBK Securities Market Regulation
4
See Kazakhstan Stock Exchange Web site, available at http://www.kase.kz/eng/.
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Department, the aggregate volume of trades on KASE in 2001 was KZT 74,784,415.4 thousand.5 Government securities are the predominant segment of KASE activity, while the corporate securities market is still in a fairly early stage of development. KASE functions as a centralized share exchange with regulated listing requirements.6 The majority of listed companies are from the agricultural, oil and gas, metallurgy, mining and banking sectors, as a result of privatization and the need for new financing by these companies.7 Financial institutions also play a prominent role on KASE. In addition to corporate and government securities, KASE is also involved in a variety of other publicly traded instruments. These include municipal bonds, bonds of international financial institutions, and futures markets. In 1999, several new instruments were debuted by KASE. Municipal bonds were first issued by the Mangystau region and the cities of Almaty and Astana.8 Beginning in 2000, regions of Kazakhstan received credit ratings for the first time, which significantly affected the development of municipal bond markets. As a result, KASE has seen significant growth in this area. Market capitalization increased from US $4.555 million in 2000 to almost US $40 million in 2001.9 In November of 2001, KASE offered participants a new instrument, six-month futures based on the US dollar exchange rate to the euro.10 KASE utilizes a three-level designation system for stocks and bonds: ‘A’ list, ‘B’ list, and non-listed securities. Companies that are designated as and are traded on the ‘A’ list must provide a prospectus, be profitable for one year or over the course of three years and have at least three years of operating history. ‘B’ list companies are required to file a prospectus and have at least one year of operating history.
Conclusion Effective legislation concerning securities trading which provides a transparent and effective market is essential for the continued development of the Kazakhstan economy. NBK has made substantial progress toward the creation of such a market in Kazakhstan by implementing a series of legislation affecting the public trading of securities. KASE has seen continued growth in the area of corporate security issues, as well as other new instruments such as futures. The effect of 5
See 2001 Annual Report of the Kazakhstan Stock Exchange, 6. See 2001 Annual Report of the Kazakhstan Stock Exchange, 6. 7 See 2001 Annual Report of the Kazakhstan Stock Exchange, 6. 8 See Kazakhstan Weekly News, ‘Politics and Macroeconomics’, 17 January 2000. 9 See 2001 Annual Report of the Kazakhstan Stock Exchange, 36. 10 See 2001 Annual Report of the Kazakhstan Stock Exchange, 36. 6
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new laws recently enacted governing this area remains to be seen. However, if the past is any indication of the future, it is likely that KASE will continue to be a driving force in the new Kazakhstan economy. It is critical that the regulatory structure continues to create markets which are efficient and transparent in order to ensure future success. As has been seen elsewhere in the world, investor confidence and integrity of the market is critical to creating a lasting medium for effective capital exchange in Kazakhstan.
3.9
Protection of Investment in Kazakhstan Denton Wilde Sapte, Almaty
Kazakhstan has enjoyed the reputation of being the best place in the former Soviet Union for investment, and the country has done much to foster this image with investors. Nevertheless, Kazakhstan continues to pose many challenges and it is useful, therefore, to survey the protections that are available for foreign investors.
Kazakhstan’s Law on Investment On 8 January 2003, Kazakhstan passed the Law on Investments (the Investment Law), thereby expressly revoking and replacing both the Law on Foreign Investments (the FIL), which had furnished many of the guarantees and protections enjoyed by foreign investors in Kazakhstan, and the Law on State Support for Direct Investments, which had provided incentives for investments in priority sectors of Kazakhstan’s economy. The Investment Law, which equalizes the rights of foreign and domestic investors, primarily does two things. It sets forth the basic tenets of investment protection and it provides the regime for providing ‘investment preferences’ – that is, tax and customs exemptions – as well as grants of state property for investments in specified ‘priority types of activities’.
Application of the Investment Law The Investment Law defines ‘investments’ as: all types of property (except for goods destined for personal use), including subjects of leasing agreements once the leasing contract has been executed, as well as the rights thereto, contributed by an investor to the charter capital of a legal entity or to increase fixed assets used for entrepreneurial activity.
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This definition means that only contributions to a company’s charter capital or increases in fixed assets are considered an investment. While this probably covers most forms of investments there are likely to be some investors that find that their activities do not qualify as investments under this definition. Natural resource and infrastructure investments will almost certainly involve either or both of a charter capital contribution or an increase in fixed assets used for entrepreneurial activity and, therefore, would be deemed investments under the Investment Law. Presumably, this definition is broad enough that the Investment Law applies to the branches of foreign companies operating in Kazakhstan. An ‘investor’ is defined as an entity that is making an investment ‘within Kazakhstan’. This is significant because it means that the Investment Law’s protections extend to both Kazakhstan and nonKazakhstan legal entities and actual persons making investments. However, the generally broad application of the Investment Law may be limited. Article 2.3 states: ‘The provisions of this Law shall not apply to relations which emerge when carrying out investments and which pertain to the sphere of the effect of other legislative acts of the Republic of Kazakhstan, except for the cases that are provided for by such legislative acts.’ The meaning of this provision, in particular the phrase ‘which pertain to the sphere of the effect of other legislative acts’, is unclear. A broad interpretation would not make sense since it would exclude from the protections provided by the law activities specifically governed by other laws. For example, investments in mining which are specifically governed by the Law on Subsoil and Subsoil Use would be excluded from receiving the protections afforded by the Investment Law whereas they would have the protections provided by the FIL. Thus, it appears that such provision is intended to be narrowly construed to give precedence to other legislation only where such legislation specifically regulates certain conditions of investments. As a result, the provisions of the Investment Law almost certainly apply to most investments in Kazakhstan.
Investment protections The Investment Law contains a number of provisions that provide protection to investors. These include certain guarantees similar to those provided under the FIL. In addition, it includes provisions governing dispute resolution and contract stability. In general, however, the Investment Law is narrower in its scope and the protections it provides to investors than the FIL. However, a number of such protections are also provided by other legislative acts of Kazakhstan. Key protections are discussed below.
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Contract stabilization The Investment Law contains two stabilization provisions: Article 4.3 and Article 2.3. Article 2.3 only applies to contracts involving ‘investment preferences’ (ie those dealing with investments in certain priority sectors of the economy) granted in accordance with the Investment Law. It states that privileges granted in such contracts shall remain in effect for the life of the contract. Article 4.3 has a broader application although it is still somewhat limited. Article 4.3 only applies to contracts entered into with state bodies of Kazakhstan. Nominally Article 4.3 provides for the stability of the terms of a contract between an investor and an authorized state body throughout the contract’s period of effectiveness. However, Article 4.3 protects against changes in legislation during the term of such contract except where such changes are made to laws affecting national security, the environment, human health and morals, or the procedure and conditions for the import, production or sale of excisable goods. In addition to the stability provided by Article 4.3 of the Investment Law, similar provisions are found in other legislative acts. Of particular note are the provisions found in the Edict of the President of the Republic of Kazakhstan having the force of law ‘On Subsoil and Subsoil Use’ (the ‘Subsoil Law’) and the Edict of the President of the Republic of Kazakhstan having the force of law ‘On Petroleum’ (the ‘Petroleum Law’). Article 71 of the Subsoil and Subsoil Use Law contains the following provision: ‘Amendments and additions to legislation, which deteriorate the position of Subsoil Users, shall not apply to the Contracts which were issued and concluded prior to such amendments and additions.’ The exception to the protection provided in Article 71 is for changes in legislation concerning defence, national security, environmental safety and health protection. Article 57 of the Petroleum Law is almost identical to Article 71 of the Subsoil Law. Since investments governed by both laws would be ‘within the sphere … of other legislative acts’ they would be deemed to fall within the exception of Article 2.3. Thus, presumably the broader stabilization provided by the Petroleum and Subsoil and Subsoil Use Laws would apply to investors whose activities are governed by such laws instead of that provided by the Investment Law. Furthermore, investors who made their investments at the time the FIL was in force may find that the legislative stability provision of Article 6 of the FIL (known as the ‘grandfather clause’) still provides protection. Arguably such provision, which protected investors against changes in legislation made subsequent to their investments, would include guaranteeing against changes in legislation (ie adoption of the Investment Law), which would eliminate the benefits provided by
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Article 6 of the FIL itself. However, it is not clear how this will ultimately be decided.
Other guarantees The Investment Law preserves a set of guarantees from the former Foreign Investment Law, including: • protection against illegal acts of state bodies (Article 4); • the right to use and dispose of revenues (Article 5); and • protection against nationalization and requisition (Article 8). Unfortunately, the Investment Law does not provide specific remedies for the breach of such guarantees.
Legal protection An investor is afforded the right to compensation of damages as a result of the issuance of illegal government acts or the actions/inaction of government officials. This guarantee is substantially the same as that provided by Article 922 of the Civil Code of Kazakhstan which establishes the state’s liability in certain circumstances.
Use of income Investors are guaranteed the right to use their income at their own discretion after the payment of taxes and other obligatory payments. The guarantee to use one’s after-tax income is subject to Kazakhstan currency laws, which for foreign investors allow proceeds to be freely expatriated. However, the Investment Law contains no assurances that after-tax income in foreign currency cannot be made subject to mandatory conversion to Kazakhstan currency, although there is no such requirement under current Kazakhstan currency legislation.
Nationalization and requisitioning of property The Investment Law provides that nationalization or requisitioning of property ‘shall be allowed in exceptional cases … provided for by legislative acts of the Republic of Kazakhstan’. The Civil Code provides that ‘conversion to state ownership’ (ie nationalization) can only take place in the event of the adoption of a special law on nationalization. In accordance with the Civil Code, only in the event of a natural disaster, epidemics and other circumstances of an extraordinary nature, and on the basis of a decision of a state agency, may property of an investor be requisitioned.
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Other laws deal more specifically with the nationalization or requisitioning of property. Generally, however, the principle is established in Kazakhstan law that nationalization and requisition may only occur for public purposes, in a non-discriminatory manner, under due process of law, and upon the payment of adequate compensation. The Investment Law guarantees of compensation in the event an investor’s property is nationalized or requisitioned include compensation for all damages in the former case and payment of the market price of the requisitioned property in the latter case. The accepted international standard for compensation in cases of nationalization is that it be ‘prompt, adequate and effective’. The same standard was used in the Foreign Investment Law. The more limited standard in the current Investment Law raises the issue as to whether ‘all damages’ includes, for example, lost profits. Also, there is no statement requiring such compensation to be paid promptly. This defect in drafting may be resolved contractually. Some foreign investors will also find that there are applicable bilateral investment treaties which require prompt compensation in the event of nationalization. The standard for compensation for requisitioned property (eg oil stocks) provides that ‘property may be requisitioned by way of payment of the full market value of such property. The market value of the property shall be determined in accordance with the established legislation of the Republic of Kazakhstan.’ The law ‘On Appraisal Activity in the Republic of Kazakhstan’ provides that the market value of property would be the most probable price which can be paid for the property in a competitive transaction wherein the parties act on the basis of all available information concerning the property. In principle, the requirement to compensate at fair market value is welcome, although in practice, as may happen anywhere in the world, what the parties ultimately believe constitutes market value may differ.
Dispute resolution Availability of international arbitration Though the courts in Kazakhstan are developing there is still a lack of transparency and a sense that the judicial system may not always be fair and impartial or may lack an understanding of complex commercial issues. Therefore, among the most important protections available is the right to resolve disputes by way of international arbitration. The Investment Law’s Article 9 on dispute resolution expressly provides for the submission of ‘investment disputes’ to international arbitration by agreement of the parties. An ‘investment dispute’, as defined in the Investment Law, is one arising from contractual obligations between an investor and a state
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body of Kazakhstan. Thus, it only applies to disputes directly arising from contracts with Kazakhstan. This differs from the FIL in that it limits the application of foreign arbitration to disputes directly arising from contractual obligations. It also differs because it requires the agreement of the parties to international arbitration whereas under the FIL the consent of the Republic of Kazakhstan to submit disputes to international arbitration was presumed. Under the Investment Law, all other disputes (‘non-investment disputes’) are to be ‘resolved in accordance with legislation of the Republic of Kazakhstan’. While this clause may be interpreted to mean that Kazakhstan law and courts shall govern non-investment disputes, such interpretation seems unlikely. Article 1112 of Kazakhstan’s Civil Code permits parties to determine the choice of applicable law to their contracts unless otherwise prohibited by law. Furthermore, the Civil Code’s Article 1113 sets forth situations in which foreign law may govern a transaction involving a Kazakhstan entity or person even if the parties have not expressly chosen which law will govern. While the Investment Law does not expressly allow international arbitration to be used to resolve non-investment disputes this should not limit the parties’ right to choose international arbitration. Article 25 of Kazakhstan’s Civil Procedure Code allows parties to submit a matter that would otherwise be under the jurisdiction of a Kazakhstan court to a ‘third-party court’ (ie any tribunal not consisting of State judiciaries), unless prohibited by Kazakhstan law.
Application of dispute resolution provided by treaties Most bilateral investment treaties and the Energy Charter Treaty set forth several means by which disputes between a foreign investor and the Republic of Kazakhstan may be settled, including arbitration by the International Centre for the Settlement of Investment Disputes (ICSID), and an arbitration forum using the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). Moreover, the definition of an ‘investment dispute’ under many treaties is broader than in the Investment Law, and includes disputes related to investment authorizations (eg a licence for certain activities) and rights granted by applicable treaties with respect to an investment. Also, treaties often contain the consent of Kazakhstan to the submission of investment disputes to binding arbitration in accordance with the choice of the investor. Nonetheless, the application of the dispute resolution provisions provided in the Energy Charter Treaty and other treaties is usually limited to disputes directly connected to the guarantees and protections provided by such treaties. Still, foreign investors should consider applicable treaties to determine whether such treaties may give the
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investor the right to choose international arbitration for the settlement of investment disputes.
Enforcement of foreign arbitral awards If international arbitration is used to resolve disputes the question arises whether arbitral awards will be honoured and enforced in Kazakhstan. Kazakhstan is a party to the Convention on the Enforcement on Foreign Arbitral Awards (New York, 1958). As such, foreign arbitral awards should be enforceable in Kazakhstan without a review of the merits of the case. In addition, Article 249.5 of the Civil Procedure Code requires a Kazakhstan court to decline to review a case when the parties have executed a ‘third-party’ court dispute resolution agreement and the defendant has filed a motion objecting to the review of the case in court. In practice, the enforcement of foreign arbitral awards may be more difficult. There is limited experience enforcing such awards and there is no established procedure for doing so in Kazakhstan. At the time of writing, Kazakhstan’s Government is in the process of developing a law on commercial arbitration and has plans for development of a law on international commercial arbitration. It is hoped that one or both of these laws will establish clear procedures for the enforcement of foreign arbitral awards.
Investment treaties Kazakhstan is a party to a number of international treaties affecting investors including: • 33 bilateral treaties for the encouragement and mutual protection of investments; • 35 bilateral treaties for the avoidance of double taxation; • various multilateral investment agreements. Many investment treaties have provisions covering dispute resolution, nationalization and other protections which go beyond those protections provided by the Investment Law and other applicable Kazakhstan laws. Under Article 4(3) of the Constitution of the Republic of Kazakhstan, as well as Kazakhstan’s Law ‘On Legal Normative Acts’, treaties ratified by the Republic supersede any Kazakhstan law that is not consistent with the applicable treaty. In addition, the Investment Law expressly guarantees foreign investors the full and unconditional protection of rights and interests provided by the treaties ratified by the Republic of Kazakhstan. Therefore, individual investors may look to applicable treaties to provide them with additional protection.
3.10
Legal Incentives for Foreign Investors James E Hogan and Anthony Cioni, Salans
Introduction From the time of its declaration of sovereignty, Kazakhstan has successfully used foreign investment legislation to help create the commercial conditions and economic incentives necessary to encourage foreign investment in the Republic. The first law on foreign investment, enacted prior to national independence by the Kazakh SSR in 1990, created a vague framework governing the activity of foreign investors. The 1994 Law on Foreign Investments subsequently set out in detail the basic legal and economic foundations for attracting foreign investment to Kazakhstan. The 1994 law provided important guarantees and incentives to foreign investors, covering investment protection, stabilization and repatriation of income, and dispute resolution. The 1994 foreign investment law later applied in parallel with the 1997 Law on State Support for Direct Investments, which established an opportunity for qualifying investors within defined priority sectors of the economy to obtain limited tax and customs benefits by concluding an investment contract with a government body charged with overseeing investments. Unlike the protections established by the 1994 foreign investment law, the investment preferences offered under the 1997 law were discretionary, and they could be sought by both domestic and foreign investors. Because the priority sectors defined for the purpose of the 1997 law were very limited, as were the extent of the authorized tax and customs benefits, most foreign investors were either not entitled to benefits under this regime or were not interested in pursuing the lengthy negotiations necessary to obtain such benefits.
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Changes to the foreign investment legislation in 2003 In January 2003, the 1994 Law on Foreign Investments and the 1997 Law on State Support for Direct Investments were repealed, and the two laws were replaced by a new Law on Investments, which applied equally to domestic and foreign investors in Kazakhstan. The stated objective for repealing the 1994 law was to place domestic and foreign investors on an equal legal footing. However, the unfortunate result of these changes was to erode many of the basic protections that were deemed important to foreign investors in assessing the risks associated with their investments in Kazakhstan. The new Investment Law provided foreign investors with far fewer protections and incentives than did the 1994 law. The apparent rationale of the Kazakhstan Government was that the legal and commercial environment had developed sufficiently during the previous nine years, such that it was no longer necessary to provide special protections or incentives to attract foreign investors. However, many in the international investment community perceived the enactment of the new Investment Law as signalling a formal change in the official attitude of the Government of Kazakhstan towards foreign investment. Perhaps there is a belief among some state officials that, on the basis of the country’s mineral wealth alone, foreign companies will continue to invest in Kazakhstan, whether or not there is a favourable investment regime. Only time will tell whether this view is accurate.
Application of the new Investment Law Under the new Investment Law, qualifying investments subject to the protections provided by the law are defined as all types of property (other than goods intended for personal consumption), including leased property ‘invested by the investor into the charter capital of a legal entity or an increase of fixed assets used for entrepreneurial activities’. It is not entirely clear whether the law was intended to limit its application to cases involving the creation or an increase in the fixed assets of a Kazakhstan legal entity. However, most lawyers and jurists are of the view that the protections of law would apply to any increase of fixed assets used for entrepreneurial activities, whether they are made within a Kazakhstan legal entity or through a branch of a foreign legal entity. In addition to the foregoing uncertainty, the new Investment Law sets out a curious provision stating that the provisions of the law shall not apply to ‘relations which arise in carrying out investments and pertaining to the sphere of effectiveness of other legislative acts of the Republic of Kazakhstan […] except as provided by such legislative
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acts’. Regrettably, the new law does not clarify the meaning of the ‘sphere of effectiveness of other legislative acts’, though the implication seems to be that the new law will not apply to investment activity in areas where more specific legislation exists. This is vexing because, quite apart from industry-specific legislation, such as the Law on Petroleum, the Edict on the Subsoil and Subsoil Use, the Law on Communications, and the Law on Grain, most activities in the economy are subject to a multitude of specific laws, ranging from securities to tax to currency exchanges. The new Investment Law specifically provides that privileges granted on the basis of an investment contract signed under the previous 1997 Law on State Support for Direct Investments will remain valid until the expiration of such contract. The new Investment Law refers to continuation of only the privileges under an old contract, rather than the terms and conditions of the contract. This could be a drafting omission without any intended significance. All the same, in the current environment, in which foreign investors have witnessed an erosion in the stability of their longstanding contracts, there is a concern as to whether terms and conditions of investment contracts which do not relate to investment privileges will necessarily remain in effect.
Protections accorded investors under the new Investment Law The new Investment Law provides investors with certain specified protections, including: • full and unconditional protection of rights and interests under the law; • the right to compensation for illegal actions by state agencies and officials; • guarantee of the use of income received from business activities; • guarantee of the right to open national or foreign currency accounts; • guarantee of rights in the event of nationalization or state requisition; • free access to information on legal entities, real property transactions and licences issued, except information that constitutes a commercial secret. The scope of the above protections is considerably narrower than that enjoyed by foreign investors under the 1994 foreign investment law. For example, the 1994 law also included: • protection against adverse changes resulting from changes in Kazakhstan legislation for a period of 10 years or until the term of a long-term contract had ended;
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• specific protection against illegal inspections by state officials and the improper suspension or termination of a foreign investor’s business activity in Kazakhstan; • compensation for damages resulting from war or civil unrest; • dispute resolution by Kazakhstan courts or by international arbitration, including by specifically listed international arbitral institutions. A major point of concern in the investment community has been the repeal of protections relating to the stabilization of Kazakhstan laws. The constantly changing nature of Kazakhstan legislation can make it difficult for investors to accurately assess the extent of their obligations, which creates significant legal and business risks for foreign ventures operating in the Republic. To mitigate this risk, the 1994 law provided investors with a guaranteed period of legal stability, as described above. The new law does provide a guarantee of the stability of the terms of contracts between investors and state bodies of the Republic of Kazakhstan, except in the event of changes to legislation or treaties which alter the regime for the import, manufacture or sale of excised goods or changes to legislation concerning environmental protection, healthcare or morality. However, while the foregoing exceptions also existed under the 1994 law, the latter framed the stability protections in terms of a broad guarantee against adverse changes to legislation, which was not limited to the stability of contracts concluded with state bodies. As a consequence, the prior stabilization extended to contracts between foreign investors and private entities, generally to the benefit of both parties. The nationalization and requisition protections included in the new Investment Law have also cut back on the rights that were previously enjoyed by foreign investors. For example, the compensation payable for requisitions under the new law is stated to be the market value of the lost property, as determined by the Republic, and may only be challenged in Kazakhstan courts, not in arbitration proceedings. This is a departure from the prompt, adequate and effective compensation that was payable under the 1994 law.
Foreign investment treaties Foreign investment protections and incentives are also provided under bilateral treaties on investment protection in effect between the Republic of Kazakhstan and various foreign states. Such treaties address several main issues of concern to foreign investors, such as the promotion and protection of investments, national treatment, repatriation of income, nationalization and expropriation, and dispute resolution.
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Bilateral investment treaties serve to supplement Kazakhstan’s investment laws with respect to participating countries, and they are increasingly important, as they often include clearly stated guarantees and protections that might no longer be available to foreign investors under Kazakhstan laws of general application. The new Investment Law reiterates the constitutional provision that, to the extent that any provision of an international treaty ratified by the Republic of Kazakhstan contradicts the new Law, the provision of the international treaty shall govern.
Incentives for investment in priority sectors Among the stated objectives behind the new Investment Law are the creation of a favourable investment climate for the development of the economy; the stimulation of investment through the establishment of new, expanded or renovated production facilities using modern technologies; the creation of new jobs; and the protection of the environment. The investment preferences that qualifying investors may obtain under the new Investment Law are only available to those who carry on ‘priority types of activity’ in Kazakhstan. Under the law, the Government is responsible for determining a list of business sectors to be defined as types of priority activities. To this end, on 8 May 2003 the Government approved such a list, together with the text of a model form investment contract for use with qualifying investment projects. The Government also established maximum levels of investment to which preferences may apply in a given type of business activity, in accordance with the Investment Law. The approved list of priority types of activity sets out 32 general categories, each followed by numerous subcategories that provide details of these activities. The list includes business sectors such as agriculture, forestry, food processing, textiles, petroleum products, chemicals, metals and minerals, machine building, household and electrical appliances, medical equipment, automobiles, shipbuilding, water, gas and electricity production, construction, transportation and tourism, among others. In addition, initiatives in the fields of scientific research, healthcare, education and recreation are covered. To determine whether a potential investment project qualifies for incentives under the new law, it is necessary to closely examine the detailed descriptions provided in the listed subcategories published by the Government. In addition, Government officials have recently stressed the need for investment initiatives in the development of deep mineral deposits and value-added processing sectors using new technologies, as well as in the information technology field. Further opportunities may arise with the planned construction of a seaport in Aktau on the Caspian Sea.
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Investment contracts The model investment contract approved by the Government of the Republic on 8 May 2003 will form the basis for negotiations between the Investment Committee and each participating investor. The current form of model agreement is weighted in favour of the state, though investors may be able to obtain acceptable terms through negotiation, within the limits of the investment preferences authorized by the new Investment Law.
Investment preferences The new Investment Law stipulates three basic types of exemptions and preferences: (a) tax preferences; (b) exemption from customs duties; and (c) state grants in kind. The granting of investment preferences shall depend upon: • the inclusion of the contemplated investment activity in the list of priority types of activities; • the carrying out of investments in the fixed assets of a Kazakhstan legal entity for the purpose of creating new, or the expansion or renovation of existing, production facilities with the use of modern technologies; • the submission of the necessary documents, which confirm the financial, technical and organizational capabilities of the investor to realize the investment project. Accordingly, in addition to being restricted to the priority sectors defined by the Government, all forms of investment preferences are conditional upon investment into the fixed assets of a Kazakhstan legal entity. The new Investment Law provides that tax preferences may not be extended to an investor for a period greater than five years. Moreover, as indicated above, for each priority type of activity, maximum limits of investment and maximum time periods have been established, which shall apply to the granting of tax preferences. Any grant of tax preferences outside these established limits would require approval by a special decision of the Government. Investment tax preferences shall not apply to activities subject to a special tax regime or to activities under subsoil use contracts. In addition, tax preferences may not be extended in relation to fixed assets provided to a legal entity under a state grant in kind. Exemption from customs duties is limited to a one-year term, with possible extensions of up to five years from the moment of registration
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of the investment contract. In this regard, customs exemptions may only be granted with respect to equipment and attendant components to be imported by the investor in the absence of analogous equipment and components manufactured in Kazakhstan, or where analogous locally manufactured property is insufficient or unsuitable for the requirements of the project. State grants in kind may include land plots, buildings, construction, machinery and equipment, computing equipment, measuring and regulating devices and equipment, transport vehicles (except for light passenger automobiles) and industrial and commercial stock in trade. These grants are valued in accordance with market rates as determined by the laws of Kazakhstan and may not exceed 30 per cent of the volume of the investments into the fixed assets of the Kazakhstan legal entity to which the grant applies.
Dispute resolution Under the new Investment Law, investment disputes, which are defined as disputes ‘arising out of agreed obligations between investors and state bodies in connection with the investment activity of the investor’, may be resolved by negotiation, including with the use of experts, or in accordance with a dispute resolution procedure previously agreed by the parties. The law provides further that, in the event that the investment dispute cannot be resolved in this manner, ‘the resolution of disputes shall take place in accordance with international treaties and legal acts of the Republic of Kazakhstan in the courts of the Republic of Kazakhstan, as well as in international arbitrations determined by agreement of the parties’. Disputes not qualifying as investment disputes will be resolved in accordance with Kazakhstan law. These provisions have generated much concern in the foreign investment community, as the new law is perceived to represent an erosion of very clearly stated rights of foreign investors to dispute resolution by international arbitration under the 1994 foreign investment law. Given the vagueness of the new Investment Law on these points, foreign investors should take special care to include contractual provisions that ensure the application of international arbitration to any disputes. Even if such provisions were included in an investment contract, their validity might ultimately depend upon the provisions of future Kazakhstan legislation governing international commercial arbitration.
3.11
Competition Law and Anti-Monopoly Regulation James E Hogan and Yuliya Mitrofanskaya, Salans
Competition and anti-monopoly legislation in Kazakhstan is well developed and fairly broad in scope. In many respects it is similar to legislation developed elsewhere in the CIS. It regulates various activities that one would normally associate with monopolies and commercial practices that threaten free competition. At the same time, the legislation can often apply in unexpected ways to potential investment transactions and commercial activities taking place in the country. Kazakhstan anti-monopoly legislation consists primarily of the Law ‘On the Development of Competition and Restriction of Monopoly Activity’ of 19 January 2001 (‘Competition Law’) and the Law ‘On Natural Monopolies’ of 15 July 1998 (‘Natural Monopolies Law’), together with various regulations.
Control of natural monopolies One aspect of Kazakhstan anti-monopoly law is the control and regulation of so-called natural monopolies. A natural monopoly is a market situation in which the creation of competitive conditions for satisfying demand in a market for particular types of services, goods or works is impossible or economically impracticable due to the technical features of the production and the provision of the given type of services, goods or work. Those entities which, because of their nature or the sphere of activity in which they operate, cannot provide a given good or service in a competitive setting are subject to close state supervision and regulation under Kazakhstan anti-monopoly legislation.
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Such regulation of the activities of entities which operate within natural monopolies is not motivated by any perceived misconduct on their part. It is because of their unique position to influence a market that the state regulates natural monopolies, with a view to achieving a balance of interests between a natural monopoly and its customers. Measures intended to rein in natural monopolies form an important part of Kazakhstan consumer protection law. Typically, the recognized spheres of activity giving rise to natural monopolies are those dominated by entities such as utilities, which own or control major infrastructure connected with the provision of goods or services to their customers. The Law on Natural Monopolies lists the following as activities within the sphere of natural monopolies: • the transportation of petroleum and petroleum products via main pipelines; • the storage and transportation of gas or gas condensate by main or distributive pipelines, and the exploitation of the gas distribution network; • the transfer and distribution of electrical and thermal energy; • services for the main railroad system; • air navigation, port and airport services; • telecommunications services using the local wired network; • water and sewerage services; • public postal services. Entities engaged in activities that come within the foregoing list are included in a State Register of Subjects of Natural Monopolies, maintained by the primary state body charged with competition and antimonopoly regulation, the Agency on the Regulation of Natural Monopolies, Protection of Competition and Support to Small Business (the ‘Anti-Monopoly Agency’). The restrictions imposed upon entities whose main activity is within the sphere of natural monopolies are broad and severe, consisting primarily of state-imposed price controls and prohibitions on business practices and ownership of other businesses. Among other things, subjects of natural monopolies are prohibited from: • engaging in business activities or owning property outside of their main activity (other than certain activity that is ‘technically connected’ with the main activity); • owning shares or share interests in, or otherwise participating in the activity of, other commercial organizations (with minor exceptions);
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• setting prices in excess of the established tariffs; • imposing conditions for access to services or other actions leading to discrimination among consumers; • including in the prices for their goods or services any expenses not related to the provision of such goods and services. These entities are also required to provide financial and other information requested by the Anti-Monopoly Agency, inform the agency in advance of reductions in prices, obtain the agreement of the agency for investment projects to be taken into account in the setting of prices, and submit to annual audits. In addition, such entities must apply to the Anti-Monopoly Agency for its prior consent to certain transactions. These include any transfers or other transactions involving their fixed assets, the procurement other than for their own needs of goods transported or handled in their activity, the carrying out of any other activity which is technically connected with their main activity, the acquisition of shares in other commercial entities and their liquidation or reorganization. A very important exception to the scope of the Natural Monopolies Law is the regulation of entrepreneurs and legal entities conducting activity involving a natural monopoly but which is connected with the construction and exploitation of objects intended exclusively for their own needs. This situation often arises in connection with petroleum exploration and production companies that must construct pipelines and other facilities for the purpose of transporting their own production to port terminals or main export pipelines.
Consumer rights Consumers enjoy a number of rights guaranteed under the Natural Monopolies Law, including the right to pay the established tariff for goods and services provided by the affected entities and to refer suspected violations of the law to the Anti-Monopoly Agency or a competent court. To a limited extent, consumers are also regulated by the Natural Monopolies Law. They are required to pay, fully and in a timely fashion, the established prices charged by such entities. Moreover, consumers are prohibited from owning, independently or as part of a group, more than 25 per cent of the voting shares or interests in a subject of a natural monopoly that they use. Individuals or legal entities acquiring more than 10 per cent of the voting shares of a subject of a natural monopoly are required to notify the Anti-Monopoly Agency before doing so.
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Possible penalties Violations of the Natural Monopolies Law by an entity or members of its management may lead to the assessment of fines, penalties, and damages. These assessments may include a requirement that consumers be credited for overcharges. Additionally, profits made in violation of the law may be confiscated by decision of the Anti-Monopoly Agency, and a temporary compensatory tariff may be introduced.
Competition law A more extensive piece of Kazakhstan legislation on the subject of competition and anti-monopoly regulation, having a broader application to foreign investors, is the 2001 Competition Law. This legislation establishes a regulatory framework to foster the traditional aims of ensuring free competition and protecting the rights of consumers, as well as regulating activities which might affect competition within specific goods and services markets in Kazakhstan. In this respect, it prohibits abusive practices having the effect of restricting competition, particularly when there is concerted action by several competitors or collusion among multiple subjects in the same market.
Restriction of competition Not surprisingly, the law expressly forbids market subjects to take actions having the effect of restricting competition. They are prohibited from concluding any agreement or participating in agreed actions with competing market subjects (or potential competitors) having in the aggregate more than 35 per cent of the market for a specific good, if such agreement or agreed actions will or might result in limiting competition, or are directed towards results such as: • limiting or terminating the production or circulation of goods in order to create artificial shortages or artificially high prices; • dividing a market by territory, volume, range of goods or exclusive sellers or buyers; • limiting access to a market or eliminating certain sellers and buyers from a market; • refusing to conclude contracts with specific sellers or purchasers; • price fixing, through the establishment of uniform prices, discounts, premiums and additions; • increasing, lowering or maintaining prices at auctions and tenders.
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Agreements or agreed actions between non-competing entities, one of which has a predominant position in a goods market and the other of which is a supplier or purchaser, are also prohibited if their effect is to restrict competition and/or hurt the interests of individuals or legal entities. Violations of this kind may result in legal action by the AntiMonopoly Agency, with consequences ranging from fines to forced liquidation of the entity.
Predominant position in the market The principal focus of the Competition Law is the regulation of entities which occupy a predominant or monopoly position in a particular goods market. A predominant or monopoly position is stated to be an exclusive position of a subject in a goods market, having a negative influence on competition, hindering access to the goods market by other subjects or in any manner restricting the freedom of their economic activity. ‘Market subjects occupying a predominant position’ normally are considered those which have acquired more than a certain legislatively defined share of the market for particular goods or services. The defined levels of market share for various markets are to be established annually by the Anti-Monopoly Agency, and they must always be in excess of 35 per cent of the market for a particular good. However, the Anti-Monopoly Agency also has the discretion to consider entities that do not exceed the defined levels of market share to occupy a predominant position if it makes such a determination on the basis of: • the stability of the share of the subject on the relevant goods market; • the relative market shares belonging to competitors; • the possibility for new market subjects and competitors to enter such market. Moreover, any of several market subjects shall be determined to have a predominant position on a particular market where the aggregate market share of any two subjects is 50 per cent or higher or where the aggregate market share of any three subjects is 70 per cent or higher. All market subjects having a predominant position are included in a State Register of Market Subjects Occupying a Predominant (Monopoly) Position, maintained at the levels of the Republic, the oblast, the cities of Almaty and Astana and other cities. The consequence of this designation is an ongoing obligation to provide the Anti-Monopoly Agency with annual accounting results, reports on the sale and/or transfer of shares in the entity and certain information on monopolistic types of production, such as the volume of production, sales prices and the profitability of
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production. They must also inform the Anti-Monopoly Agency of any price increases and the reasons for such increases. Such entities are expressly prohibited from engaging in activities having the effect of restricting completion or abusing their predominant position, including: • establishment of monopolistic prices; • imposition of conditions, including requirements for discriminatory behaviour, which places the counter-party at an unequal position relative to other market subjects; • withdrawal of goods from the market for the purpose of creating shortages or increasing prices; • creation of barriers to the entry of other market subjects into the goods market; • violation of the legally established procedure for pricing; • unjustified contraction of the volume of production or termination of production on goods and services markets on which there is demand.
Transactions involving market subjects A sometimes overlooked aspect of Kazakhstan anti-monopoly legislation, which is a potential trap for the unwary foreign investor, is its potential application to seemingly ordinary transactions or activities which, because they fall within the broad parameters of the legislation, require the consent of or notification to the anti-monopoly body. Such transactions can require the preliminary consent of the Anti-Monopoly Agency, even where none of the parties to the transaction is an entity having a predominant or monopolistic position in the market. Failure to observe these requirements could lead to the assessment of fines and penalties or even to invalidation of the transaction. The Competition Law extends authority to the Anti-Monopoly Agency to exercise state control over the creation of market subjects having a share in the corresponding goods market of more than 35 per cent, as well as the reorganization or liquidation of market subjects having a predominant position. As a consequence, a merger of two entities which may result in the establishment of an entity having more than a 35 per cent market share, including through the acquisition of the assets of such an entity, would require the consent of the Anti-Monopoly Agency. The law also regulates the acquisition of shares or share interests in the capital of market subjects and the acquisition of assets in a market subject under other defined circumstances, which require the prior
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consent of the Anti-Monopoly Agency. In some cases, this requirement applies whether or not the market subject or the purchaser is an entity having either a predominant position or a market share in excess of the established limits. In essence, if the aggregate book value of the assets of the entities participating in the transaction (on the basis of a control group test) exceeds 100,000 monthly calculation indexes (in August 2003, this was slightly less than US $585,000), the prior consent of the Anti-Monopoly Agency must be obtained for the following: • the acquisition individually or as a group of voting shares or share interests in the charter capital of a market subject having a predominant position in the market, where the acquirer shall have rights of disposition over more than 20 per cent of such shares or share interests; • the acquisition by one market subject or group of market subjects of ownership or use rights over more than 10 per cent of the book value of the basic production and non-material assets of another market subject; • the acquisition individually or as a group of rights allowing for the determination of the conduct of the business activities of a market subject or the carrying out of the functions of its executive body. Accordingly, foreign and domestic investors must submit to the AntiMonopoly Agency a completed application, together with extensive supporting documents in the proper form, and receive the necessary consent of the Agency before completing any transaction falling within the foregoing categories. In the event that the total value of the assets of the participating entities in such transactions exceeds 50,000 monthly calculated indexes, and in certain other cases, the Anti-Monopoly Agency must be notified. Upon receipt of such notification, the Agency shall determine whether the transaction could result in the creation of a market subject having a predominant position or in restriction of competition.
Potential consequences for violation The possible consequences that may apply in the event of violations of the requirements set out in the Competition Law include an order from the Anti-Monopoly Agency to cease all activity in violation of the law, and potentially: • to pay compensation for damages; • to forfeit to the state budget monopolistic income earned as a result of the violation;
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• to restore the status quo that existed prior to the transaction; • to cancel or amend the underlying agreement; • to reorganize by de-merger or spin-off under the stipulated conditions. In the event of a violation of the anti-monopoly legislation the AntiMonopoly Agency may also impose fines in accordance with the applicable administrative procedure, and in cases involving price fixing or certain types of restriction of competition causing significant harm to individuals, legal entities or the state, criminal penalties may apply. Moreover, the Anti-Monopoly Agency may seek to invalidate in a court proceeding any transaction that it believes was concluded in violation of the anti-monopoly legislation.
Part Four Business Development: Operating an Enterprise
4.1
Property Rights and Land Ownership Issues Assistance, LLC Law Firm
Adopted on 20 June 2003, the new Land Code is a fourth-generation statute and is a key act of the ongoing land reform in Kazakhstan. Prior legislation, including the 2001 Law ‘On Land’ and the 1995 Edict of the President ‘On Land’, allowed the private ownership of certain types of land. However, agricultural land, which amounts to 90.9 million hectares or 33.4 per cent of all land in Kazakhstan, has been excluded from private ownership except for ownership by citizens of Kazakhstan for development of their personal residences, gardens and summer houses. The new Land Code has abolished this exclusion, and private ownership of agricultural land by Kazakhstani legal entities and individuals for farming and agricultural production is now permitted, thereby creating another opportunity for investments and development of the land market in Kazakhstan. In addition to this, the Land Code has clarified and streamlined the rights of foreign persons to own and lease land in Kazakhstan.
Land laws Land laws are based upon the Constitution, and comprise the new Land Code and other acts adopted in its implementation. In addition to this, the many issues of ownership, use, and possession of land and real estate are covered by the Civil Code and laws adopted in its implementation. Laws and regulations adopted prior to the effective date of the Land Code continue to apply to the extent that they do not contradict to the Land Code. Treaties ratified by the Republic may also contain the applicable rules, which have the prevailing power over the rules contained in the Land Code in the event of a conflict. The Land Code provides only a general description of the lands designated for industrial, transportation, communications, defence
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and other non-agricultural purposes, referring for details regulating the use of such lands to the relevant special legislation, for example the laws ‘On Transportation at the Republic of Kazakhstan’, ‘On Railway Transportation’, and ‘On Communications’. Along with the recently adopted law ‘On Investments’, the Land Code governs the issues of allocation of land parcels and land use rights as in-kind grants to investors carrying out investments into the priority sector of economy. The Land Code does not address the issues of use and protection of subsoil, water, air, flora, fauna, and other natural resources having significant ecological, scientific and cultural value, nor does it cover the national parks. These issues are governed by special legislation, for example the laws ‘On Subsoil and Use of Subsoil’, ‘On Specially Protected Natural Territories’, the Water Code and the Forest Code.
Categories of land There are seven categories of land in Kazakhstan depending upon its use: • agricultural land; • land in cities, towns and villages; • land to be used for industrial, transportation, communications, defence and other non-agricultural purposes; • land of protected natural territories, and land to be used for health improvement, recreation, historic and cultural purposes; • forestry land; • water fund land; • reserve land (ie all lands that are owned by the state and are not allocated for use or private ownership). The above categories determine the legal status of land. Once designated, the land and property located thereon carry restrictions on the use and type of constructions that can be built. Any acquisition and alienation of a land parcel are subject to land designation and zoning requirements. Land designation and zoning is performed by a local Land Resource Management Agency under the administration of a local executive authority, Akim, and requires approval of a local representative authority, Maslikhat. It is important, therefore, to verify the designation of a land parcel before carrying out any transactions. Certain categories of land are exempt from land use transactions. They include land for public use, land designated for defence needs,
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forestry and water fund land, protected natural territories, and land used for health improvement, recreation, historic and cultural purposes.
Land rights The Land Code lists the following categories of rights in respect of a land parcel: • ownership; • permanent use; • short-term free use; • lease (ie use of land for a valuable consideration). Rights to a land parcel generally extend to surface soil, landlocked water basins and plantation located within the boundaries of the parcel. Ownership or lease of a land parcel per se does not confer the rights to develop a mineral resources deposit or a hydrocarbons field situated beneath that parcel. Those rights may be conferred by the state only in accordance with the laws governing subsoil use operations, for example laws ‘On Subsoil and Use of Subsoil’ and ‘On Petroleum’. Rights of ownership, lease or use of a land parcel for more than one year are effective upon state registration with the agencies of the Ministry of Justice’s Real Estate Registrar. Land rights are certified by a relevant act such as an Act of Ownership or an Act of Permanent Land Use, or an Act of Temporary Land Use issued by the local Land Resource Management Agencies on the basis of underlying legal documents such as a resolution of Akim, or a contract of sale (exchange, gift or other transaction for alienation of a land parcel) or a court judgment. Transactions with a land parcel in absence of the documents certifying the land rights to the parcel are prohibited. Unless the documents certifying the land rights expressly provide for indivisibility of a land parcel, it is deemed to be dividable, and a subdivided part thereof can be subject to a separate transaction.
Ownership of land In terms of ownership, the Land Code echoes Article 6(3) of the Constitution providing for the state ownership of land as a natural resource. Notwithstanding this, land parcels are allowed for private ownership, except for the following: • land occupied for the needs of defence and state security; • protected natural territories, and land used for health improvement, recreation, historic and cultural purposes;
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• forestry lands other than land parcels of private persons covered with artificial woods created at the expense of such private persons; • water fund land other than land parcels occupied by privatized irrigation and drainage systems; • land occupied by railroads and automobile roads of public use; • land in cities, towns and villages designated as territories of public use; • land designated for the state reserve. A land parcel owner may generally conduct any transactions with its parcel, provided, however, that such transactions are not expressly prohibited by the laws and do not change the designation of the land parcel. Among other things, a land parcel owner may sell, rent, exchange, pledge, give it as a gift, contribute into a charter capital of a legal entity, etc. However, owners of agricultural land parcels who have not paid in full the purchase price for privatization of their parcels will be restricted in transactions with the parcels until they make the full payment. To prevent a single owner obtaining mass accumulation of land within an administrative territory, the Government is to set upper limits for private ownership of agricultural land.
Use of land Land that cannot be owned privately may be allocated by the state a particular use, which can be temporary or permanent condition. Depending on the category of land, the right of land use may be provided either free or for a valuable consideration. Allocation of land for activities that require a licence is conditioned upon receipt of the relevant licence. Subsoil users who have a contract for exploration and/or production operations are entitled to allocation of the relevant land parcel on the basis of their contract. Permanent land use may be granted to state-owned legal entities of the Republic, which have the right of possession and management in respect of buildings and premises in a condominium, or are engaged in agricultural and forestry production, or are using protected natural territories. Permanent land use rights of citizens and legal entities of the Republic, who have acquired such rights for a valuable consideration prior to the effective date of the Land Code, in respect of a land parcel designated for agricultural purposes, will be converted into the ownership rights of such persons without an additional payment. Short-term free use of land is generally granted to citizens and legal entities of the Republic for up to five years. In certain cases, for example with resoiling of land, the free use may be granted for a longer
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period. Alienation of a land parcel granted for the short-term free use is prohibited. Lease of land, ie temporary use for a valuable consideration, may be authorized for a term ranging between 5 and 49 years. Both Kazakhstani and foreign individuals and legal entities, and foreign organizations, are allowed to lease a land parcel. However, citizens and privately owned legal entities of the Republic may lease the land for farming and agricultural production for up to 49 years, while foreign citizens and stateless individuals may lease it for the maximum term of 10 years. The Land Code is silent in respect of the maximum term for which the land for agricultural production may be leased by a foreign legal entity. A lessee, which has duly performed its obligations under the original lease, has a preferential right to renew the lease on expiry.A lessee, which has fully paid for its lease to the state, may sublease, transfer or assign the land use rights to another person without changing the designation of the land parcel. This right, however, does not apply to land users engaged in farming and agricultural production, and those among them who rented their parcels of agricultural lands prior to the adoption of the Land Code have to terminate the rent by 1 January 2005. Further subleasing of the land parcel by a sub-lessee is prohibited.
Rights of foreign persons to land Subject to a few limitations set forth by the Land Code, foreign companies and individuals can exercise the same rights as local entities and individuals. The term ‘Foreign Land Users’ covers nationals of foreign countries, stateless individuals, foreign legal entities, foreign countries and international associations and organizations. Under the Land Code, Foreign Land Users cannot own parcels of agricultural and forestry land, or have the right of permanent use of land, or lease parcels of agricultural land within the three-kilometre protection zone adjacent to the state border of the Republic of Kazakhstan. Private foreign legal entities and individuals may own parcels of land designated for construction and operation of buildings, whether industrial or not. Legal entities established and registered under the laws of Kazakhstan, including those that are fully or partially owned by foreign persons, are deemed to be ‘National Land Users’, and may own parcels of agricultural land, forestry land, and land designated for construction and operation of buildings, whether industrial or not. Unlike in the Russian Federation, where legal entities, wherein foreign persons control over 50 per cent of the equity, cannot own agricultural land, the Land Code permits such ownership in Kazakhstan by foreign-owned and/or foreign controlled legal entities of the Republic.
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Buildings Ownership of a building implies the right of the building owner to the land parcel occupied by the building. Assignment of title to the building brings simultaneous assignment of the land rights. Alienation of a building without the land parcel occupied by the building, and vice versa, is prohibited. By the same token, renting of a building means renting of the land parcel occupied by the building. In event that a land user is statutorily prohibited from alienation of a land parcel, he or she is generally banned from alienation of the building situated on the land parcel.
Land for construction An applicant seeking a land parcel for construction has to file a petition with a local Akim indicating the purpose for which the parcel is sought, its desired dimensions and location, as well as possession by the applicant of another land parcel. In a case where the parcel is sought for development of a mineral resources deposit or a hydrocarbons field, the applicant would have to provide a copy of its exploration and/or production contract. Application is to be considered within three months of its filing. Thereafter, the Akim would instruct a local Land Resource Management Agency to choose an appropriate land parcel, and would form a commission comprising representatives of the local Maslikhat, the Land Resource Management Agency, and the architecture to approve the chosen parcel. Approval follows by development of a land tenure project, which is to specify, inter alia, the size of the parcel, its location, boundaries, divisibility, existing easements and other encumbrances, and current owners and users of the parcel and calculation of damages they would sustain as a result of the parcel taking. The applicant is responsible for obtaining consent of such owners and users and is required to enter a contract with each owner and user providing for the terms and deadlines for vacating the land parcel, and is responsible for obtaining all relevant administrative consents and approvals as may be necessary. For example, a person seeking a land parcel to build an oil transportation infrastructure facility would be required to get an approval of the authorized state agency in the area of oil transportation. Allocation of the land parcel would be evidenced by the Akim’s resolution based upon the data contained in the land tenure project.
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Mortgage A security interest can be created in a land parcel that is privately owned or leased for at least five years. Mortgage of a land parcel is subject to general rules applicable to mortgage of real estate, provided, however, that the mortgage agreement cannot restrict the debtor’s rights to use the land parcel, or provide for the transfer of the land parcel or the rights of use in respect of such parcel to the creditor or third parties. Mortgage of a land parcel would cause simultaneous mortgage of the building situated on the parcel, and vice versa. A mortgage is not valid in the absence of registration with a local agency of the Ministry of Justice’s Real Estate Registrar. On default of the debtor, the mortgagee can realize on the mortgaged real estate, including the mortgaged land parcel, by having a foreclosure sale, either judicial or nonjudicial, under which the mortgaged real estate is sold to satisfy the debt. Both debtor and mortgagee are permitted to bid at the sale.
Easements An easement is the right of a person or the state to use a land parcel of another person for a special purpose such as, for example, to lay pipe or access a road. Private easement is created on the basis of a contract with a landowner/user. An easement holder is required to compensate the landowner/user all damages associated with the easement. Private easements are subject to registration with a local agency of the Ministry of Justice’s Real Estate Registrar. Public easements are created by an act of a local Akim to protect interests of the state and local population. In cases where creation of a public easement makes it impossible for a land owner/user to continue the use of the land parcel, the owner/user may require the act of taking of the parcel by the state with payment of its market value and compensation of damages, or allocation of another parcel of equal quality. Among other things, a public easement may be created for the purpose of geophysical and geological prospecting work on the basis of a permit for the land use issued by a local Akim. Duration of the easement and obligations for compensation of damages and restoration of land to the condition satisfactory for the use of the land parcel according to its designation are to be determined in a contract between a person conducting the geophysical and geological prospecting works and an owner/user of the land parcel that is subject to the easement right. Restoration must be performed, at latest, within one month from the completion of works.
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Failure to use an easement for three years or longer would cause termination of the easement. Other grounds of termination include waiver of the easement right by a person to whom it has been granted, expiry of the fixed duration of the easement, a court rendering a judgment to terminate, and termination of the easement granted for an indefinite term by a land owner/user of the land parcel affected by the easement after one-month advance notice of termination.
Taking Taking by the state of a privately owned or leased land parcel is allowed in the following cases only: • attachment of the land parcel owner’s or lessee’s assets, which include the land parcel or the right of use thereof, to satisfy the debt of the parcel owner or lessee; • taking of the land parcel for state needs (including discovery of a mineral resources deposit or a hydrocarbons field underneath of the land parcel; construction of roads, power transmission lines and pipelines; and general plans of construction in cities and towns) after one year advance written notice of the expected taking; and with • payment to the owner or lessee of the market value of the land parcel or rights thereto, and market value of the building situated in such parcel, and all damages sustained or to be sustained by the land parcel owner or lessee due to the taking, including damages that will be sustained due to premature termination of obligations to third parties; or • upon agreement with the owner or lessee, allocation of a substitute land parcel; • a court approving the taking due to failure of an owner or lessee of the land parcel, designated for construction or agricultural production, to use the parcel in accordance with its designation for one year (unless a longer term is established by the laws), provided that the land owner or lessee has been given at least one-year’s written notice stating the requirement to use the land parcel in accordance with its designation; • a court approving the taking due to material violation by the land parcel owner or lessee of the rules on rational use of land continued after the land owner or lessee has been subjected to administrative penalties for the same misconduct; • taking of a radioactively contaminated land parcel with provision to the owner or lessee of a substitute land parcel of equal quality;
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• confiscation of the land parcel owner or lessee’s assets as sanction for crime committed by such land parcel owner or lessee; • temporary taking for public needs in emergency situations with compensation of damages sustained by a land parcel owner or lessee; and • termination or expiration of the lease term.
Dispute resolution Disputes arising out of issues relating to land are subject to settlement in judicial proceedings. Under the Code of Civil Procedure, the Kazakhstani courts have the exclusive jurisdiction over all disputes associated with rights to real property located in Kazakhstan.
Land payments Land parcels that are privately owned, or granted by the state for permanent use or short-term free use, are subject to land tax pursuant to the Tax Code. Tax rates vary according to the category and size of a land parcel. Tax rates for parcels of agricultural land also vary according to the quality of soil. Land parcels provided by the state for the lease are subject to lease payments pursuant to the Tax Code or treaties ratified by the Republic of Kazakhstan. Allocation of land parcels by the state into private ownership is subject to payment pursuant to the resolution of an Akim. Payment is to be calculated on the basis of a Kadastre Value, which is to be determined by a local Land Resource Management Agency by multiplying a land parcel Base Payment Rate (the BPR) by an adjustment coefficient. BPRs are to be set forth by the Government at the rates not lower than the land tax. Adjustment coefficient is to be set forth by a local Maslikhat and shall not exceed double the amount of the applicable BPR.
4.2
Dispute Resolution* Asel Tokusheva and Dinara Jarmukhanova, McGuireWoods Kazakhstan LLP *Note: This chapter discusses only the procedure for resolution of commercial disputes between legal entities. It does not touch upon criminal matters or disputes between persons.
Kazakhstan is booming, and the number of commercial disputes is growing as commercial activity accelerates. As Kazakhstan makes the transition from being a communist country to a market economy, its judicial system, although quite developed, has been shown to have certain shortcomings, although its codes and laws are quite comprehensive. Kazakhstan’s courts have general jurisdiction over any dispute unless the parties have explicitly agreed to refer it to arbitration. Dispute resolution in Kazakhstan is governed by the Code of Civil Procedure adopted in 1999. The Supreme Court only considers commercial disputes as a final appellate court, unless otherwise prescribed by a treaty.
Resolution in the first instance Commercial disputes may be heard in the first instance by: Regional Courts and the City Courts of Almaty and Astana, the former and the current capitals of Kazakhstan (the ‘Regional Courts’); and Special Inter-district Economic Courts. Their respective jurisdictions depend on whether a foreign entity is a party to the dispute. Regional Courts adjudicate commercial disputes where one party is an international or foreign organization,1 and Special Inter-district Economic Courts hear all other cases where parties are legal entities. The prevalent way to adjudge a commercial dispute is by way of lawsuit proceedings. When there is no dispute between the parties, 1
Foreign organizations means legal entities established pursuant to the laws of a foreign country. Legal entities established in Kazakhstan that are wholly owned by a foreign investor are not deemed to be foreign organizations.
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however, there are also short-form proceedings, namely order proceedings and special proceedings.
Lawsuit proceedings All cases are considered by a judge; there is no trial by jury in Kazakhstan. Parties to the proceeding may challenge the impartiality of a judge if, for example, he or she is related to any participant in the case or their representative, or has a personal or indirect interest in the outcome of the case. When there are unsettled questions of law, a court often asks a prosecutor to participate in the proceeding. It is the duty of the General Prosecutor’s Office to expose any violations of law, and judges often want to know the opinion of a prosecutor before they render their decision. A court is not bound by the opinion of a prosecutor, however, nor does the opinion of the prosecutor have any effect on the rights and obligations of the parties to the dispute. Filing a statement of claim In order to file a statement of a claim, a plaintiff must pay a state duty in the amount set by the Tax Code of Kazakhstan. The amount varies depending on the type of proceeding and the category of case. For example, when a plaintiff files a claim to demand a debt due to nonperformance of contractual obligations, the amount of state duty shall be 3 per cent of the amount of claim. A plaintiff has to attach to the statement of claim the original documents confirming payment of the state duty. Practice shows that courts demand such documents to be certified with a bank seal and a signature of an accountant. Otherwise the court may return the statement of claim, or simply put it on the shelf and ignore it. A plaintiff must also attach a document confirming authority of the person filing and signing the claim on behalf of the plaintiff, eg a power of attorney, or a copy of corporate documents authorizing that person to act on behalf of the company. Acceptance of a claim filed After a claim is filed, the judge reviews it and decides whether it should be considered. From a practical standpoint, it is advisable for a plaintiff to obtain a document that confirms the claim has been filed with the court, specifying the date and the incoming registration number with the chancellery office of the court. That should allow a plaintiff to prevent delay. Unfortunately, judges often fail to comply with the deadlines set forth by law for consideration and disposition of a case. To ensure that a judge accepts the claim for trial, the following should be considered. A plaintiff must comply with the form and
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content requirements for a statement of claim and must attach all the necessary supporting documents. A substantial number of claims are ‘left without motion’, or shelved, because of failure to comply with these requirements, in particular because a plaintiff fails to attach the original document confirming payment of the state duty or the documents confirming the factual circumstances of the claim. A dispute between the same parties, with same subject matter and based on same grounds, that has been already resolved by a court, will be precluded from adjudication. Likewise, if a settlement agreement had been reached in the same dispute and approved by a court, the court shall refuse to accept the claim for consideration. The statement of claim must be signed by an authorized person and filed with the court that has jurisdiction over the dispute. The plaintiff must comply with whatever pre-trial settlement procedure, if any, is required for the type of claim filed. Finally, a court will return the claim without consideration if its consideration is precluded by lis pendens, ie the same dispute between the same parties is being considered by another court. A plaintiff may appeal the ruling of the court that denies acceptance of a claim or returns it without consideration if he or she believes that the ruling of the court is groundless or unlawful. Trial If the judge decides to accept a claim for consideration, he shall arrange for delivery of a copy of the claim to the defendant and start preparing the case for trial. The maximum period the law allows for such preparation is seven days. The judge has a right to summon the parties and question them before the actual trial. The actual trial should not last longer than two months. The court may consider the case without participation of the parties on the basis of their statements, unless the court finds it necessary to hear the parties’ reasoning at a trial. The judge also may pronounce a default judgment if a defendant does not have a good reason for failing to appear. If there is to be an actual trial, the secretary of the court records the testimony and argument in the transcript of the hearing. The law does not limit the number of hearings. When a case is complex, a judge usually conducts approximately a dozen hearings until the position of the parties is clear, all pertinent information is provided and all documents have been submitted. If the defendant does not admit a claim, it shall submit a reasoned objection in writing and support it with pertinent evidences. A defendant may also file a counter claim in the same manner as the initial claim. Each party bears the burden of proving the facts on which it relies to support its contentions. In practice, judges usually disregard testi-
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monial evidence and accept only original documents or their notarized copies. An exception to this practice is when the other party acknowledges the trustworthiness of a copy that has not been notarized. If a party is unable to produce such evidence, it may ask the court to obtain it from the other party or from a third person, but a party has to indicate in its motion why it cannot obtain the evidence itself and why the other party may have it. Witnesses, experts and specialists may be engaged in the trial, either on the initiative of the court or on the motion of a party. The court may at any time prior to pronouncing judgment take interim or enjoining measures to secure a claim, namely attach bank accounts or other property, prohibit certain actions, provided one of the parties has made a well-founded case. The parties may conclude a settlement agreement any time before the court renders its decision, and in that case the court shall dismiss the case. When the judge decides the case, that decision must specify the facts found by the court and the grounds for the decision. The decision comes into force 15 days after it is rendered unless a party or a participant of the case files an appeal before the expiration of this 15-day period. Order proceedings Order proceedings are short-form proceedings designed for creditors seeking (i) to enforce their monetary claims against debtors or (ii) to recover property from a debtor in satisfaction of undisputed debts. The advantages of order proceedings are the shorter time allowed for court consideration of the claim, the smaller state duty and the fact that the parties do not need to attend the hearings. To apply for order proceedings, however, either the debt must be evidenced with a notarized document or the debtor must fully recognize his obligation to repay the debt or to return the property. If the judge finds that the claims of the creditor are lawful and wellfounded, he will order the debtor to satisfy the claims of the creditor within three days following receipt of the application by the court. The court shall then immediately forward copies of the order to both parties. Thereafter the debtor may object to the claim of creditor within ten days of his receipt of the order. If the debtor objects, the court cancels the order and the claim may be pursued in a lawsuit. If the debtor does not object, the court order can be implemented. Special proceedings Special proceedings are another form of short proceedings that are designed to obtain official recognition of various undisputed facts. Among other things, special proceedings are employed to establish a fact of legal significance or on bankruptcy of legal entities and indi-
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vidual entrepreneurs. Such proceedings are governed by the same rules as lawsuits.
Revision of court decisions Appeals A decision of the court that has not yet come into effect, ie within 15 days of its rendition, may be appealed by both parties to the case, and also by non-party participants of the hearings and by third parties whose rights were affected by the decision. A prosecutor who participated in a case may also appeal the decision if he or she finds that it was not lawful or fair. There is an exception to the time limit for filing an appeal when the appellant has a good reason for filing late. In that case, the appellant must file for an extension of the deadline for appeal. A decision of a Special Inter-district Economic Court may be appealed to a Civil Law Panel of a Regional Court, depending on the venue. A decision of a Regional Court may then be appealed to the Civil Law Panel of the Supreme Court of Kazakhstan. An appeal should be filed with the same court that rendered the decision in the first instance. The amount of the state duty for filing an appeal varies depending on whether it is a property or a non-property claim, and on the amount of the claim. If an appeal is filed in the due order, then the court that heard the case in the first instance sends copies of this appeal to the participants of the case, and sends the appeal itself and the case papers to an appeal court. The first instance court shall also notify the persons participating in the case concerning the time and place of a hearing so that these persons and the court of appeal have time to review the case. The participants of the case (who did not file the appeal) or third parties whose rights were affected by the decision in the first instance have a right to file a counter appeal. Prior to consideration of the appeal the parties shall have a right to conclude a settlement agreement. If this agreement is approved, the court of appeal shall vacate the decision of the first instance court and terminate proceedings in the case. The appellate instance court must consider the appeal not later than one month following its receipt. An appeal is considered by a panel of three judges. All parties attend the hearings, and the prosecutor always participates in the appeal proceedings. If a person fails to appear without a good reason, the court may consider the appeal without him. Judges question the participating persons, hear the opinion of the prosecutor and render a wellreasoned decision. The appeal court may: • leave the decision unchanged; • alter the decision of the first instance court;
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• reverse the decision of the first instance court and render a new decision; • reverse the decision of the first instance court and send the case back to the first instance court for new adjudication; or • reverse the decision in full or in part and discontinue the adjudication of the case or leave the claim without consideration. Supervisory revision Supervisory revision is designed to revise judicial decisions and rulings that have already come into force. It is designed to examine and control the lawfulness of judicial acts, and only the court’s compliance with the rules of substantive and procedural law may be examined. The same persons who are entitled to file an appeal are also entitled to file a supervisory complaint. A prosecutor seeking such a review of a court decision files what is called a ‘protest’. A supervisory complaint may be filed directly with the court conducting such review within one year after the judicial act in question took effect. The decisions of district courts and the appellate rulings of the Civil Law Panels of the Regional Courts are reviewed by the Supervisory Panel of the relevant Regional Court. The decisions and rulings of the first instance by Regional Courts and Rulings of the Supervisory Panels of Regional Courts may be reviewed by the Civil Law Panel of the Supreme Court. Finally, the Supervisory Panel of the Supreme Court may review the decisions and rulings of the Civil Law Panel in the first instance (except for commercial disputes that are not adjudged by the Supreme Court in the first instance) and the appellate and supervisory rulings of the Civil Law Panel of the Supreme Court. In exceptional circumstances, the Supervisory Panel of the Supreme Court may also review its own rulings when the General Prosecutor files a protest. Supervisory revisions or protests are considered by three judges with participation of the same persons who would be entitled to participate in the appellate proceedings, including the mandatory participation of a prosecutor. The decision of a supervisory court takes effect from the moment of its rendition. Discovery of new facts Judicial acts may also be revised on the merits when new facts have been discovered. Such new facts, however, can only include important circumstances of the case that existed at the time of its consideration but that were not and could not have been known to the applicant or to the court. An application for review on the basis of new facts may be filed by any participant in the case or by the prosecutor within three months
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from discovery of such new facts. The review is conducted by the same court that rendered the original decision. The court may then reverse its original decision or ruling or deny the review.
Enforcement proceedings Decisions and rulings of the court are enforced on the basis of acts of execution, or court orders, issued by the first instance court within three days after the decision comes into force. The court delivers the act of execution to an executor or, upon the written request of executor, the court sends it to the appropriate Legal Administration Committee. Executors initiate enforcement proceeding and take whatever measures are necessary to secure enforcement. A debtor may submit an application for voluntary enforcement within five days. If the debtor fails to fulfil the decision within this term on a voluntary basis, however, a court marshal is required to take measures to enforce it, eg attach the property or cash or to affix a seal on the property of the debtor.
4.3
The Status of Commercial Arbitration in Kazakhstan Richard Remias, Bracewell & Patterson LLP
Overview This summary briefly outlines the regulatory framework for commercial arbitration in the Republic of Kazakhstan. The summary is divided into two primary sections: domestic commercial arbitration and international arbitration. ‘Domestic commercial arbitration’ refers to arbitration between private parties that are located within the territory of the Republic and that have selected a Kazakhstani arbitration institute to resolve their commercial dispute. ‘International arbitration’ refers to an arbitral process carried out between the parties to a dispute in an internationally recognized arbitration institute established outside the territory of the Republic. ‘International arbitration’ takes place between two private parties or between a party and the Republic (ie an investment dispute).
Domestic commercial arbitration Judicial proceedings vs. commercial arbitration In most developed countries, arbitration provides a number of advantages to those seeking to settle their commercial disputes. Efficiency seems to be the cornerstone of the well-established acceptance of arbitration as a viable form of dispute resolution. Arbitration allows parties to avoid often time-consuming and costly litigation in local state courts. Despite its widely accepted premise, it cannot be said that the foregoing reasoning is wholly applicable to the utility of arbitration in the Republic. For instance, the fast-paced nature of commercial arbitration is not a primary motivator for its use as procedural rules force
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judges of the Republic to dispose of cases within a prescribed timeline of two months (subject to various stays and extensions).1 Additionally, litigation of a local dispute is not as costly in the Republic of Kazakhstan as in other countries2 due to the fact that the costs of local legal representation and the consequent case preparation are typically less expensive than in other jurisdictions. Nonetheless, the role and validity of domestic arbitration courts within the Republic has been debated for many years. Proponents of domestic arbitration courts believe that arbitration will provide a positive alternative to local state courts, which are widely viewed with scepticism. Local state courts in the Republic are widely perceived as partial and corrupt. They are also criticized for lacking expertise or competence in technical commercial matters. Proponents believe that arbitration, by means of the selection of arbitrators, may provide more qualified – more experienced – referees. Lastly, proponents also contend that arbitration can provide a neutral forum void of corrupt influences. The result of these factors has left commercial arbitration in the Republic underdeveloped. While the purpose of arbitration and certain benefits that it yields are recognized, it is difficult to generate commercial acceptance of arbitration or interest in its legislative development without overriding practical motivations such as efficiency or costs.
Enforcement of awards rendered in the Republic Although local arbitration institutes do exist in the Republic,3 their power is minimized due to resolutions made by the Constitutional Council of the Republic of Kazakhstan (the ‘Constitutional Council’). The debate over arbitration courts and their powers of adjudication within the Republic of Kazakhstan came to the Constitutional Council in early 2002. The Constitutional Council addressed the interpretation of articles 13.2 and 75.1 of the Constitution of the Republic of Kazakhstan. These articles of the Constitution set forth the individual’s rights in accessing the courts and, conversely, the courts’ right to adjudicate civil matters. The question was raised as to whether 1
Article 174 of the Civil Procedural Code of the Republic of Kazakhstan. The only exception to this statement could be the amount plaintiffs must pay to file their civil claims. The ‘state duty’ or filing fee for civil cases is generally 3 per cent of the sought amount. This amount is non-refundable. The 3 per cent filing fee is often criticized as being excessive and unfair. Proponents of the 3 per cent filing fee, however, argue that this practice deters the filing of frivolous lawsuits, thus clearing the dockets for worthy disputes. 3 Despite the temporary lack of guiding legislation, arbitral institutes have been formed on the territory of the Republic of Kazakhstan, such as the International Arbitration Court of Kazakhstan (known as ‘IAC’) and the International Arbitration Court of the Juridical Center (known as ‘IUS’). 2
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these constitutional rights are potentially infringed by the existence of an arbitration clause that can arguably preempt one’s rights to apply to the local state courts. Upon review, the Constitutional Council held that, despite the existence of a bona fide arbitration clause between the parties, arbitration was not the proper means for adjudicating a civil dispute.4 Furthermore, the dispute could be submitted to the local state courts even though this would be contrary to the arbitration clause agreed to in the underlying contract between the parties. Based on this Resolution, a local state court could soundly refuse to recognize and enforce any arbitral award. Due to various ambiguities in the foregoing Resolution, the Constitutional Council was immediately requested to restate their holding.5 Approximately two months after rendering the prior Resolution, the Constitutional Council amended the ruling and narrowed its previous holding by limiting its application to domestic arbitration courts.6 The new Resolution also cited the lack of legislative guidance on the issue in the current laws of the Republic. Presumably, the Constitutional Council was passing the task to the lawmakers for their determination – which is still pending. Thereafter, the General Prosecutor of the Republic of Kazakhstan seized the moment and took formal measures to protest pre-existing resolutions of the Constitutional Council that upheld the validity of domestic arbitration courts.7 Since that time, a large-scale legislative initiative has come about to address this controversy. As is explained below, a current draft law has been promulgated and seeks to establish local arbitration courts as a valid and conclusive means to adjudicate disputes. In the meantime and until such time when new legislation is enacted, domestic arbitration courts are not a viable option for doing business in the Republic as their decisions and awards can be subject to subsequent review by local state courts or rendered unenforceable altogether. 4
Resolution, On the Official Interpretation of Article 13 (2) and Article 75 (1) of the Constitution of the Republic of Kazakhstan (15 February 2002). 5 Requests were made by the Supreme Court of the Republic of Kazakhstan and by the General Prosecutor’s Office. 6 Resolution no. ½, On Petitions of the Supreme Court of the Republic of Kazakhstan and the Prosecutor General of the Republic of Kazakhstan With Respect to the Resolution of the Constitutional Council of the Republic of Kazakhstan On the Official Interpretation of Article 13 (2) and Article 75 (1) of the Constitution of the Republic of Kazakhstan dated 15 February 2002 (12 April 2002). 7 After the resolutions of February and April 2002, the General Prosecutor sought to overturn earlier resolutions of the Constitutional Council that lent support to the validity of arbitral decisions in the Republic. The Constitutional Council seemingly deferred this issue to the legislature for resolution in a Resolution dated 28 June 2002.
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International arbitration Applicability of international arbitral forums The laws of the Republic of Kazakhstan and the international treaties to which the Republic of Kazakhstan is a signatory clearly envisage the right of parties to include arbitration clauses in their respective contracts and to proceed with enforcement once a decision is rendered by the appropriate tribunal. The Constitution of the Republic of Kazakhstan unequivocally establishes the supremacy of international treaties over local laws.8 The Republic is signatory to nine international treaties and conventions. The following are the most notable: the New York Convention of 19589; the ICSID Convention of 196510; the European Convention11; the Kiev Treaty12; Convention on Legal Assistance and Legal Relations Regarding Civil, Domestic and Criminal Cases13; and the Agreement on order of Executing Arbitration and Economic Court Rulings on the Territories of the Participant States of the Commonwealth.14 The Republic is also party to approximately 31 bilateral investment treaties that stipulate the use of arbitration in investment related disputes between nationals of the foreign state and the Government of the Republic.
8
Article 4 (3) of the Constitution currently states, ‘[i]nternational treaties ratified by the Republic shall have priority over its laws and be directly implemented except in cases when the application of an international treaty shall require the promulgation of a law’. 9 The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, ratified by Presidential Edict no. 2485, ‘On the Joining the Republic of Kazakhstan to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958’, 4 October 1995. 10 The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (signed 18 March 1965 in Washington, DC). 11 The European Convention on International Commercial Arbitration of 1961, ratified by Presidential Edict no. 2484, ‘On Joining of the Republic of Kazakhstan to the European Convention, On International Commercial Arbitration of 1961, 4 October 1995. 12 The Treaty on Procedures for Resolution of the Disputes Connected to Carrying Out Business Activity (signed 20 March 1992), ratified by Decree of the Supreme Soviet of the Republic of Kazakhstan, ‘On Ratification of the Treaty on Procedures for Resolution of the Disputes Connected to Carrying Out Business Activity’, 2 July 1992. 13 The Convention on Legal Assistance and Legal Relations regarding Civil, Domestic and Criminal Cases (signed 22 January 1993, in Minsk, Belarus). 14 The Treaty on the Procedure for Reciprocal Enforcement of Decisions Arbitration and Economic Court Rulings on the Territories of the Participant States of the Commonwealth (signed 6 March 1998), ratified by Parliamentary Law no. 10–II, ‘On Ratification of the Treaty on the Procedure for Reciprocal Enforcement of Decisions Arbitration and Economic Court Rulings on the Territories of the Participant States of the Commonwealth’, 30 December 1999.
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The local laws governing the issue are generally the Civil Code of the Republic of Kazakhstan (the ‘Civil Code’) and the Civil Procedural Code of the Republic of Kazakhstan (the ‘Procedural Code’). The Civil Code allows parties to choose the applicable law in their contracts.15 Presumably this would create the legal basis necessary for the acceptance of judgments rendered by foreign tribunals and potentially founded on foreign law. Articles 425 (1) and 426 of the Procedural Code deem that judgments of foreign courts are recognized and applied in the territory of the Republic of Kazakhstan if stipulated by local law or international treaty.16 The Law of the Republic of Kazakhstan, ‘On Execution Proceedings and the Status of Court Enforcement Officers’, theoretically should allow for enforcement of foreign arbitral awards as it states that ‘the procedure and enforcement of foreign court judgments and arbitration tribunals’ is determined by the relevant treaties.17 Despite the foregoing, the practice of and procedure for executing foreign arbitral awards has not been adequately defined in the local laws. This had led many commentators, namely foreign investors and local legal scholars, to conclude that foreign arbitral awards are not expressly enforceable in the Republic of Kazakhstan. In fact, certain widely publicized cases demonstrate the exact opposite – prompt and proper execution of foreign arbitral awards is not guaranteed in the Republic.
Lack of enforcement mechanisms As the foregoing states, the Republic has signed a number of international treaties on arbitration. Still the Republic has not enacted any legislation that corresponds to those treaties and, as such, very few foreign arbitral awards have been enforced locally. Whether or not a party can enforce a foreign arbitral award in the Republic is one of the factors which that foreign investor, bank or exporter will take into account when deciding whether to do business in the Republic or go elsewhere. In other words, the enforceability of foreign arbitral awards is a key element in the Republic’s attractiveness to international business. While the Republic’s legislation in principle does allow for the enforcement of arbitral awards under several treaties, judges do not have clear implementing language in local legislation to assure of the proper enforcement mechanism. 15
Articles 1112 and 1113 of the Civil Code of the Republic of Kazakhstan. Please note that according to Article 1113 (2) of the Civil Code of the Republic of Kazakhstan, disputes involving immovable property located within the Republic of Kazakhstan are solely subject to Kazakhstani law. 17 Article 80, Law of the Republic of Kazakhstan, ‘On Execution Proceedings and the Status of Court Enforcement Officers’, no. 253–1 (30 June 1998). 16
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In December 2002, the Foreign Investors’ Council Chaired by the President of the Republic of Kazakhstan (the ‘FIC’) recognized this problem and decided to organize a roundtable on the enforcement of foreign arbitral awards in the Republic. This roundtable was held on 28 March 2003 and it was organized by the Ministry of Justice, the Supreme Court and the Legal Working Group of the FIC. All the participants at the roundtable, including lawyers, judges and members of the American Chamber of Commerce, agreed upon the importance of international commercial arbitration within the context of legal reform in the Republic. The foreign members of the FIC recommended that the Republic adopt a law based on the Model Law On International Commercial Arbitration adopted by the United Nations Commission On International Trade Law (UNCITRAL) in 1985. The Ministry of Justice and government, however, opted to draft a law that followed the principles of the UNCITRAL Model Law and also addressed the domestic arbitration courts and their status in the Republic (as discussed above).
Draft law of the Republic: On arbitration courts The Ministry of Justice has promulgated a draft law which defines the status of local and international arbitral awards within the territory of the Republic of Kazakhstan. Many foreign lawyers have added comment to the draft. Although the draft is scheduled to be heard in Parliament in 2003, it remains to be seen whether the draft will be adopted and, if so, what will be its final content.
Conclusion Companies considering an entrance in the markets of the Republic of Kazakhstan cannot fully yet rely on domestic commercial arbitration as a viable form of dispute resolution. The current legislation and related resolutions of the Constitutional Council cast the enforceability of local arbitral awards in doubt. Unlike local arbitral awards, however, the enforcement of international arbitral awards in the Republic is possible. Foreign companies doing business in the Republic should request arbitration clauses in their contracts and should seek to select international arbitral institutes that are well established (such as ICSID or ICC). It follows from the foregoing analysis, however, that foreign companies carrying out business in the Republic should be advised that execution of an international arbitration award may be problematic within the Republic. A foreign company may be able to decrease its risks regarding the issue of enforcing an arbitral award in the Republic by seeking execution in a third-party country. For
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example, if an aggrieved investor has obtained an arbitral award against the Republic, it will undoubtedly have problems in enforcing this award within the territory of the Republic. In this case, the investor may elect to enforce (or attempt to enforce) the award in a separate jurisdiction where the Republic has assets and which recognizes and executes foreign arbitral awards. Although foreign arbitral awards have the legal basis for enforcement in the Republic, until such time as the Republic adopts conclusive legislation on the issue, one must anticipate that execution within the territory of the Republic will be difficult. Companies seeking to make investment into the Republic and carry out business transactions should seek the appropriate legal counsel to advise them on the best way to mitigate their risks and secure a suitable form of potential dispute resolution.
4.4
Intellectual Property I: Copyright Assistance, LLC Law Firm
Kazakhstan has made substantial progress toward developing the copyrights legal framework that meets international standards. Notwithstanding this, widespread piracy of copyrighted products, mainly audio and video recordings and software, for a number of years, has remained one of the major problems of the intellectual property regime in Kazakhstan. The forthcoming accession to the World Trade Organization (WTO) provides a great stimulus for Kazakhstan to make enforcement of intellectual property rights consistent with the TRIPS Agreement.1 And steps undertaken by the government authorities in this direction do provide evidence of the country’s efforts to comply.
Protected rights Copyright is governed by the Copyright Law,2 which resembles the 1886 Berne Convention for the Protection of Literary and Artistic Works and the 1971 Geneva Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms, which Kazakhstan adopted in 1998 and 2000, respectively. According to reservations made by Kazakhstan on joining the treaties, protection thereunder is granted for works first published after Kazakhstan joined those treaties, which means that foreign works created and released earlier are not protected in Kazakhstan.
1 TRIPS, which stands for Trade-Related Aspects of Intellectual Property Rights, arose out of the same Uruguay Round Agreements that launched the WTO and came into effect in 1995. TRIPS Agreement sets the minimum standards for the content and enforcement of intellectual property law. 2 Law of the Republic of Kazakhstan no. 6–1 of 10 June 1996 ‘On Copyright and Allied Rights’.
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The general issues relating to copyrights and allied rights are also addressed in the Civil Code (Special Part) Chapters 50 and 51.3 Both the Copyright Law and the Civil Code permit copyright protection for the following types of original works of authorship: • literary and dramatic works, including any accompanying music; • stage productions, pantomimes and choreographic works; • motion pictures, sound recordings, and other audiovisual works; • pictorial, graphic, and sculptural works; • musical works, including any accompanying words; • items of applied art; • pieces of architecture, urbanization and gardening; • photographs, maps, sketches, illustrations, and the like; • computer programs and databases, etc. Allied rights that are covered by the Copyright Law and the Civil Code Chapter 51 relate to stage productions, performances, phonograms, broadcastings and cable broadcast organizations. Copyright protects the form of expression rather than the subject matter of the work and extends to scientific, literal and artistic works regardless of their purpose, content and value of method and form of expression.
Originality Copyright protection is available only for original works of authorship. They must be published in Kazakhstan or otherwise recorded in a tangible form to qualify for copyright protection, and must be in a form that can be reproduced or otherwise communicated. A work is deemed to be published in Kazakhstan if it is published therein within 30 days from the date of first publication outside Kazakhstan.
Existence by act of creation Copyright arises automatically when the work is created, and unlike patents and trademarks, no registration is required for copyright to exist. The rights to enforce copyright, however, are maximized if the 3 Civil Code of the Republic of Kazakhstan (Special Part) no. 409–I of 1 July 1999, as amended.
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copyright is registered with the Intellectual Property Rights Committee of the Ministry of Justice.4 During the first six months of 2003, the Intellectual Property Rights Committee has issued over 1,700 registrations, which is five times higher than the number of registrations performed during the six months of 2002.5 Registration involves filing the appropriate application form along with the required fee and deposit of the work.
Protection mark A copyright owner is entitled, in order to note its rights, to use for the the copyright a protection mark, consisting of three elements: • roman letter ‘c’ in the circle – ©; • name of the copyright owner; • year of first publication of the work. The protection mark for allied rights is similar but instead of roman letter ‘c’ it has roman letter ‘p’ in the circle.
Term of protection Copyright exists in goods for 50 years after the death of the author or 50 years after the first publication of the work, whichever is longer, provided such publication is made for the first time within 30 years from the death of the author. Protection of the attribution rights of authorship, name and reputation of the author is timeless. For a work made under an employment or other contract, the copyright exists for 10 years after the publication of the work. Allied rights are protected for a term of 50 years from the date of first performance or stage production, or 50 years from the date of first release of the phonogram or its first recording in case of an unrelated phonogram.
Assignment and licensing Assignment or licensing of a copyright may be exclusive or nonexclusive and must be made in writing. The Copyright Law prescribes that an agreement for assignment or licensing is to be specific with 4
Order no. 146 of the Minister of Justice of the Republic of Kazakhstan of 27 September 2002. 5 KazInform news, 18 July 2003.
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regard to the scope of the assigned/licensed rights, term and territory for which such rights are granted, and royalty payments. The Copyright Law also entitles the owners of copyright and allied rights to form non-profit-making organizations to manage their proprietary rights on a collective basis. Such organizations are authorized to license the proprietary rights of the owners. Licensing agreements to be entered by such management organizations are subject to registration with the Intellectual Property Rights Committee.6
Remedies for copyright violation The Copyright Law provides for civil, administrative and criminal liability for violation of copyright and allied rights. Civil law protection is generally achieved by a court judgment providing for: • recognition of rights of copyright; • restitution of the situation existing prior to violation of the copyright; • injunctive relief; • recovery of the profits received by a violator as a result of infringement; • damages including lost profit or payment of compensation in amount of up to 50,000 times the minimum monthly wage7 (ie around US $1,700,000) established under the laws of Kazakhstan; • confiscation of counterfeited production, materials and equipment used in such production. In case of a civil action – prior to trial – a judge may grant an injunction in respect of goods, which are claimed to be counterfeit, by temporarily restraining the defendant’s right to produce, copy, sell and/or use them. Copies of such goods, and materials and equipment used for their production, may be also temporarily attached until the court renders its judgement. The Criminal Code contains charges for copyrights violations committed with the goal of profit making and resulted in material damages of at least 500 times the monthly calculation index (MCI8), ie 6
Order no. 145 of the Minister of Justice of the Republic of Kazakhstan of 27 September 2002. 7 The minimum monthly wages for the year of 2003 are set at 5,000 tenge, which is around US $34. 8 The monthly calculation index (MCI) for the year of 2003 is set forth at 872 tenge, which is around US $6.
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around US $3,000. Maximum penalties are 500 times the MCI (ie around US $3,000) or five times the violator’s monthly wages, or imprisonment of up to two years. For repeat offenders the maximum fines are 800 times the MCI (ie around US $4,800) or nine times the violator’s monthly wages, or imprisonment of up to five years.9 Smaller violations are penalized under the Administrative Code. The maximum penalty for such violation is 100 times the MCI (ie around US $600) with confiscation of counterfeit goods, and for a repeated violation occurred within a year the penalty is 200 times the MCI (ie around US $1,200) with confiscation of counterfeit goods.10
Fighting counterfeit production Kazakhstan has established a system of state agencies whose function is to ensure protection of intellectual property rights. In June 1999 the Copyright Agency of the Ministry of Justice11 – which in March 2001 has been transformed into the Intellectual Property Rights Committee of the Ministry of Justice12 – became the prime administrative agency to oversee protection of copyrights. Enforcement of intellectual property rights is mainly carried by the local agencies of the Ministry of Justice and the Ministry of Interior which are authorized to inspect businesses, seize counterfeit goods and impose penalties. According to the data released by the Ministry of Justice, 287 inspections, performed during the first six months of 2003, resulted in seizure of 83,000 items of counterfeit goods,13 which are usually subject to confiscation and destruction.14 In addition to these, the Anti-Monopoly Committee is a regulatory agency that has authority to take prompt action against infringement. Among other things, it may perform inspections of businesses, impose administrative charges on violators, and file a civil action to declare the goods counterfeit and to seek damages sustained by other businesses and consumers as a result of infringing activity.15 Moreover, the recently adopted Customs Code provides the proper authority for the Customs Administration to seize the counterfeit 9 Criminal Code of the Republic of Kazakhstan no. 167–I of 16 July 1997, as amended, Article 184. 10 Code of the Republic of Kazakhstan no. 155–II ‘On Administrative Misconducts’ of 30 January 2001, as amended, Article 129. 11 Decree of the Government of the Republic of Kazakhstan no. 846 of 25 June 1999. 12 Decree of the Government of the Republic of Kazakhstan no. 411 of 29 March 2001. 13 Supra note 5. 14 KazInform news, 12 July 2003. 15 Order no. 216–OD of the Chairman of the Agency of the Republic of Kazakhstan on Regulation of Natural Monopolies and Protection of Competition of 28 October 2002.
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items at the border as required by the TRIPS Agreement.16 To get protection, the intellectual property rights holder has to record such rights at the Register of Goods Containing a Subject Matter of Intellectual Property maintained by the customs authority.17 Among other things, the intellectual property rights holder may record the information on authorized importers and exporters, and list of countries being the major source of counterfeit manufacturing, and names of potential infringers. This information is deemed to be confidential and is not subject to publication along with the other data from the Register. Initial protection is usually granted for up to two years from the recording date, and may be extended further by a subsequent application of the intellectual property rights holder. In addition to state agencies a number of public organizations do contribute to protection of copyrights and allied rights, including the Kazakhstani Authors’ Society and the recently established Kazakhstani Association for Protection of Copyrights and Allied Rights.
Computer programs and databases Unlike in Russia, there is no special law governing protection of computer programs and databases in Kazakhstan; these are protected under the Copyright Law – computer programs are protected as literary works and databases as compilations. In addition to remedies for violation of copyrights outlined above, the Criminal Code also penalizes an unauthorized access to protected computer information (resulted in destruction, suspension, modification or copying of the information), and creation, use and distribution of harmful computer programs. The maximum penalty is set at 1,000 times the MCI (ie around US $6,000), or 12 times the monthly wages of the convicted, or two years’ imprisonment.18
Steps that remain to be taken In addition to the positive action already taken by the government, Kazakhstan still has few steps to take to fulfil its intellectual property commitments under the Cooperation Agreement signed with the World Intellectual Property Organization (WIPO) in February 200119 and to 16
Customs Code of the Republic of Kazakhstan of 5 April 2003, Part 10, Chapters 52 and 53. Order of the Chairman of the Customs Control Agency of the Republic of Kazakhstan no. 201 ‘On Certain Issues of Customs Control’ of 13 May 2003. 18 Supra note 9, Article 227. 19 Program for Cooperation Between the Government of the Republic of Kazakhstan and the World Intellectual Property Organization signed in Almaty on 28 February 2001. 17
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make its intellectual property regime and enforcement of intellectual property rights consistent with the TRIPS Agreement. Among other things, Kazakhstan is to become a member of the: • WIPO Copyright Treaty (WCT) (adopted in Geneva on 20 December 1996); • WIPO Performances and Phonograms Treaty (WPPT) (adopted in Geneva on 20 December 1996); and • International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Rome, 26 October 1961). Kazakhstan will also continue to improve its regulatory regime of enforcement of intellectual property rights. In addition to this, development of the laws specifically dealing with computer programs and databases and providing police with the proper ex officio authority to commence criminal copyright cases, and ensuring protection of copyright on the Internet, are issues to be addressed.20
20
Concept of the Intellectual Property Rights Protection approved by the Decree of the Government of the Republic of Kazakhstan no.1249 of 26 September 2001.
4.5
Intellectual Property II: Patents and Trademarks Assistance, LLC Law Firm
Legal framework The legal framework for patents and trademarks in Kazakhstan is fairly well developed and comprises: • Civil Code1 containing Chapters 52 and 56 setting out the regulations for patents and trademarks, respectively; • Patent Law2 specifying the intellectual property subject matter that can be patented and the conditions under which a patent may be obtained; • Trademark Law3 governing relations associated with registration, legal protection and use of trade marks, service marks and appellation of origin of goods; • Selective Achievements Law4 dealing with patenting of rights to plant varieties and breeds of animals; and • rules and regulations adopted in implementation of these laws. Moreover, the Criminal Code5 and the Administrative Code6 contain sanctions for violation of patents and trademarks. 1
Civil Code of the Republic of Kazakhstan (Special Part) 409–I of 1 July 1999, as amended. 2 Patent Law of the Republic of Kazakhstan no. 427–1 dated 16 July 1999. 3 Law of the Republic of Kazakhstan no. 456–I ‘On Trademarks, Service Marks and Appellations of Origin of Goods’ of 26 July 1999. 4 Law of the Republic of Kazakhstan no. 422–I ‘On Protection of Selection Achievements’ of 13 July 1999. 5 Criminal Code of the Republic of Kazakhstan no. 167–1 of 16 July 1997, as amended, Articles 184 and 199. 6 Code of the Republic of Kazakhstan no. 155–II ‘On Administrative Misconducts’ of 30 January 2001, as amended, Article 145.
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In addition to these national laws, Kazakhstan is a member of major international treaties addressing patent and trademark issues. A detailed list of such multilateral treaties to which Kazakhstan is a party (together with the corresponding implementation act) is provided in Table 4.5.1. Table 4.5.1 Kazakhstan: Membership of international organizations and treaties in the area of patents and trademarks Name of Treaty
Republic of Kazakhstan implementing act
1883 Paris Convention for the Protection of Industrial Property
Declaration of the Republic of Kazakhstan on International Treaties in the Area of Protection of Industrial Property of 5 February 1993
1891 Madrid Agreement Concerning the International Registration of Marks
Declaration of the Republic of Kazakhstan on International Treaties in the Area of Protection of Industrial Property of 5 February 1993
1957 Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks
Law of the Republic of Kazakhstan no. 258–II of 16 November 2001
1967 Convention establishing the World Intellectual Property Organization
Declaration of the Republic of Kazakhstan on International Treaties in the Area of Protection of Industrial Property of 5 February 1993
1968 Locarno Agreement Establishing an International Classification for Industrial Designs
Law of the Republic of Kazakhstan no. 291–II of 31 January 2002
1970 Patent Cooperation Treaty
Declaration of the Republic of Kazakhstan on International Treaties in the Area of Protection of Industrial Property of 5 February 1993
1971 Strasbourg Agreement Concerning the International Patent Classification
Law of the Republic of Kazakhstan no. 257–II of 16 November 2001
1977 Budapest Treaty on the Law of the Republic of Kazakhstan no. International Recognition of the 259–II of 16 November 2001 Deposit of Microorganisms for the Purposes of Patent Procedure continued opposite
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Name of Treaty
Republic of Kazakhstan implementing act
1994 Eurasian Patent Convention
Decree of the President of the Republic of Kazakhstan no. 2364 of 18 July 1995 on ratification
1994 Trademarks Law Treaty
Law of the Republic of Kazakhstan no. 292–II of 4 February 2002
1998 Moscow Agreement of Co-operation on Suppression of Offenses in the Field of Intellectual Property
Law of the Republic of Kazakhstan no. 201–II of 11 May 2001
1999 Minsk Agreement on Measures for the Prevention and Repression of the Use of False Trademarks and Geographical Indications
Law of the Republic of Kazakhstan no. 189–II of 4 May 2001
Patents Nature of the patent A Kazakh patent is a grant of an exclusive property right to the patentee, or his or her heirs or assignees, to use and exploit certain types of industrial property and to exclude others from exploiting such property. The three types of industrial property that may be protected by patent rights are inventions, utility models and industrial designs. The definition of invention covers the structured and functional characteristics of any device, machine, apparatus, method, substance, manufacturing process, chemical compound and composition, strain of microorganism, plant or animal cells, as well as the new application of a previously known device, method, substance or variety. The definition of utility model covers, inter alia, the utilitarian features and application of manufacturing articles. The industrial design patent protects only the appearance of a manufactured item, and not its structure or utilitarian features. It must be noted that the right of exclusive use conferred by the Kazakh grant of patent does not merely entitle the patent owner to exclude others from use of that invention, utility model or industrial design,7 but also requires such owner to make use of the protected subject matter. The use may be achieved by any means, including sale, offer for sale, licence, manufacture and importation of a product 7 As, for example, in the United States. See, Title 35 of the United States Code, and Rules of Practice in Patent Cases, Title 37, Code of Federal Regulations, US Government Printing Office.
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containing the patented right. In case of the patent owner’s failure to use its invention, utility model or industrial design for any continuous term of four years without a valid excuse, a court, in response to a motion of any interested person, may order the owner to grant such interested person a non-exclusive licence.
Regulatory agency The patent is issued by the state patent organization (Kazpatent8), functions of which are performed by the Intellectual Property Rights Committee of the Ministry of Justice. Kazpatent administers the patent laws relating to the grant of patents for inventions, utility models and industrial designs, and performs other duties relating to patents. Kazpatent has the power to examine applications and grant patents and publishes and disseminates patent information as well as recording the assignment of any patents.
Term of the patent The Patent Law allows the issuance of a provisional patent for an invention and industrial design; however, no provisional patent may be filed in respect of a utility model. The major difference between the provisional patent and the full patent is in the scope of Kazpatent’s examination of the patent application. The documents supplied in connection with the application for a provisional patent are examined by Kazpatent solely with respect to compliance with the formal requirements, and, unlike the full patent application, it is not examined on its merits. The patent confers an exclusive right to the patentee throughout Kazakhstan for the term of the patent subject to the payment by the patentee of maintenance fees.9 The term of the provisional patent in respect of an invention is five years from the date of first filing of the application with Kazpatent with a possibility of extension for a further three years. The term of the full patent in respect of an invention is 20 years from the date of first filing. The Patent Law also allows extension of a full patent for invention for a maximum term of five years in a case where the 8 By the Government Decree no. 411 of 29 March 2001 the Republic’s State Enterprises ‘Kazpatent’ has been reorganized into the Republic’s State Enterprise ‘Kazakhstan Institute of Patent Expertise’ and became a structural division of the Intellectual Property Rights Committee of the Ministry of Justice. 9 Decree of the Cabinet of Ministers of the Republic of Kazakhstan no. 1369 ‘On Patent Fee’ of 5 December 1994, as amended; and the Decree of the Cabinet of Ministers of the Republic of Kazakhstan no. 889 ‘On the Procedure for Payment and Amount of Fees for Patenting of Inventions, Industrial Designs and Utility Models, Registration of Trade Marks and Service Marks, Registration and Grant of Rights of Use of the Names of Origin of Goods’ of 20 October 1992, as amended.
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patentee is subject to the statutory requirement to obtain a special permit for the use of the patent. The term of the provisional patent for industrial design is five years from the date of first filing. The term of the full design patent is ten years from the filing date with a possibility of extension for a further five years. The term of the patent for a utility model is five years with a possibility of extension for a further three years.
Conditions for obtaining a patent The Patent Law requires that the subject matter of the patent must be new, ‘non-obvious’ and have industrial application. The condition of novelty is satisfied if the invention, utility model or industrial design is not known from the prior art. To qualify as new an invention, utility model or industrial design must not have been known, published, made, or used publicly anywhere in the world before the invention was made by the applicant, and not have been described by anyone in a printed publication anywhere in the world, except for public disclosure made by the applicant or a person duly authorized by the applicant, including a demonstration by the applicant or such person, of the invention as an exhibit in any officially recognized exhibition held on the territory of a country participating in the Paris Convention, provided the application for the patent is filed by the applicant within six months from such public disclosure. To be ‘non-obvious’ an invention, utility model or industrial design must not be obvious to a person having ordinary skills in the area of technology related to such invention, utility model or industrial design, and it must not be apparently anticipated from the prior art. The term ‘industrial application’ in this connection refers to the condition that the subject matter has a useful purpose and could be manufactured and practically used in industry, agriculture, medicine and/or other areas of activity. The patent is granted upon the new machine, device, or other subject matter and cannot be obtained for a mere idea or suggestion. A full description of the actual machine or other subject matter for which a patent is sought is required. Discoveries, scientific theories and mathematical methods, management methods, rules, programs for calculators and algorithms per se, projects and construction plans, construction proposals, proposals contrary to public interests and to principles of humanity and morality are not patentable.
Filing a patent application The following application documents in the Kazakh or Russian language must be filed with Kazpatent: • a formal request to issue a patent;
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• a description of the invention, industrial design or utility model, made in such full and adequate detail to enable any person skilled in the particular technological area to which such invention, industrial design or utility model pertains to make and use the same; • the formula of the invention or utility model indicating its nature and substance (or a set of impressions or make of industrial design); • drawings and other materials – generally required for understanding the essence of the invention, industrial design or utility model, and these must show every feature specified in the description; • a summary of the invention or utility model, that generally includes a statement of the object and purpose of the invention or utility model; • power of attorney in favour of a representative or a patent agent10; • a petition for issuance of a patent for invention (in the case of a nonprovisional application); • the filing fee. The specific requirements for compilation of an application are provided by Kazpatent. An official printed copy of the patent with specifications, drawings, and claims is provided to the patentee.
Conventional priority The Patent Law allows an applicant to claim a priority for the patent on the basis of the 1883 Paris Convention for the Protection of Industrial Property (the Paris Convention), or other applicable international or regional treaties. Conventional priority under the Paris Convention means that the application for a patent must be submitted to Kazpatent within a certain period of time from the date of first filing in another member country of the Paris Convention. This period is 12 months in the case of first application for inventions and utility models and six months in the case of industrial designs. Such applications under the Convention to Kazpatent will be regarded as if they had been filed on the same day as the original application in the other member country. In addition to the Paris Convention, priority may be claimed under the 1970 Patent Cooperation Treaty (the PCT). The PCT affords to its members – which include most industrial countries – a 20- or 30-month extension period to file an application in the PCT countries.11 An applicant may also seek to protect its invention by seeking a Eurasian Patent from the Eurasian Patent Office in Moscow. 10
Foreign companies and individuals domiciled outside Kazakhstan are required to deal with the Kazpatent through a registered patent agent. 11 Conventional priority for inventions under the PCT – 20 months, and under the PCT Chapter II – 30 months. Kazakhstan is a member of both the PCT and the PCT Chapter II.
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Assignment of patent rights Rights for the grant of a patent or provisional patent, as well as the rights of a patent owner, may be assigned fully or partially to a third party. The Civil Code and the Patent Law provide for such assignment by an instrument in writing which is subject to mandatory registration with Kazpatent. Failure by the parties to observe this requirement renders the assignment void and unenforceable.
Protection of patent rights Kazpatent, through its Appellate Council, has the authority for pretrial settlement of certain types of disputes, such as Kazpatent’s refusal to grant a patent, or a third party’s challenge to a patent which has already been granted. However, a decision of the Appellate Council is not final and may be appealed to a court within six months from the date of the decision. Otherwise, if patent rights are infringed, the patent owner may sue for relief in the appropriate court of Kazakhstan. The following remedies are made available to a patent owner under the Patent Law in the case of an infringement: • injunctive relief; • compensation in the form of damages or confiscation of illegally derived income; • confiscation of counterfeited products; • mandatory publication of an acknowledgement of the violation of the patent rights.
Trademarks Trademarks, service marks and appellations of origin A trademark relates to any word, name, symbol, or device that is used in trade with goods. The trademark indicates the source or origin of the goods or services, it symbolizes or guarantees the quality of the goods that bear the mark and distinguishes the goods from the goods of others. In other words, a trademark is a brand name. Trademark rights can prevent others from using a confusingly similar mark but do not prevent others from making the same goods or from selling the goods under a non-confusing mark. Similar rights can be acquired in a service mark, which are used in the sale or advertising of services. In addition to trademarks and service marks, the Trademark Law provides protection for the use of the name designating the origin of goods – for example, country names, historical names, and names of
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other geographical points or combinations of the same which are used for distinguishing goods, specific qualities of which are primarily associated with the place of manufacture.
Registration of trademarks Trademarks used in Kazakhstan must be registered with Kazpatent to trigger the exclusive rights of the trademark owner to use the mark in Kazakhstan. Registration is accomplished by making a formal application for registration in the Kazakh or Russian language to be filed with Kazpatent and accompanied by: • the trademark’s imprints; • a list of goods and/or services for which registration is sought in accordance with the international classification of goods and services; • a power of attorney in favour of a representative or patent agent; • a certified copy of the first application under the claimed conventional priority (if any); • the filing fee. Upon receipt of a complete application, Kazpatent will review the application in a two-stage process. The first stage is referred to as ‘provisional expertise’ and is to be made within two months from the filing date, during which time Kazpatent reviews the content of the application, verifying observance of the formalities with regard to its compilation. The second stage is referred to as ‘full examination’ and is to be performed within 12 months of the filing date. At this stage Kazpatent will review the application to make sure that no grounds exist that would prevent the trademark’s registration. Registration of a trademark is confirmed by Kazpatent by the issuing of a trademark certificate. In discharging its powers in relation to trademarks, Kazpatent performs similar functions as indicated above under ‘Patents’. Information on the registered trademarks is published in Kazpatent’s official bulletin.
Conditions for registration The Trademark Law provides that the mark may not be registered if it is any of the following: • a mark with no distinguishing feature; • a public property, or state symbol, or a generally accepted symbol or term; • offensive to morality and public policy;
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• in conflict with a prior registered mark, or otherwise constitutes information or is related to goods and services for which registration is already requested; • in conflict with a mark recognized as well known in Kazakhstan in respect of any goods or services; • deceptive or misleading with regard to the quality of the goods, the manufacturer, or appellation of origin; • considered to constitute information or resemble the name or nickname, portrait, or facsimile of any person in the absence of a proper authorization; • seen to contain the words ‘like’, ‘as’, ‘similar’, ‘of the type’, ‘in style’, or similar.
Term and extension The term of a trademark is ten years from the date of first filing and may be extended for further periods of ten years upon the application of the trademark owner, such further application to be filed within the last year of each ten-year term. The conventional priority which may be claimed under the Paris Convention is six months.
Use of a trademark Trademark rights ultimately require use of the mark in connection with some goods or services. Such use may be accomplished by displaying the mark in commercial advertisements, publications, letterheads, signs, and exhibits held in Kazakhstan. Failure by the trademark owner to use the mark for a continuous period of five years following the date of registration may entitle any interested person to challenge the trademark’s registration. Registration of the trademark gives its owner the right to use the registration symbol Å, and the words ‘trademark’ and ‘registered trademark’, which may deter others from using the mark. Additionally, the trademark owner has the right to sue unauthorized users of the trademark for an injunction, damages, or recovery of profits.
Assignment and licensing A trademark may be a subject of transactions, and rights thereto may be assigned or licensed fully or in part to any person. An assignment or licensing agreement must be made in writing and registered with Kazpatent. The licensing agreement must contain a clause requiring a licensee to maintain the quality of goods or services at a level not lower than the quality of goods and services of the licensor.
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Remedies for trademark infringement The following remedies are available to a trademark owner under the Trademark Law in case of an infringement: • injunctive relief; • compensation of damages; • destruction of infringing trademarks or counterfeited goods containing the infringing trademark. Unfair Competition Law12 further requires an infringer to pay to the budget an administrative penalty of up to 100 times the monthly calculation index (MCI),13 ie around US $600, and the amount of income received as a result of unauthorized use of a trademark. Repeated infringement or an infringement resulted in material damages of at least 500 times the MCI (ie around US $3,000) are subject to the Criminal Code establishing the maximum penalties at 500 times the MCI (ie around US $3,000), or five times the infringer’s monthly wages, or two years’ imprisonment.14
12 Law of the Republic of Kazakhstan no. 232–I ‘On Unfair Competition’ of 9 June 1998, as amended. 13 Supra note 6. 14 Supra note 5, Article 199.
4.6
Employment of Foreign Citizens in Kazakhstan Denton Wilde Sapte, Almaty
Introduction Broad issues of employment policy in Kazakhstan are governed mainly by the Law On Employment of the Population dated 23 January 2001 (the ‘Employment Law’). Most day-to-day labour issues are dealt with in the Law On Labour in the Republic of Kazakhstan dated 10 December 1999 (the ‘Labour Law’). The purpose of such laws generally is to provide certain protections to employees. The laws are broad in their application and apply to all persons working in Kazakhstan, whether foreign or local. According to the Employment Law, another main principle and objective of Kazakhstan State policy is to protect the internal labour market by setting quotas for retaining foreign labour. These quotas are established annually and are based on a percentage of the employed population. Certain significant normative acts of Kazakhstan, for example the Subsoil Edict and the Petroleum Edict, stipulate that when a company hires workers and specialists in order to carry out operations under a subsurface use contract, preference must be given when possible to qualified Kazakh job applicants. Legal entities with foreign participation may establish their own hiring, dismissal and other labour policies in collective and individual labour agreements, although they are regulated by the parameters set forth in Kazakhstan legislation.
Individual labour agreements (contracts) The centrepiece of employment relations is the individual labour agreement. Individual employment agreements must comply with the requirements of labour legislation. The Labour Law provides that any employment carried out on the territory of Kazakhstan must be
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governed by the legislation of Kazakhstan. Thus, contracts with all employees, including foreign personnel working in Kazakhstan, must be governed by Kazakhstan employment laws.
Visas and work permits Visas Unless Kazakhstan has a specific agreement with a country, foreigners are required to have valid passports and visas in order to enter Kazakhstan. Visas are granted based on letters of invitation. Multiple entry visas may be granted if requested. If a foreigner has a valid work permit, a multiple entry visa for the period of the work permit may be obtained. Some foreign companies may apply for investor’s visas which are issued only for the chief executive and top management of such companies. The types of companies which may obtain such visas is not clearly defined in the legislation; however, the Investment Committee of the Ministry of Industry and Trade will approve companies whose employees are entitled to such visas. Investor’s visas do not require an invitation letter, can be issued on the same day the application is submitted and may be granted for a period of up to two years. An HIV/AIDS test and a signed statement from a doctor certifying that the foreigner does not have HIV/AIDS are required when an individual will be in Kazakhstan for more than three months. Usually this is required to be submitted when applying for a visa and any extensions. In addition, within three days after arrival in Kazakhstan, foreigners must be registered with an agency of the Ministry of Internal Affairs, commonly referred to as OVIR.
Work permits To hire foreign citizens, companies must obtain work permits from the Ministry of Labour and Social Protection of the Population of the Republic of Kazakhstan (the ‘Labour Ministry’). The issuance of work permits in Kazakhstan is regulated by the Rules On the Determination of Quota and Issue of Permits for Employers to Retain Foreign Labour in the Republic of Kazakhstan (the ‘Rules’) approved by the Resolution of the Government of the Republic of Kazakhstan no. 836 on 19 June 2001, as amended on 20 January 2003. The Rules exempt the following foreigners from the requirement to obtain a work permit: • heads of branches and representative offices of foreign legal entities; • persons on business trips the duration of which does not exceed in aggregate 45 calendar days in one calendar year;
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• chief executives and general managers of companies which conclude an investment contract with the Government of the Republic of Kazakhstan in the amount of US $50 million or more; • chief executives of legal entities which make investments in priority sectors of the economy and which have a contract with the authorized state body on investments; • persons who have a residence permit (ie who obtain permanent residence status); • heads and general managers of banks, insurance organizations and pension funds; • employees of diplomatic missions and international organizations accredited in Kazakhstan; • representatives of foreign mass media, radio and television organizations accredited in Kazakhstan; • employees of charitable and humanitarian organizations registered in Kazakhstan; • crew members of sea and river vessels, air, railway and automobile transport owned by foreign companies; • artists and sportspeople working under contracts with appropriate central executive bodies of Kazakhstan (eg ministries and state committees); • individual entrepreneurs; • persons who have refugee status or have been officially granted political asylum. Work permits are divided into the following three categories: • first category – upper management of an organization; • second category – specialists with higher and specialized secondary education who have documents confirmed according to the established procedure; • third category – skilled workers. Depending on the categories of work permits discussed above, the Labour Ministry may specify mandatory special conditions for the issuance of work permits as follows: • for work permits of the first category – to provide training and professional development of Kazakh specialists with higher and specialized secondary education;
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• for work permits of the second category – to provide training and professional development of Kazakhstan’s specialists with higher and specialized secondary education with a view to replacing the foreign employees; • for work permits of the third category – to provide training of Kazakhstan’s specialists with a view to replacing the foreign employees and/or to create additional jobs for Kazakhstan’s citizens.
Procedure for obtaining work permits The process for obtaining a work permit consists of three stages as follows. Stage 1 An employer must submit a work permit application (in Russian and Kazakh) to the regional (oblast) labour department. The following documents must accompany the work permit application: • documents confirming that the employer has taken measures to search for local employees – the following are confirmation documents: – (a) originals of newspapers in Russian and Kazakh with advertisements about details of the vacancy in the national and regional newspapers published not less than one month and not more than three months prior to applying for a work permit; and – (b) a notice to the local labour department within three days after the vacancy becomes available; • a letter confirming that among the Kazakh citizens who have applied for the job the required specialist was not found – this letter is issued by the regional labour departments on the basis of information from the regional database; • an employer’s letter confirming that the work experience and/or education of a foreign employee corresponds to the job duties and the qualification requirements as to the professional skills, seniority, command of foreign languages and ability to use modern technologies; • an employer’s letter justifying the request for retaining foreign employees; • an employer’s letter substantiating its refusal to retain Kazakh citizens for the vacant positions (if any). Upon the receipt of these documents, the labour department must issue an opinion letter regarding the possibility for retaining the requested number of foreign employees within 10 business days. This opinion letter must be submitted to the Labour Ministry.
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Stage 2 Upon the receipt of the opinion letter of the regional labour department, the Labour Ministry located in the capital of Kazakhstan, the city of Astana, must issue a work permit or deny the application for a work permit within 10 business days. The Labour Ministry may reject the issuance of a work permit in the following cases: • incomplete and improper submission of required documents; • failure to take measures to search for employees on the domestic labour market; • exceeding the quota limits. Stage 3 Within 30 days of receiving the work permit issued by the Labour Ministry, the employer must apply to the regional labour department to certify the list of foreign employees to be retained. At this stage the following information is required from the employer: • A notarized copy of the work permit issued by the Labour Ministry. • A copy of an individual employment contract. • A list of the foreign employees to be retained. • A notarized Russian translation of the diploma of the foreign employee or other document confirming his or her educational background. • An HIV/AIDS certificate for each foreign employee. An HIV/AIDS certificate issued by an overseas medical organization must be certified by an HIV/AIDS medical organization in Kazakhstan. • Documents confirming the length of professional service of a foreign employee. Employment contracts, letters from former employers, labour books issued in CIS countries or extracts from orders regarding recruitment and dismissal also common in CIS countries may serve as confirmation of the length of professional service of the employee. • A copy of a deposit agreement with any Kazakhstan bank or a bank letter confirming the deposit of funds. These deposits are to ensure that the foreign employee will leave Kazakhstan at some point; the deposits are returned to the company upon the employee’s departure. The amount of a guarantee deposit is calculated as the sum of the return ticket for the holder of a work permit to his or her country of residence plus a per diem. The deposited funds must be returned to the employer upon submission of a written permission
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from the regional labour departments to the bank. Such permission can be obtained after the employee has left Kazakhstan. The employer must ensure that the foreign employee leaves Kazakhstan at the expiry of the validity term of the work permit. In most cases the procedure for obtaining work permits takes about one to two months (although there have been many cases of much longer periods). The Labour Ministry may request employers to extend the search for employees in the domestic labour market, including searching in the national database through the Web site of the Labour Ministry. However, the Rules do not specify how long an employer must search for employees at the domestic labour market nor reasons why an employer may be requested to follow this if other requirements are properly observed. As discussed above, work permits are issued in accordance with quotas which the Government of Kazakhstan establishes annually. The quotas are distributed among the regions of the country based on the Government’s assessment of the local job markets and the availability of qualified Kazakhstan personnel to fill the various positions. Unfortunately, the Rules do not specify for what period a work permit may be issued. In practice, the Labour Ministry issues a work permit for a period of not more than one year. The Labour Ministry may refuse to approve a list of foreign employees in the following cases: submission of incomplete or improperly prepared documents; or failure of a foreign employee to comply with the category or qualifications required. If an individual labour agreement with a foreign employee is terminated prior to the expiration of the work permit, the employer must obtain approval for an amended list of foreign employees by the regional labour department.
Extension of work permits When work permits expire they can be extended by the Labour Ministry (ie it will not be necessary to search local labour market, etc). The term of a first-category work permit can be extended twice, that of a second-category work permit only once. To extend a work permit the employer must submit to the regional labour department the following documents: • an application; • the original copy of the work permit; • lists of foreign employees approved by the Labour Ministry; • lists of foreign employees in relation to whom the employer seeks the extension of work permits;
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• documents confirming fulfilment of special conditions of existing or expired work permits; • an employer’s letter substantiating the extension of the term of the work permit. The regional labour department should issue a letter substantiating its approval or refusal to extend the work permit within 10 days from the date of receipt of the above-mentioned documents based on the demand in the labour market. The Labour Ministry reviews such a letter and the documents submitted within 10 calendar days from the day of their receipt by the Labour Ministry. The Labour Ministry is required to make a decision as to whether to extend the term of a work permit and send a notice to the regional labour department and the employer about its decision within five business days. In the case of a denial, the Labour Ministry must provide the reasons for it. If the validity term of the work permit is extended, the list of foreign employees must be approved in accordance with the Rules.
Suspension or revocation of work permit The Labour Ministry has the right to suspend the validity of a work permit for up to three months or revoke it. The Labour Ministry must specify the reasons for suspension or revocation. A work permit may be suspended if the employer violates or fails to comply with the specific terms and conditions specified in the work permit. A work permit that has been suspended may be renewed by the Labour Ministry after the discovered violations have been eliminated. The employer will be notified of the decision to renew a work permit within 10 business days from the date of such decision. In the case of a failure to cure the reasons for which a work permit was suspended, the Labour Ministry may revoke the work permit.
Payment of employees Branches and representative offices of foreign legal entities that are non-residents may pay their employees in hard currency, but legal entities established in Kazakhstan must pay their local employees in Kazakhstan tenge. According to Article 7 of the Labour Law, employees must have equal pay for equal work with no discrimination, a provision that may be taken to mean that local and foreign employees must receive identical pay and working conditions for the same work. However, there has been no concerted attempt to implement such an interpretation in real-world practice.
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Taxation of employees All foreign employees working in Kazakhstan are subject to tax in accordance with Kazakhstan’s Tax Code. For foreign employees working in Kazakhstan this means they are subject to tax on Kazakhstan source income the same as if they were citizens of Kazakhstan unless a double tax treaty is applicable. The maximum individual income tax rate is currently 30 per cent but from 1 January 2004 will be reduced to 20 per cent. Employers are required to pay social tax at applicable rates for all employees. As of 1 January 2004 those rates will also be reduced with the rate varying on a regressive scale based on the individual employee’s income.
4.7
Kazakhstan’s Labour Law Macleod Dixon LLP
The Law on Labour in the Republic of Kazakhstan (the ‘Labour Law’) came into effect on 1 January 2000, replacing the 1972 Labour Code. In general, the Labour Law establishes the fundamental rights and obligations of employers and employees, and certain minimum terms and conditions governing labour relationships. It also contemplates the execution of individual or collective labour agreements and governs their terms and conditions. Certain additional matters not provided for in labour agreements may be regulated by private employer/employee agreements. This more flexible scheme is a fundamental conceptual change from the regime established by the old Labour Code which provided much more detailed legislative regulation of labour relations. The following sections describe certain requirements of the Labour Law.
Application of the Labour Law The Labour Law regulates all labour relationships in Kazakhstan with Kazakh and foreign citizens unless otherwise provided by law or international treaty.
Labour agreements The Labour Law specifies the requisites of individual labour agreements, as well as certain formal procedural steps to be taken in connection with the execution of an individual labour agreement, such as the provision that at least two copies of a labour agreement must be signed. After the signing of a labour agreement, the employer must issue an order of appointment of the employee to his or her position, deliver this order to the employee, and obtain an acknowledgement of receipt from the employee. A labour agreement may contain other provisions in addition to the specified requisites.
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Note that as evidence of a prospective employee’s ability to do a job, an employer may now require copies of previous employment agreements from new employees. Therefore, employment agreements should be prepared with the understanding that competitors and others may see them. Where the term of an agreement is not specified it is deemed to have an indefinite term.
Employee dismissal The Labour Law provides that a labour agreement terminates at the end of its term or for reasons beyond the control of the parties. The meaning of ‘for reasons beyond the control of the parties’ is not exhaustively defined in the Labour Law, but examples provided include military conscription, enforcement of a sentence against the employee making his or her continued employment impossible, death and the recognition by a court of the incapacity of the employee to further perform the job. The Labour Law provides that a labour agreement is cancelled either by written consent of the parties or at the request of either party in certain cases. An employer may request the cancellation of a labour agreement only in certain specified cases and provided that the employee is notified in writing, as specified in the labour agreement. In any event, this notification must be given not less than one month prior to the date of cancellation. Since the employer’s intention would not be clear if a labour agreement does not specify a notice period, employers should ensure that a clause to this effect is included in all labour agreements. An employer may request the termination of a labour agreement in specified cases including: • Liquidation of the organization, which would include the deregistration of a branch office; • reduction of the workforce; • non-compliance of the employee with job requirements due to lack of qualification or bad state of health which is indicated during the term of the individual labour agreement; • absence from work for more than two months because of temporary incapacity, except for certain cases such as maternity leave; • repeated non-fulfilment of work obligations after a disciplinary punishment; • a single gross violation of work obligations of the employee, including certain violations described in the Labour Law; • the reinstatement of an employee under court order.
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Under the old Labour Code, the right to dismiss workers because of personnel reduction was grouped together with the case of liquidation of the employer. The provision was interpreted very narrowly to apply only under a general downsizing. Now that the reduction of the workforce is a separate basis for dismissal and not grouped together with company liquidation, there is an argument that it should be interpreted to be applicable under a broader set of circumstances. The termination and cancellation of an individual labour agreement is executed on the basis of a written order issued by the employer. Note that one of the rights provided for employees in the Labour Law is to require the employer to confirm the powers of the person representing the employer in a labour agreement. It is not clear how far this right will extend. However, it would be prudent for employers to make certain that they can formally prove the authority of the person signing an order of termination/cancellation to avoid subsequent arguments of lack of authority from former employees challenging their dismissals. One month’s written notice must be provided where a labour agreement is cancelled on the grounds of a liquidation or reduction of the workforce. No extra notice requirement is specified for a cancellation on grounds other than these, presumably leaving the parties with the notice provision set out in the employment agreement (minimum one month). After the cancellation of an agreement, the Labour Law specifies mandatory payments to employees in certain cases. In the cases of a liquidation and personnel reduction (together with the case of termination of a labour agreement where the worker is conscripted) the Labour Law specifies the payment of an average monthly salary on cancellation.
Probation periods Since the employer’s ability to dismiss employees is restricted, the practice of having probation periods for new employees will continue. The Labour Law contemplates the use of probation periods in order to test the capacity of an employee to perform his or her duties. The probation period must be established in the labour agreement and may not exceed three months. During the probation period, the employer or the employee may terminate the labour agreement upon written notice. If neither party gives notice of cancellation of the labour agreement then at the end of the probation period the agreement automatically continues and may be terminated as provided in the agreement and the Labour Law.
Working hours The maximum hours of work and amounts of overtime depend on the classification of a job under one of the following four categories:
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• hard physical jobs – work related to manual lifting or moving objects, and any other job, where the energy consumption is over 300 kcal per hour; • jobs under harmful, or extremely harmful, work conditions – conditions under which the impact of certain work factors may result in incapacity or sickness of an employee or a negative influence on the employee’s descendants; • jobs under dangerous, or extremely dangerous, work conditions – conditions under which the impact of certain work factors in the case of failure to follow safety rules may result in a sudden strong worsening of health, or sudden and serious injury of an employee, or the employee’s death; • regular work – all other types of work. The Labour Law provides that generally speaking the regular work schedule shall be 40 hours per week. In cases where employees do hard physical jobs or jobs under harmful conditions this amount is reduced to 36 hours per week. The Labour Law does not mandate shortened work time for jobs under dangerous or extremely dangerous work conditions, but provides that legislation can determine additional jobs where work time must be shortened. Unfortunately, the definitions of harmful and dangerous work make it difficult to distinguish between these two categories, since in many cases it is easy to argue that factors that may result in sickness or inability may also result in a sudden strong worsening of health, or a sudden serious injury. In addition, the definitions are not drafted on an exclusive basis, and so perhaps all work under dangerous conditions is also work under harmful conditions. Additional interpretation difficulties arise in the provisions relating to overtime. Except for certain limited cases, overtime may only be required with the consent of the employee. The Labour Law provides for a maximum of two hours per day of overtime, or one hour per day for hard physical jobs, jobs under harmful conditions, or jobs under dangerous conditions. Overtime work in extremely harmful and extremely dangerous conditions is prohibited. Unfortunately, the definitions used in the Labour Law for each of harmful and extremely harmful, and dangerous and extremely dangerous, work conditions are the same, and so strictly speaking overtime for all harmful and dangerous work might be prohibited. Generally, a five-day working week is mandated. In cases where the nature and conditions of work make a five-day working week unreasonable, a six-day working week can be implemented, although the maximum number of hours per week is not affected. Where a six-day working week is set, the maximum number of regular hours per day is
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specified. The maximum number of regular hours per day under a fiveday working week is not specified. An employee must have a break at least one hour long each day or shift. In addition there must be at least a 12-hour daily break between finishing work one day and beginning work the next day. The Labour Law requires that employees with a five-day week be given two consecutive days off, one of which is Sunday, and employees with a six-day week are to get one day off, generally Sunday. Work can be required on days off only with the consent of an employee. Some flexibility is provided where work cannot be interrupted for production and technical reasons or because of the need to provide uninterrupted service to the general population and in organizations with uninterrupted production. In these situations, the employer can establish any days of the week as days off for groups of employees. The minimum number of days off per week is not affected, but the timing of those days off can be adjusted in these cases.
Holidays Generally speaking, work on official holidays is prohibited, except where work cannot be interrupted for production or technical reasons or because of the need to provide uninterrupted service to the population. In addition, the Labour Law indicates that unless it is otherwise stipulated in legislation, individual or collective agreements, or an employer’s deed, employees must have at least 18 calendar days of annual paid vacation. The annual vacation for the first year of employment is to be taken after one year of employment. At the request of an employee, an annual vacation may be divided.
Shift work The Labour Law deals with shift work. Shift work is defined as a work process performed beyond the place of permanent residence of the workers, where it is impossible for them to return to their places of permanent residence daily. In these cases, the Labour Law provides that employers must provide employees with accommodation, transportation to the site and back, and conditions for doing the jobs and for rest-time between shifts for the entire period the employee is on site. The Labour Law provides that the work period on site and rest time between shifts on site must not exceed 15 calendar days. An exception to this rule is provided in the Labour Law: ‘In exceptional cases on certain sites upon agreement between the employer and representatives of the employees the shift work period may last 30 calendar days.’ There is no guidance as to what is meant by the references to exceptional cases and certain sites, so the application of this exception is uncertain. However, the normal practice of a company using shift work is subject to the general 15-day rule.
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Work permit If a company wishes to employ foreign citizens in Kazakhstan it must apply for a work permit to the Ministry of Labour and Social Protection (the Ministry of Labour). Work permit procedures are regulated by the Rules for Determination of Quota, Requirements and Issuance Procedure for Bringing Foreign Manpower in the Republic of Kazakhstan approved by Government Resolution No. 836 dated 19 June 2001 (as amended by Government Resolution No. 55 dated 20 January 2003) (the Rules). A work permit is a document which gives a company the right to employ foreign citizens to work in Kazakhstan on a temporary basis. Once a company obtains a work permit, a list of specific foreign citizens to be covered by that work permit is approved by the regional department of the Ministry of Labour.
Work permit categories The Rules differentiate three categories of foreign citizens who are subject to obtaining a work permit as follows: • Category I – managerial staff; • Category II – specialists with higher and high vocational education; • Category III – qualified employees.
Workers not requiring a work permit The following foreign citizens do not require a work permit in order to work in Kazakhstan: • heads of branch and representative offices of foreign legal entities; • foreign citizens on business trips, the duration of which does not exceed in aggregate 45 calendar days within one calendar year; • heads and general managers of entities having entered into contracts with the Government of Kazakhstan which provide for investments amounting to more than US $50 million as well as heads of legal entities of Kazakhstan which are involved in investments in priority economy sectors of Kazakhstan and have entered into contracts with the authorized body of investments; • heads and general managers of banking institutions, insurance companies, and pension funds; • persons belonging to diplomatic representative offices and international organizations accredited in Kazakhstan;
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• representatives of foreign mass media, radio, or television which are accredited in Kazakhstan; • those working with charitable and humanitarian organizations registered in Kazakhstan; • members of the crews of sea and river vessels, air, railway and automobile transport belonging to foreign organizations; • artists and sportspeople performing under contracts subject to approval by the respective state authorities; • individual entrepreneurs; • those who have a residence permit in Kazakhstan; • those with refugee status or those who have acquired formal political asylum in Kazakhstan. In all other cases where foreign citizens are engaged in labour activities in Kazakhstan they must hold a work permit.
Quotas Each year the Kazakh Government sets a quota for employment of foreign citizens based on a certain percentage of the economically active population of Kazakhstan. This year the quota is 0.14 per cent, which means that work permits will be issued to approximately 10,665 foreign citizens in 2003.
Search of the local labour market The position which the foreign employee is seeking to fill is an important factor in the issuance of a work permit. If the position is one that can be filled by a citizen of Kazakhstan, then the application for a work permit will be rejected. In order to check whether any Kazakh citizens could fill a given position, a company should perform a search of the local labour market. Such a search includes submission of information on vacancies to a regional labour department; and publication of a vacancy in newspapers. The Ministry of Labour may request that companies perform a search on its official Web site (www.enbek.kz). In practice, the Ministry of Labour often uses this step as an opportunity to postpone the issuance of a work permit. Where a search is not required A search is not required for the following foreign employees: • managers of structural divisions of foreign banking institutions;
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• founders who are simultaneously heads of legal entities; • employees in seasonal agriculture projects which are in compliance with the Agreements On Cooperation in the Area of Labour Migration and Migrating Labour Social Protection. A company may skip the search and apply directly to the Ministry of Labour where foreign citizens are employed in the following areas: • operations in the financial sector which are subject to agreement with the National Bank of Kazakhstan; • operations of organizations which have entered, with the Government of Kazakhstan, into Production Sharing Agreements and other agreements which involve provisions governing investments and subsoil use.
Application procedure After a search has been made, a company should submit an application for a work permit to the regional department of the Ministry of Labour in the region where the foreign employee will work. Within 10 working days as required by the Rules, a regional department will issue an opinion on the advisability of employment of foreign citizens and will send it to the Ministry of Labour. Under the Rules, the Ministry of Labour must issue a work permit or reject an application within 10 working days. However, in practice delays are very common. An application may be rejected on the following grounds: • failure by a company to perform a search of the local labour market; • failure by a company to provide a complete and proper application and/or the necessary documents; • exceeding the established quota. A work permit is granted for a specific position. In order to ensure that such work permit covers a specific foreign citizen, a company should certify the lists of foreign employees at the regional labour department. These lists must be enclosed with a work permit listing the specific positions.
Work permit applications – documents required Upon application for a work permit the following documents must be submitted: • application; • information on a search for required specialists among Kazakhstan’s citizens, and evidence of non-availability of those who have applied for a vacancy.
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• information on compliance with the qualification requirements in the job description; • reasoning for the required quantity of foreign labour; • reasonable refusal by a company to employ citizens of Kazakhstan applying for a vacant position. Upon obtaining a work permit, the following documents shall be submitted for the purposes of certification of foreign employees: • certified copy of a work permit; • certified copies of educational documents; • copies of employment contracts concluded in accordance with Kazakhstani law; • AIDS/HIV medical certificates in accordance with international standards; • documents confirming the employee’s job experience.
Extending a work permit A company may apply for an extension of a work permit directly to the Ministry of Labour. Work permits for Category I (managerial staff) may be extended twice, and work permits for Category II (specialists with higher and high vocational education) may be extended once.
Documents required for the extension of a work permit For the extension of a work permit a company must submit the following documents: • an application; • the work permit; • lists of foreign employees certified by the regional labour department; • lists of foreign employees for an extended work permit; • information on fulfilling special requirements of a previous work permit; • reasons for the extension of the work permit. The Ministry of Labour has 10 working days to consider the application, although it rarely actually meets this deadline.
Work permit transfer A work permit is granted to a specific company and is not transferable. In the event that a foreign employee decides to move to another
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company, the new employer must obtain a new work permit for the employee. In the event that a company terminates an employment contract with a foreign employee, the company may update the certification lists to be enclosed with work permits. However, a new foreign employee must have the same qualifications and be from the same category as the employee being replaced.
4.8
Cultural Distinctions between Kazakhstani and Western Business Practice Patrick M Hussey, US-Kazakhstan Business Association, Washington, DC
Many Westerners, including Americans, hold preconceptions of how the world should be and how business should be conducted, with an expectation that their preferences, norms and habits are shared by others. Investors should disabuse themselves of such prejudices, and begin their enterprise in Kazakhstan with a blank slate, since the actual experience of operating in Kazakhstan is in practice quite different from the US model. It is important for Westerners to appreciate that the Kazakhstanis seek equal treatment and a level playingfield in business relationships. An additional complication for Western investors is that different groups in Kazakhstan have their own particular cultures and subgroup dynamics. However, this chapter will focus on the most commonly encountered tendencies. To speak of Kazakhstanis is to speak of citizens of Kazakhstan, which primarily means Kazakhs and Russians but also embraces a proud host of other nationalities (Ukrainians, Uzbeks, Germans, Uyghurs, Chinese, Koreans, and others). Kazakhs and Russians represent 56 per cent and 28 per cent respectively of the Kazakh population as a whole, and are the primary economic and political actors. Russians once occupied many important posts in government; however, many Kazakhs have since independence taken the place of ethnic Russians in important positions. An important initial step some Americans need to take to avoid appearing ‘out of touch’ is to begin pronouncing the word ‘Kazakhstan’
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correctly. Many Americans inadvertently tend to insert an unwelcome ‘i’ between the syllables akh and stan – probably because the other ‘stans’ in the region have this short ‘i’ sound. The country’s name is correctly pronounced ‘Kaz-ach (hard, as in German)-stan’. You would do well to practise this, if necessary.
Not what you know, but who you know In Kazakhstan, the importance of who you know is fundamental to early success. Having the right connections may ultimately make or break your enterprise. Associations, US Government Trade/Business Missions, the US Chamber of Commerce in Almaty, the US Embassy in Almaty, and other US investors are the best vehicles for screening and establishing appropriate contacts. It is wise to get to know your contacts before getting down to ‘brass tacks’. Live meetings are better than telephone contact, and telephone contact is superior to faxes and e-mail communiqués, especially when discussing substantive matters. It is important to gain competence in spotting true entrepreneurs and working around rent-seeking apparatchiks. Some officials remain bureaucratic and may only expedite your case, permit or request if given a financial incentive. These incentives are inappropriate, for not only do they violate the Foreign Corrupt Practices Act of the United States, they can also be prosecuted in Kazakhstan under the Law on Combating Corruption. The Government of Kazakhstan has set up a special Anti-Corruption Committee with direct access to the President of Kazakhstan’s office in Astana; all problems of this kind should be brought to the attention of the head of this committee. There are also practical reasons not to make these payments, since as soon as a company makes the first payment, it risks becoming a magnet for more requests of this kind. Officials are also constantly being shuffled around by the powers that be, so the intended benefits of these incentive payments may quickly be wiped out. It is difficult to compete with companies which disburse these payments as freely as some central banks print currency, but ‘playing the game’ doesn’t have to mean risk of criminal penalties. The Kazakhstani equivalent of an incentive payment is to provide unique access to Westerners. Since some types of access are cut off to Westerners, those with special access have more options than those who do not, and use this access to the advantage of those within their circle. This kind of ‘access incentive’ may or may not be legal, depending upon the circumstances. Rule of law is often lacking. Government officials do not always view themselves as servants of the people, but as enforcers of ‘important rules’ that may in some cases only be circumvented by personal appeal to a higher power, rather than due process. Approaching such officials with a helpful, open mindset free of the language of ‘rights’ may not
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only get you what you want, but may allow your company to bank on an ally in the future. As you develop a more serious relationship, it is important that you not be a ‘Hi–bye’ American. ‘Hi–bye’ Americans are sometimes perceived as superficial for their tendency to greet everyone with a surface ‘Hello’ and a plastered, toothy grin backed by little relational substance. Americans sometimes fail to maintain human bonds in the same highmaintenance, yet dedicated and personable manner that Russians and Kazakhs do. At first glance, Russians and Kazakhs seem to have an icy exterior, but once you get to know them, they are very warm, caring and make extraordinary friends. This tendency stems partly from the influence of official controls in the Soviet era, which distanced people at the formal level, but fostered a compensatory need for selective, rich human relationships at the informal level. Also, Westerners often use a veneer of friendliness as a personal marketing tool, while many Russians and Kazakhs still find this superficial and unnecessary, unless they have experience dealing with the West. Thus, if you break through this exterior, but fail to live up to the duties and obligations required of that enhanced relationship, you are devaluing the relationship you have worked hard to cultivate. The value of these ties is unquantifiable. You should not think of building these time-intensive ties as a cost, or worse, a commodity – for, if you fail to build these relationships, you will still devote just as much management time stopping the flow of red ink once something goes wrong, and likely be stuck with an ugly tax bill, fine, or other liability. Investing in these relationships is not a silver bullet, but it could be a bulletproof vest that stops some otherwise fatal rounds. Kazakhs and Russians are accustomed to a top-down approach to management. Anyone who is not a CEO or delegation leader will usually not be taken very seriously, since he or she is not regarded as a decisionmaker, in spite of the fact that some companies are quite decentralized. (For more details, please visit www.worldbiz.com, Business Customs and Protocol in Kazakhstan.) Ageism and sexism are common, so it is a plus to appoint a greybeard as delegation head. Some of these tendencies may change as more investment flows into the country. In the same vein, Kazakhs and Russians view information flows very differently than do Americans. Information does not always travel horizontally in Kazakhstan, sometimes only vertically and in narrow circles, for it is seen as a way to deliberately wield or deny power. The media are still restricted, thus lending potency to those who possess it. This makes good contacts who are ‘in the know’ more important than in the States.
How to forge a bond Kazakhs and Russians are much more formal than Americans. Not only do they always dress well for formal occasions, they have a more
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expansive definition of what is formal, including a range of social activities that Americans universally regard as informal. There are important norms to observe in attire and mannerism. For many practical reasons, both women and men should dress conservatively. Because of the tendency toward formality, address a Kazakhstani by his or her first name and patronymic. Major cultural traits among Kazakhs include strong familial ties, respect of elders, a competitive society, and a high regard for courtesy toward others. Company officers who are either female or young may not be accorded the same level of respect as a greybeard – you should be mindful of this in putting together a delegation, and consult with the US Embassy in Almaty beforehand. Some events may involve drinking. Bring your liver and be sure to zakusit’ (have an appetizer or two) prior to drinking, as you may soon be recalling any long-forgotten drinking techniques from your college days. Never try to keep up with a Russian or Kazakh; it might be wise not to drink to every toast. Instead, wait for the most important ones of the evening. For those especially abstemious of alcohol, use a serious health reason as an excuse. In some circles, not wanting to drink can be blasphemous, and you don’t want to be known as an ‘unbeliever’ in the bonding powers of vodka. ‘Investing in a relationship’ in Kazakhstan does not mean just drinking alcohol, or sitting in long meetings. Sitting down to a multi-course meal that may go on for hours at an associate’s dacha, or perhaps a trip to the banya, are ways to ‘invest’ yourself in such relationships. Be careful what dishes are refused – you might be served a delicacy that defies your notions of food. Depending upon circumstances, it may be wise to swallow hard and chew quickly, since you may be receiving this food as a guest of honour. Kazakhs and Russians strongly prefer tea over coffee. Being invited to someone’s home for a meal in a family setting is a special honour, and should not be refused by any of the invitees. An invitation of this kind is a very positive sign. When invited to someone’s place for the first time, bring a small souvenir, bottle of wine, or a bouquet of flowers for the hostess. When visiting a private home, shoes are always removed at the door out of politeness to the host. Gift giving in Kazakhstan is helpful, so long as it is done in an appropriate setting. Conventional wisdom specifies expensive alcohol as the conservative, safe choice in gift-giving. However, everyone gives alcohol – why not instead buy something that is unique and hard to find in Kazakhstan, like speciality home items found at places like Crate & Barrel? An item like a spice rack filled with fresh spices, a portable barbeque grill, or other similar items with ‘sizzle’ will bring a personal touch often lacking from the West, and endear investors to the families of their Kazakhstani business partners. Kazakhstanis may appreciate the delicious irony of a Westerner bringing a spice rack to the world’s ancient spice routes.
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Topics of conversation include vacation spots, food, sports, movies, and books. Kazakhs and Russians tend to be very well educated, collect lots of facts, and read more frequently than most Americans. They are typically familiar with Mark Twain, Ernest Hemingway, J D Salinger, and several other popular American writers, while Oscar Wilde and J R R Tolkien are two British favourites. In the 2003 Tour de France, Kazakhstan’s Alexander Vinokourov made world headlines by finishing third overall, just minutes behind winner Lance Armstrong and the second place finisher, Jan Ullrich. Popular sports include soccer, tennis, golf, horseracing, and hunting. Almaty is the main city in Kazakhstan for sports, since there are several sports stadiums, Medeo (ice-skating), and Chimbulak (skiing) in the vicinity. Political discussions should usually be avoided unless the relationship is a strong one. Kazakhstanis will swoon to words of praise for the hospitality and good spirit of the Kazakhstani people, and will welcome compliments about the natural beauty of the country. Each of the peoples of the Former Soviet Union has its own tragic history. Kazakhstan’s two greatest tragedies both stem from Soviet rule. Collectivization under Stalin resulted in the starvation of millions. Soviet above-ground nuclear testing caused massive radiation damage to the population affecting many generations with infertility, cancer, and genetic defects. It might be helpful to learn more of these events. When you call Kazakhstan’s Washington Embassy, you hear the Beatles song ‘Let It Be’, a song aptly representative of the pace of life in Kazakhstan. In Kazakhstan, things happen in their own time, whether it’s the arrival of your taxi or a meeting with an important official, sometimes running an hour late. Then again, sometimes everything runs like clockwork, so you should always arrive on time anyway – there is no magic formula of ‘everyone comes an hour late and you should too’. In a related vein, sometimes meetings end much later than expected, so limit your expectations of what you can accomplish in one day or even a week. Be ready for lots of ‘hurry up and wait’. Don’t fight these issues, let them be. The bond you forge with your business partner may exist at the intangible and unquantifiable level. This is a necessary prerequisite for success, but bear in mind that government contacts may suddenly leave with little advance notice if there is a reshuffling – a frequent occurrence in Kazakhstan. You should also make efforts to diversify your ‘portfolio’ of contacts to minimize downside loss.
‘A rising tide sinks some boats’ Most Westerners are familiar with the notion that ‘A rising tide lifts all boats’. The Kazakhstani version of this would be something like ‘A
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rising tide sinks some boats’, since Kazakhs and Russians often have a zero-sum approach to business deals. Another form of this might be ‘If something raises your boat, it must be sinking mine’. In other words, the pie does not grow to accommodate the needs and wants of everyone simultaneously, but rather increases the assets or profits of one party at the expense of another. Not everyone in Kazakhstan thinks this way, but many still do – so be ready to disarm these damaging, false assumptions about the real nature of business. At the most basic level of political awareness, Kazakhs remain in a Hobbesian state, while most businessmen inhabit a Kantian world – ie the Kazakhstani formulation ‘What might I get away with in this anarchic environment’ (or ‘Have my core interests in this matter changed?’) stands in stark contrast to the Western question ‘What are my rights in this matter according to law?’ Law is not yet generally viewed as the supreme, overriding principle. The average Kazakhstani citizen resents the tendency of business to put profits before people. Government officials will sometimes give voice to these concerns on behalf of citizens. As consumers, Kazakhstanis tend to resent being ‘nickel and dimed’ for every little expense or aggressive forms of revenue collection, and regard commodities like water and energy as ‘free’ (although they are not). Ironically, Kazakhstani tax officials have been known to apply every possible legal measure to squeeze every last drop from your bottom line. On a positive note, they no longer use ski masks, submachine guns, dogs, and threats of violence to enforce tax compliance. Foreign, as well as domestic, investors in Kazakhstan often encounter a ‘bolt from the blue’ that is highly disruptive to operating efficiency and undermines profitability. Bureaucrats and private entities in Kazakhstan often behave in a way that Westerners regard as infuriating – demanding bribes, blatant overtaxing, and frequently breaching contract. The backdrop to this story is that Kazakhs are often highly, highly competitive with one another. The after-effects of their internecine warfare are often found in the collateral damage inflicted on Western investors, who are unaware of such struggles until it hits their bottom line. Doing business in Kazakhstan can resemble taking part in a horse race, with lots of pushing, shoving, and jockeying for position. It often takes an appeal to a ‘higher power’ to resolve a problem, but rare is the Westerner who is able to outwit a local by trying to go over that person’s head. This ultimately means being wellconnected, and patiently negotiating before litigation. Kazakhs possess strong negotiating skills, whether from centuries of skilful trading or mastery of chess, so you should bring your game theory and be prepared to wield it with strategic acumen. Although obstacles to business deals may seem torturous, from the Kazakhstani perspective Western business has a lot of resources, the Kazakh people
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remain mostly poor, and Kazakh oil won’t last forever. Therefore, the current long-term economic strategy in Kazakhstan is to develop sectors ancillary to and independent of the oil sector as a prerequisite for subsoil extraction. They won’t give away the farm, and are rarely ‘checkmated’, even by the biggest multinationals.
Contracts One problem with contracts in Kazakhstan is that real negotiations often begin after the document is signed; contracts are often viewed as ‘statements of intent’, rather than sacrosanct. This is partly a reflection of the Hobbesian nature of business in Kazakhstan, but also it is a result of devaluation of language. Because Kazakhs and Russians suffered so many Orwellian twists of the tongue under Communism, language has lost much of its meaning. The shredded Soviet Constitution, which seemed remarkably liberal and full of ‘rights’, was interpreted in a devastatingly inhuman way that led to widespread cynicism, as well as fundamental misunderstandings about the nature of law and actual meanings conveyed through language. The lesson learned was that ‘it’s not what the law says, it’s how law is interpreted’. Consequently, as soon as one side gains the upper hand in any potentially litigious matter (whether due to large capital investments, windfall profits, special trade concessions to a unrelated, strategic foreign trade partner, etc), the Kazakhstani side will often use that new status to renegotiate contracts on the basis of changed circumstances – thus destroying the whole point of a contract. You should bear in mind the role freedom of the press and courts should play in such matters. Government officials have emphasized ‘transparency, predictability, and stability’, indicating that they are aware these beliefs are held sacred by the Western business mind. Courts are in a nascent stage of development, and can hardly be relied upon to regularly settle matters in a manner consistent with an objective interpretation of the law. Kazakhs prefer friendship societies to a court of law – they would rather that matters be resolved with tact and in an amicable fashion rather than with a quick legal decision. Courts of law in Kazakhstan are tricky, unreliable, and susceptible to higher intervention. You are better off complaining to the US Embassy or pursuing contacts in Washington, if you do not have close ties in Kazakhstan who are above the level of your antagonists. Kazakhstan has a strong interest in attracting foreign investment, so its leaders have an interest in maintaining the right appearances. This ‘back door’ approach also requires tact, since it again smacks of confrontation and risks public embarrassment of Kazakhstan. Kazakhs and Russians tend to prefer notions of justice to a purely legalistic approach.
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Language Russian is currently the ‘official’ language of commerce and government, spoken by the urban, educated populace and widely used (by 64 per cent of people). However, Kazakh is the ‘state’ language in a bilingual (or perhaps polyglot) society and is growing in importance as more people from younger generations learn Kazakh, sometimes at the expense of Russian. Further complicating the picture is the fact that few Russians speak Kazakh. Over time, the influence of the Kazakh language should continue to grow. Many official documents are now written in English, Russian and Kazakh. Business cards are usually in Russian, and sometimes in English. There is also a language law, which requires that transactions entered into by legal entities on the territory of the Republic of Kazakhstan be documented in Kazakh and Russian. It is helpful to have a few Kazakh words in your vocabulary for easy deployment. Zhakhsy means good or indicates agreement, and rakhmet means thank you. Russian, however, remains the most important language, and since it is the unifying language of choice for most in government and industry, the best way to connect after the first few Kazakh words are exchanged is in Russian. For Englishspeaking Kazakhstanis, UK English is much more common than US English due to the favoured status of UK English in schools. A Google search will reveal a host of online language options and interpreters. One subtle influence of language is the emphasis in Russian on process, not results, in the communication of ideas. Many Kazakhs prefer to communicate indirectly, rather than in a blunt, ‘Texas-style’ approach. Frustrating though it may be, you may achieve desired results by asking fewer questions and building a relationship slowly, demonstrating patience throughout the courtship. This roundabout style, of course, may lead to problems in the contract later if anything substantive is signed before the relationship truly develops. Speak in slow, measured tones. By doing this, you will avoid mistakes in interpretation, and set the right tone.
Aiming for a cultural win–win Possessing a diverse array of contacts in one’s quiver and knowing how to aim them at problems will significantly aid your activities in Kazakhstan. Be sure to adapt in deferential ways to Kazakhstani preferences, or at least create a perception that you have done so, while retaining core corporate interests in mind. Not all of the above recommendations will work in all cases, but sometimes even clumsy attempts to adapt will win favour from your Kazakhstani partner. It’s
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especially challenging to overcome the differences, largely cultural and perceptional, inherent in contracts, language, philosophy, and a tragic history underappreciated by the West. If your delegation is able to juggle all of these issues while navigating the uncertain depths of the Caspian or finding refuge on the steppes, your venture may yield dividends.
Part Five Appendices
Appendix 1
Case Study: Scot Holland Estates Roger Holland
Scot Holland Estates (SHE) is a professional real estate services company with most of its business centred in Kazakhstan’s three main cities, Astana, Almaty and Atyrau. Originally, its major clients were large foreign organizations – essentially from the oil and gas sector, consulting corporations, law firms and some fast-moving consumer goods companies. SHE locates and provides rental accommodation and office space for its clients, and supports various other requirements including qualified personnel. In 1999 the company staged its first Ideal Home Exhibition in the five-star Regent Almaty Hotel. SHE launched its operation in Kazakhstan in September 1994, under what one may almost refer to as an ‘accidental corporate strategy’ during a time when the institutional culture for capitalist business development in the former Soviet Union (FSU) was only beginning to emerge. The company’s founders, Vivienne Scot and Roger Holland, were initially interested in major population centres in the FSU, and were not specifically focused on any one location. Their first choice for the company was Vladivostok in the Russian far east. However, it turned out that Holland missed his flight from Moscow to Vladivostok and, eager to get things started, hopped on a flight to Almaty the following day. Hence, Scot Holland Estates was baptized on Kazakh territory. Receiving very little assistance in opening its operations in the country, it took Holland five months and fees to a US law firm of around US $10,000 to open the business in Kazakhstan. The delay was due to the fact that the legal structure could not accommodate the highly unusual scenario of a foreigner starting a brand new company in the country. All other foreign companies at the time were either representative or branch offices of existing entities for which the legal framework existed. Since it was not possible to open a bank account until all documents were organized and supplied to the Ministry of Justice, the company was forced to operate on a marginal basis – with cash transactions – during its first six months in the country.
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Business commenced slowly and office space was both expensive and of poor quality. Many essential business inputs taken for granted in the developed market economies were scarcely found in Kazakhstan, reliable market information was hard to come by, and the only really helpful people that the company could find were several local willing employees. Holland has found most of his workforce intelligent and well qualified but often lacking in marketing skills, which they have been forced to learn on the job rather rapidly due to the company’s highly incentivized remuneration policy. Holland initially elected to operate Scot Holland Estates independently, without a local partner, which he thought would double the inherent risk in trusting a completely unknown person. However, after three years he decided to take his most senior ‘right hand’ colleague into the company as a full partner, apparently one of the best decisions he ever made. The small startup capital came originally from the other original founding partner Scot, who later decided to opt out of the partnership and look for greener pastures in China. In 1998 Holland acquired a recruitment agency which he has run in parallel with the property business ever since. Though a small part of the business, it is quite complementary for some of the foreign companies in particular trying to find quality executive staff. As the company grew and started to offer broking services to local citizens buying and selling properties, Holland decided to publish the first real full-colour Property magazine in June 2000. This magazine is well known and respected in the local market, and is of a high enough standard to be distributed on some of the European airlines connecting the country. Holland also registered some trademarks to try to protect his intellectual property rights for both the magazine and his exhibitions. Generally, there are few problems with the many lease agreements the company brokers, but of course from time to time a landlord may refuse to honour some conditions or a conflict will appear between the parties. Legal proceedings are not normally necessary, and are unlikely to be favourable for the tenant in any case. Currently, the company has developed a growing real-estate consulting department headed by a colleague from the US. Although this type of expertise was difficult to sell early on, Holland now receives numerous enquiries from all types of project. They include apartment buildings, office blocks, shopping centres and recently even discussions on a possible monorail system for the city of Almaty. SHE is able to offer market analysis, feasibility studies, highest and best use, plus valuations and assistance with business plans for financing. Scot Holland Estates rarely has any contact with customs authorities as it does not import or export. As for the tax environment, this is
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an ever-changing situation and it is important to have good accounting staff to keep abreast of all new requirements. In recent years the tax police or inspectors have become quite persistent and aggressive in their approach. Corporate taxes are levied in bands but there are a number of social taxes in addition to these, and taxes soon mount up. Holland has recently employed a local specialist firm in this area to ensure the company is working in compliance, efficiently and with better planning. Overall, Holland is optimistic and very positive about doing business with Kazakhstan. He believes that while operating here is never easy, if you are flexible, patient and resourceful you will win. It is important as everywhere to establish good relationships with key people, in all sectors of business life. One should also take advantage of the great talent pool in the country, although a lot of time is still required for specific training. There is an abundance of opportunities everywhere as the country is still very young. Franchising is a good example of this; a national association only started about two years ago but there are already several serious members and a strong and growing interest. Certainly the economy appears to be quite strong at the moment, and if real-estate construction is a visible sign, then you can say there is a boom. The country should really prosper in the next 10 years with all its natural wealth, but there will always be logistical challenges with such a large country and small population making some products and services inherently expensive. Holland believes that President Nazarbayev has done a very good job, and provides the country a real solid and stable father figure whom the population both admire and respect.
Appendix 2
Practical Procedures for Obtaining a Visa for Kazakhstan The Embassy of Kazakhstan in London
Foreign citizens and those individuals without Kazakh citizenship need to obtain a visa in order to enter the territory of the Republic of Kazakhstan (RK). The visa of the RK is glued into the passport or another document acceptable to the Kazakh authorities. The visa accounts for the identity of the individual to whom it is issued and gives that individual the right to enter and remain in the RK, as well as to depart the country or cross its territory in transit to a third country. A visa is issued or extended on the basis of a letter of invitation from international organizations, foreign countries' representations or Kazakhstan state organizations. The letter of invitation should be registered with the Department of Consular Service (DCS) of the Ministry of Foreign Affairs (MFA) of Kazkahstan in Astana or its representation in Almaty. Citizens of 27 countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Great Britain, Greece, Iceland, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Malaysia, Monaco, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the USA) can get one month single-entry Business, Tourist, Private, Diplomatic or Service visas at embassies or consulates of Kazakhstan in Astana or its representation in Almaty. A permit from the Ministry of the Interior is not required for entities inviting citizens of Andorra, Argentina, Bulgaria, Brazil, the Vatican, Hungary, Cyprus, the Republic of Korea, Costa Rica, Cuba, Latvia, Lithuania, Mexico, Nauru, Poland, Romania, San Marino, Slovakia, Slovenia, the USA, Turkey, Uruguay, Czech Republic, Chile, Switzerland, Estonia, SAR or Jamaica for the purpose of business or tourism. It means that the host entity should submit the letter of invitation directly to the DCS (Astana, Almaty).
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Kazakhstan issues the following types of visas: Diplomatic, Official, Investor, Business (Iskerlik), Private, Tourist, Study, Work, a visa for Medical Treatment, a visa for Permanent Residence and a Transit visa. A Diplomatic visa is issued to the holders of diplomatic passports and in some cases, when the issue of a diplomatic visa has been recognized expedient. Diplomatic visas are registered free of charge. An Official visa is issued to personnel of foreign diplomatic and other representations and international organizations, who are not referred to the diplomatic category, and also to foreign citizens and persons without citizenship travelling on business purposes. An Investor visa is issued to real investors – CEOs of major foreign companies operating in Kazakhstan, or those who have real plans to develop business projects. A Business (Iskerlik) visa is issued to foreign citizens and persons without citizenship travelling for business purposes. If the applicant is not a citizen of one of the aforementioned 27 countries then a copy of the letter of invitation registered with the Consular Department of the Ministry of Foreign Affairs of Kazakhstan should be attached to the application form. A Private visa is issued to the applicants on presentation of the original invitation form prepared by a Kazakhstan national (citizens of the aforementioned 27 countries need no letters of invitation). A private letter of invitation should be registered with the local office of Kazakhstan Ministry of the Interior. Foreign citizens born in Kazakhstan or relatives (spouses, children and parents) of Kazakhstan passport holders may apply for a one-month visa without obtaining the invitation letter (a maximum of twice yearly). For registration of a Tourist visa it is necessary to obtain a letter of invitation from any travel company registered in Kazakhstan. For citizens of the aforementioned 27 countries, only a completed application form is required. A Study visa is issued upon presentation of a letter of invitation from a Kazakhstan educational institution that is registered with the Immigration Police. In order to register a Work visa, a work permit is necessary in addition to other documents if it is not regulated otherwise by an international treaty or the RK agreement. A work permit is not required for CEOs of Kazakhstan legal entities that have concluded a contract with investment authorities of Kazakhstan, for CEOs of banks, insurance companies and pension funds, for representatives of foreign mass media accredited in Kazakhstan, for employees of charities and humanitarian organizations. A visa for Medical Treatment is issued to applicants travelling to Kazakhstan for treatment, medical examinations, consultations and
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other similar purposes on the basis of petitions of the relevant institutions and organizations confirming the purpose of the invitation. A visa for Permanent Residence is issued in the presence of the necessary documents registered in the order stipulated by the legislation. A Transit visa is issued on presentation of documents (a visa) required to enter the destination country, along with relevant tickets proving departure from Kazakhstan. The date of departure should be no later than 5 days from the moment of arrival to the port or station in the territory of Kazakhstan. Extension of a visa may be granted by the DCS or Immigration Police of the Ministry of the Interior. The fee charged for consular services for document processing and visa issuance is levied on the basis of the amount of the approved consular fees and the amount of reimbursement for actual expenditures. These are collected in US dollars or currency of a country of the foreign institution's accreditation on a mutual basis. The embassies and consulates of Kazakhstan have different tariffs of consular fees. At the Embassy of Kazakhstan in London the consular fee is: • £33 for a single-entry business or private visa; • £43 for a double-entry business visa, £33 for a tourist; • £73 for a triple-entry visa; • £133 for a multiple-entry business visa valid up to 1 year and £263 for 2 years; • £23 for a tourist single-entry visa for less than 30 days; • £33 for a tourist double-entry visa for less than 60 days; and • £13 for a transit visa. The applicants should submit the following items: 1. an application form, fully completed and signed by the applicant; 2. a letter of invitation (fax copies are acceptable), with a reference number, if applicant is not a citizen of one of the aforementioned 27 countries; 3. a business letter from employee (for business visas); 4. a valid passport with one full blank page to affix a visa; 5. one passport sized photograph.
Appendix 3
Contributor Contact Details American Chamber of Commerce in Kazakhstan 531 Sefullina Prospect 4th Floor Suites 414–16 480091 Almaty Kazakhstan Tel: +7 3272 58 79 38 Fax: +7 3272 58 79 39 Contact: Diana Brett, Executive Director e-mail:
[email protected] Web: www.amcham.kz Andromeda Financial Services Tel/fax: +7 3272 93 40 57 Mobile: +7 333 214 0840 Contact: Steve Fast Investment Banking and Strategic Consulting US tel: +1 620 947 3672 US fax: +1 413 803 9898 e-mail:
[email protected] Aon Kazakhstan 86 Gogolya Street, Floor 7 480091 Almaty Kazakhstan Tel: +7 3272 792 056/581 317/501 674 Fax: +7 3272 582 475 Contacts: Ms Lazzat Buranbayeva, Chairman and CEO e-mail:
[email protected]
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Assistance, LLC Law Firm 153/50A Zharokov Street Almaty Kazakhstan Tel: +7 3272 752 667/746 191 Fax: +7 3272 752 767 e-mail:
[email protected] Contact: Zhaniya B Ussen Esq e-mail:
[email protected] Web: www.assistance-law.com BISNIS Business Information Service for the Newly Independent States USA Trade Center US Dept of Commerce Washington, DC 20230 USA Tel: +202 482 4656 Fax: +202 482 3574 Contact: Trevor Gunn, Director e-mail:
[email protected] Bracewell & Patterson LLP (Kazakhstan) 57 Amangeldy Street 480012 Almaty Kazakhstan Tel: +7 3272 581 400 Fax: +7 3272 581 444 Contact: Gregory Vojack e-mail:
[email protected] Contact: Richard Remias e-mail:
[email protected] Bracewell & Patterson LLP (USA) 711 Louisiana Street Suite 2900 Houston Texas 77002 2781 Tel: +713 223 2900/800 887 1993 Fax: +713 221 1212 Contact: Edgar Marston e-mail:
[email protected] Contact: John Couch e-mail:
[email protected]
Contributor Contact Details
Central Asia Tourism Corporation 537 Seifullin Ave 480012 Almaty Kazakhstan Tel: +7 3272 501 070/707 Contact: Folke von Knobloch (CEO) e-mail:
[email protected] Denton Wilde Sapte 273 Furmanova 3rd Floor 480099 Almaty Kazakhstan Tel: +7 3272 581 950 Fax: +7 3272 581 905 Contact: Tom Johnson e-mail:
[email protected] EBRD Almaty Resident Office Tel: +7 32 72 581 476 Mobile: +7 300 711 51 00 Fax: +7 32 72 581 422 Contact: Daniel Berg e-mail:
[email protected] Ernst & Young Ernst & Young Kazakhstan 240 G Furmanova Street 480099 Almaty Kazakhstan Tel: +7 3272 58 5960 Fax: +7 3272 58 5961 Contact: David Wilkes, Managing Partner FIAS Washington DC, USA Tel: +202 473 4442 Fax: +202 522 3183 Contact: Geeta Batra Senior Private Sector Development Specialist Investment Climate Department e-mail:
[email protected]
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HSBC Bank Kazakhstan 43 Dostyk Avenue 480100 Almaty Kazakhstan Tel: +7 3272 581 333 Fax: +7 501 501 Contact: Marat Dzhaukenov, Deputy CEO e-mail:
[email protected] Web: www.hsbc.com Jay Nathan, PhD, MBA, MA, CFPIM, CPM, APP 210 Laurel Lane Clarks Summit Pennsylvania USA 18411 Tel: +7 18 990 1879/570 587 4995 Fax: +7 18 990 5966 e-mail:
[email protected] KPMG 105 Abylai Khan Avenue 480091 Almaty Kazakhstan Tel: +7 3272 50 88 55 Fax: +7 3272 50 88 77 e-mail:
[email protected] Contacts: Janat Berdalina, Managing Partner Martin Cocker, Audit Partner Jones Ward, Senior Tax Manager Kuhn Consulting 2/91st Aiteke-bi 480091 Almaty Kazakhstan Tel: 7 300 372 8883 Fax: 7 3272 32 14 27 e-mail:
[email protected] Kuhn Corporation Moscow, Russia Tel: 7 095 252 77 14 Fax: 7 095 696 61 54 e-mail:
[email protected] Web: www.kuhncorp.biz
Contributor Contact Details
Macleod Dixon Almaty office: 3rd Floor 1/1 Dzhandosov Street 480008 Almaty Kazakhstan Tel: +7 3272 509 380/581 092 Fax: +7 3272 509 382 Atyrau office: Suite 401, 404 4th Floor 48 Azattyk Avenue 465020 Atyrau Kazakhstan Tel/Fax: +7 3122 586 898 McGuireWoods Kazakhstan LLP 41 B Kazibek Bi Street 5th Floor 480100 Almaty Kazakhstan Tel: +7 3272 596 100 Fax: +7 3272 596 116/596 117 Contact: Alexander V Barsukov, Managing Attorney e-mail:
[email protected] Web: www.mcguirewoods.com Michael Wilson & Partners Ltd 5th Floor 36 Samal-1 480099 Almaty Kazakhstan Tel: +7 3272 58 48 90/50 15 70 Fax: +7 3272 50 15 75 e-mail:
[email protected] Contact: Arlan Yerzhanov e-mail:
[email protected] Web: www.mwp.kz Oil & Gas Vertical 30 Marshala Timoshenko Str 1214359 Moscow Russia Tel/fax: +7 095 149 7245/141 2480/141 1373 e-mail:
[email protected]
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PLLG KAZAKHSTAN Office 103 Samal – 2, 105 480099 Almaty Kazakhstan Tel: + 7 3272 501150/509909 Fax: + 7 3272 509911 Contact: Nurzhan Shakirov e-mail:
[email protected] Web: www.pllg.kz PLLG UK 100 Pall Mall St James’s London SW1Y 5HP United Kingdom Tel: + 44 (0)207 664 8777 Fax: + 44 (0)207 664 8778 Contact: Peter Levine/Anara Kazkenova e-mail:
[email protected] Web: www.pllg.net PLLG RUSSIA 29 Schepkina Street Moscow 129090 Russian Federation Tel: + 7 (095) 730 7080 Fax: + 7 (095) 730 7079 Contact: Katya Kirsanova/Ivan Papkov e-mail:
[email protected] Web: www.pllg.ru Russell H Ragsdale Taugul 1 Building 46 Apt 16 Almaty 480042 Kazakhstan Tel: +7 3272 55 41 75 e-mail:
[email protected]
Contributor Contact Details
Salans (Kazakhstan) Prospekt Abilai Khana, 135 480091 Almaty Kazakhstan Tel: +7 3272 582 380 Fax: +7 3272 582 380 e-mail:
[email protected] Web: www.salans.com Contact: Aigoul Kenjebayeva Salans (Paris) 9, rue Boissy d’Anglas 75008 Paris France Tel: +33 1 42 68 48 00 Fax: +33 1 42 68 15 45 Contact: James E Hogan e-mail:
[email protected] Web: www.salans.com Scot Holland Estates 105 Dostyk Avenue 3rd Floor, Business Center 480051 Almaty Kazakhstan Tel: +7 3272 58 17 60 Fax: +7 3272 58 17 68 e-mail:
[email protected] Web: www.realestate.kz Seimar Investment Company 62 Karasay Batyr Str 480091 Almaty Kazakhstan Tel: +7 3272 500 077 Fax: +7 3272 500 379 Contact: Aiganym Malisheva, PR Department Chief e-mail:
[email protected] Web: www.almatykus.kz
379
380
Appendices
Douglas Townsend Crugawelon Silian, Lampeter Ceredigion SA 48 8AB Tel: +44 7768 091 901 e-mail:
[email protected] The US-Kazakhstan Business Association 1200 G Street, NW Suite 827 Washington, DC 20005 USA Tel: 202 434 8748/202 434 8791 Fax: 202 638 3040 Contact: William C. Veale, Executive Director e-mail:
[email protected] Contact: Patrick M Hussey e-mail:
[email protected] Web: www.uskba.net
Appendix 4
Useful Web sites Government President of Kazakhstan http: //www.president.kz/ Parliament of the Republic of Kazakhstan http: //www.parlam.kz/Default.asp?ln=en Ministry of Foreign Affairs http: //www.mfa.kz/ Ministry of Finance http: //www.minfin.kz/ Ministry of State Revenues http: //www.mgd.kz/index2.htm?22 Agency on Statistics http: //www.kazstat.asdc.kz/
Other organizations Mayor of Almaty http://www.mayor-almaty.kz/ Kazinvest http://www.kazinvest.kz/ Kazakhstan Stock Exchange http://www.kase.kz/eng/ Union of Chamber of Commerce and Industry of the Republic of Kazakhstan http://www.ccikaz.kz/ Kazinform http://www.kazaag.kz/3.php
Index accounting standards 251–55 AES, case study 107–08 Agency for Information Technology Development and Informatization 136 agriculture 9, 179–87 crops and animal production 185–86 food processing 186 government strategy 182–85 investment opportunities 181 trends 187 Air Astana 212–13 air travel 212–13 Almaty map xxxiv office market 194–200 restaurants 126–31 American Bar and Grill chain 127 Andromeda Financial Services 32 Anti-Corruption Committee 356 Anti-Monopoly Agency 287–88, 290–93, 324 anti-monopoly regulation 286–93 arbitration 313–19 Asian Development Bank (ADB) 171–72, 175–76 Astana, map xxxiii audit practice 245–50
bank accounts 45 bank deposits 12 Banking Law 258–61 banking system 23–27, 39, 221–22 commercial banks 26–27, 258–59 foreign capital 27 investment 261 lending 260 local payments 24 mortgage financing 262 reform of 263 regulations 23–24, 257–63 regulatory organization 25–26 retail 261–62 see also National Bank bilateral investment agreements 49, 221 branches 218, 226–27 buildings, ownership of 302 business audit requirements 246 branches 218, 226–27 corporate forms of 218–19, 225–31 corporate governance 247–49 establishing a 218 liability exposure 226 see also joint stock companies (JSC), limited liability partnerships (LLP)
384
Index
business centres 197–200 business culture 6–7 contrast with Western business 355–64 capital markets 25 portfolio investments 48–49 cement industry 109–15 market 113–14 obstacles 111–13 overview 109–10 plants 109–10 prospects 114–15 technologies 110–11 Central Asian Small Enterprise Fund (CASEF) 31–32 Civil Code 19, 48, 189, 203, 205, 217, 222, 226, 265–66, 274, 276, 321, 327, 333 commercial disputes arbitration 313–19 resolution of 306–12 Communications Law 140 Competition Law 286, 289–93 violation of 292–93 computer programs, protection of 201–03 consumer rights 288 contracts 222–23, 362 individual labour agreements 337–38 investment 284 stabilization 18–19, 80, 273–74 Copyright Law 201–04, 320–26 computer programs/databases 325 intellectual property 320–26 remedies for violation 323–24 corporate governance and privatization 247–49
corporate income tax 232–36 corruption 8, 356 measuring 38 culture see business culture currency see tenge currency control 259–60 customs Code 45–46, 324 duties 209, 241, 284–85 excise tax 240–41 dispute resolution 275–77 commercial 306–12 foreign direct investment (FDI) 20–21, 47, 80, 222–23, 285 investments 285 land ownership 305 law 222–23, 275–77 double tax treaties 49 Eagle Kazakhstan Fund 30–31 economy 7–9 overview 10–13 reform of 34–38 ecotourism 211 electricity see power industry employees dismissal of 346–47 holidays 349 probation periods 347 shift work 349 working hours 347–49 employment legislation 50–51 foreign citizens 337–44 insurance liability 191–92 see also Labour Law Energy Charter Treaty 276 enforcement proceedings 312, 314, 317 environmental issues 92
Index
European Bank for Reconstruction and Development (ERBD) 34–40, 213 European Union 41 exports 10–12, 221, 237 minerals 99 oil and gas 61
30,
fees and levies 241–42 food and beverage industry 116–25 assets 121 case study 126–31 distribution 117 investments in 121 liquidity 120 profitability 117–20, 123–24 recommendations 130–31 sales 123 structure 116 trends in 128–30 wages in 122 foreign capital 27 foreign currency 45 foreign direct investment (FDI) 10–12, 14–22, 35, 37 contract stabilization 18–19, 80, 273–74 country of origin 42 definition 18 dispute resolution 20–21, 47, 80, 222–23, 285 incentives 220–21, 279–86 legal framework 14–22, 42–52, 217–24 ‘new’ Law (2003) 14–17, 220, 271, 280–82 oil industry 62 performance requirements 45
385
preferences 284–85 priority sectors 21–22, 283 projects, examples of 53–54 protection of 17–21, 271–77, 281–82 reasons to invest 51–52 repatriation 19–20 treaties 277, 282–83 United States 28 foreign investment climate 41–54 legislative framework 42–52 reasons to invest 51–52 Foreign Investors’ Council (FIC) 39 foreign labour 50–51 ‘Foreign Land Users’ 301 foreign trade zones 51 free trade ports 51 gas 63–72 exports 61 industry development 70–72 investment climate 72–73 pipelines 79 processing 68–70 production 64–66 regulation 73–80 reserves 64 transporting system 66–68 gift giving 359 Healthcare Agency of Kazakhstan 164, 170, 175 healthcare services 164–72 competition in 167–69 end-user analysis 169–70 financing 171–72 market access 170–72 market profile 164–66 medical insurance 168
386
Index
overview 164 reform 171 regulation 170 see also medical equipment market hotels 130, 210 imports 11–12, 221 individual labour agreements 337–38, 345–46 information technology (IT) sector 147–57 demand for equipment 154 demand for services 155 end users 155–57 government and 149–50 Industry Association 148–49 Internet 150–53 legal environment 148–49 overview 147–48 PC supply and production 153–54 software market 154–55 trends 154–55 see also software copyright protection insurance market 188–93 arranging a policy 190 currency issues 191 legal framework 189–90 overview 188–89 trends 192–93 use of captives 191–92 intellectual property rights copyright 320–26 patents and trademarks 327–36 see also Copyright Law Intellectual Property Rights Committee 206–07, 322, 324, 330
Interbank Payment Centre (IPC) 24 Internal Audit Committee 247–48 International Accounting Standards (IAS) 251–55 International Finance Corporation 31 International Standards on Auditing (ISA) 245–46 Internet 150–53 investment banking 261 funds 28–33 promotion 32 see also foreign direct investment (FDI) joint-stock companies (JSCs) 49, 218, 226–27, 229–31, 265 law 250 management of 230 transfer of shares 230–31 Kazakh Small Business Programme 39 Kazakhstan agro-geography 180 demography 6, 169 economy 7–9 geography 4–5, 210 history 3–4 Kazakhstan Accounting Standards (KAS) 251–55 Kazakhstan Development Bank 32 Kazakhstan Electricity Grid Operating Company (KEGOC) 105–07 Kazakhstan Investment Promotion 32
Index
Kazakhstan Kagazy CJSC 159 Kazakhstan Mortgage Company (KMC) 262 Kazakhtelecom 133, 141–43 National Operator 145 KAZINVEST 213 Kazmunaigas 76 Kazpatent 330, 332–35 see also patents Labour Code 347 Labour Law 337, 343, 345–64 Labour Ministry 343 Land Code 47–48, 181, 183, 187, 222, 297–301 land laws 297–98 land ownership 297–305 categories of land 298–99 dispute resolution 305 easements 303–04 for construction 302 rights 299 taking by the state 304–05 tax 305 use 300–301 language 363 law attitude towards 7 Banking Law 258–61 Communications 140 Competition Law 286, 289–93 Copyright Law 201–04, 320–26 Customs Code 45–46, 324 dispute resolution 222–23, 275–77 Employment Law 337 Government Procurement 43–44 international business 217–24
387
Investment 42–43, 220, 271–76, 285 joint-stock companies (JSCs) 49, 226, 229–31, 250, 265 Labour Law 337, 343, 345–64 land 297–98 Licensing 48, 260 Limited and Additional Liability Partnerships 226 minerals 96–97 Natural Monopolies 287–89 Patent 201, 205, 327, 330–31, 333 Petroleum 79–80 Securities Market 265–67 Tax Code 44, 190, 219, 268, 305, 344 Trademark 204–05, 327, 333–34, 336 work permits 50–51 Licensing Law 48, 260 limited liability partnership (LLP) 218, 226–29 management of 228 transfer of interest units 228–29 livestock 9 medical equipment market 173–78 evaluation of sector 176–77 overview 173–77 procurement arrangements 175–76 subsectors 174 see also healthcare services minerals 8–10, 81–100 aluminium 83 barite 84
388
Index
bauxite 83 chromites/ferroalloys 84 coal 84–86 copper 85 exports 99 gold 85–86 iron ore 86 law 96–97 lead 86–87 manganese 87 phosphate rock 87 production 83 reserves 82 steel 87–88 tax value 83 titanium 88 uranium 88 zinc 86–87 mining industry 83–88 environmental issues governance 98–100 investment in 88–90 minerals 83–88 privatization 98–100 railway system 92–96 residual government shares in 90–91 Stock Exchange 92 taxation 97–98 Ministry of Agriculture 13, 182 support programmes 184 mobile telephone industry 134–35 mortgage financing 262, 303 National Agency of Tourism and Sport 208, 213 National Bank 12–13, 23, 25–26, 48, 222, 227, 257–58, 262–63 insurance market regulation 188–89
securities market regulation 265–67 see also banking system National Informational Infrastructure 149 national oil and gas company see Kazmunaigas National Oil Fund xxxv, xxxvi National Securities Commission (NSC) 25, 49, 264 nationalization 19, 274–75 natural monopolies, control of 286–89 Nazarbayev, President 41–42, 57, 249 ‘new’ Law see foreign investment Nursat 139 offices 194–200 classification of 195–98 oil 8, 11–12, 34–35, 57–63 compulsory insurance 191–92 foreign investment 62 major producers 59–62 pipelines 79 processing 79 procurement rules 43–44, 77–78 production 59–62 refining 62–63, 79 regulation 73–80 reserves 57–59 transportation 62–63, 79 paper industry 158–63 export prospects and competition 161–63 rising demand 158–59 waste 159
Index
Patent Law 201, 205, 327, 330–31, 333 patents 329–33 see also Kazpatent pension funds 244 personal income tax 242–43 petroleum see oil Petroleum Law 79–80 portfolio investments 48–49 poverty 8 power industry 103–08 infrastructure 105 private ownership 47 privatization 11, 46–47 corporate governance and 247–49 mining industry 98–100 Programme for Industrial Innovation and Development 32–33 property rights 48, 222, 274–75, 297–305 public telecommunications networks 141–43 railway system 9, 92–96, 212 costs 94–96 mining and metallurgical sector 92–96 restructuring programme 94 real estate market 194–95 reform programme 35–38 roads 9, 212–13 Sarbanes-Oxley Act 248 Scot Holland Estates 367–69 securities market 264–70 disclosure requirements 267–68 Silk Road Fund 31
389
social bonding 358–60 social tax 243, 344 software copyright protection 201–07 Soviet Union, break-up of 10 Stock Exchange 13, 25, 30, 49, 264, 267–70 development of 249–50 mining industry 92 see also securities market subsidiaries 218–19 Subsurface Law 79, 273 SWIFT (Society for Worldwide Interbank Financial Transmission) 24 tariff policies 44 taxes 219–20, 244 corporate income tax 232–36 customs duties 209, 241, 284–85 double tax treaties 49 excise tax 240–41 exemptions 284 land tax 239–40, 305 personal income tax 242–43 preferences 284 property tax 238–39 social tax 243, 344 subsoil users 240 Tax Code 44, 190, 219, 268, 305, 344 vehicle tax 239 see also Value Added Tax telecommunications industry 133–46 equipment 145–46 fixed line services 135
390
Index
licensing 143–45 major companies 136–39 market overview 133 mobile telephones 134–35 public telecommunications networks 141–43 reform of 146 regulation 135–36, 140–46 size of 134 see also Kazakhtelecom tenge 8–9, 191, 259 devaluation 11 tourism and travel 208–13 Trademark Law 204–05, 327, 333–34, 336 trademarks 333–36 transfer policies 44–45 transportation 9, 213 see also air travel, railway system, roads TRIPS (Trade-Related Aspects of Intellectual Property) 207, 320, 325–26 utilities
103–08
Value Added Tax (VAT) 44, 209, 219, 236–37 venture capital 29–30 visas 209, 338 water, importance of 5 wheat 9 work permits 50–51, 222, 338–43, 350–54 categories 350 exemptions 338–40, 351 extensions of 342–43, 353 procedure for obtaining 340–42, 352 quotas 351 search of local labour market 351–52 suspension or revocation 343 transfer of 353–54 World Bank 35, 171, 175, 187 World Intellectual Property Organization (WIPO) 325–26 World Trade Organization (WTO) 46, 207, 320
Index of Advertisers Air Astana American Chamber of Commerce BG Group British Airways British-Kazakh Society Celtic Resources Ltd IBC UK Conferences ITE Group Kazkommerts Bank Marsh LLP McGuireWoods Kazakhstan LLP PLLG International Lawyers SALANS Scot Holland Estates US Kazakhstan Business Association
