2012 Investment Climate Statement - Kazakhstan

2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012

Openness to, and Restrictions Upon, Foreign Investment

Kazakhstan has made significant progress toward the creation of a market economy since it gained independence in 1991, and the European Union (2000) and the U.S. Department of Commerce (March 2002) granted it market-economy status. Kazakhstan also has attracted significant foreign investment since independence. As of September 2011, foreign investors had invested a total of $159.3 billion in Kazakhstan, primarily in the oil and gas sector. Despite numerous weaknesses in the investment climate, Kazakhstan is widely considered to have the best investment climate in the region. Numerous international firms utilize Kazakhstan as a regional headquarters location.

The government's Program for Accelerated Industrial Development, as part of its “Road Map for Business 2020,” aims to diversify Kazakhstan's economy, and plays a key leading role in determining the country's investment priorities. the government of Kazakhstan adopted a "National Plan for Attracting Investment" in December 2011. The plan anticipates a number of measures to facilitate foreign investment in Kazakhstan, including the simplification of visa procedures, customs clearance, and transit across borders, as well as the establishment of special service centers for foreign investors under regional municipal authorities.

In 2011, Kazakhstan voiced its intention to join Organization of Economic Cooperation and Development (OECD). To meet OECD requirements, the government anticipates that it will make changes to its investment legislation.

The government has liberalized its trade policies and passed legislation to bring its legal and trade regimes into conformity with World Trade Organization standards. Kazakhstan submitted its Memorandum on the Foreign Trade Regime (MFTR) in 1996 and the first round of consultations on WTO accession took place in 1997. Kazakhstan has made significant progress in implementing the legal framework necessary for WTO accession and signed bilateral protocols on market access for goods and services with a bulk of the working party members. Russia, Belarus, and Kazakhstan officially entered into the Customs Union on July 1, 2010. Russia’s membership in the WTO may accelerate Kazakhstan’s negotiations, which the government of Kazakhstan hopes to complete by the end of 2012. Kazakhstan's entrance into the Customs Union almost doubled its average import tariff. Furthermore, as required by the Customs Union, Kazakhstan implemented tariff-rate quotas (TRQs) on January 1, 2010 on poultry, beef, and pork. U.S. exporters are concerned about the possible trade limiting-effects of these TRQs, as well as the way TRQs are calculated and distributed. According to the Ministry of Economic Development and Trade, Kazakhstan plans to maintain its tariff-rate quotas in 2012 at 2010-2011 levels.

Kazakhstan signed a Free Trade Zone treaty with Commonwealth of Independent States countries in November 2011. The treaty, however, has country-specific exceptions. For example, Kazakhstan will impose high import tariffs on Ukrainian sugar and vodka. The Common Economic Space (CES) of unifies Russia, Belarus and Kazakhstan into force on January 1, 2012.

Several major acts of legislation impact foreign investment in Kazakhstan: 1) the 2003 Law on Investments; 2) the 2003 Customs Code and the Customs Code of the Customs Union, which came into force in July 2010; 3) the Tax Code; 4) the Law on Currency Regulation and Currency control; and 5) the Law on Government Procurement. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. Inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to automatically accept government positions as correct, can create a significant obstacle to business in Kazakhstan.

The 2003 Law on Investments established a single investment regime for domestic and foreign investors and provides, inter alia, national treatment and non-discrimination for foreign investors. It guarantees the stability of existing contracts, with the qualification that new contracts will be subject to amendments in domestic legislation, certain provisions of international treaties, and domestic laws dealing with "national and ecological security, health, and ethics."

The Law on Investments contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants (See A.5. Performance Requirements and Incentives).

The Law also provides for dispute settlement through negotiation, Kazakhstan's judicial process, and international arbitration (See A.4. Dispute Settlement). In general, U.S. investors have expressed concerns about the Law’s narrow definition of investment disputes, its lack of clear provisions for access to international arbitration, and certain aspects of investment contract stability guarantees.

Experts consider Kazakhstan's tax laws among the most comprehensive in the former Soviet Union. In January 2009, Kazakhstan adopted a new Tax Code that lowered corporate-income and value-added taxes, replaced royalty payments with a mineral-extraction tax, and introduced excess-profits and rent taxes on the export of crude oil and natural gas. Accordingly, the corporate income tax rate has dropped from 30% to 20%. The value-added tax (VAT) has been reduced gradually from 16% in 2006 to 12% in 2009, where it now remains and will likely remain in the near term. Kazakhstan has a flat 11% social tax on employees' earnings and a personal income tax rate for residents of 10%. The tax rate for non-residents is between 5% and 20%, depending on an individual's type of income. Subsurface users are subject to additional payments: a signature bonus, commercial-discovery bonus, and historical cost reimbursement.

In 2001, Kazakhstan adopted transfer-pricing legislation, which gives tax and customs officials the authority to monitor export-import transactions. A new transfer pricing law that came into force on January 1, 2009, introduced the commonly accepted "arm's length principle." The law was amended in 2010 to provide for rights and liabilities of government agencies, the right of a transaction party to provide state agencies with a justification for applied price, and the right to appeal results of tax inspections. According to the law, the Ministry of Finance has the right to monitor transactions of companies by surveying the prices of transactions and analyzing companies’ reports. Foreign investors concede that the new law is more closely aligned with international standards, but are concerned that the law will be applied not only to transactions with related parties, but to all international transactions. The Embassy is not aware of any cases involving the inappropriate application of transfer-pricing legislation in 2011.

Although no sectors of the economy are legally closed to investors, restrictions exist, such as a 20% ceiling on foreign ownership of media outlets and a 49% limit for foreign ownership in the telecommunications sector. The restriction in the telecommunications sector might be removed following Kazakhstan’s accession to the World Trade Organization (WTO). No constraints on the participation of foreign capital in the banking and insurance sectors exist, but a ban on foreign bank and insurance company branches remains in force. Restrictions also exist on foreign ownership of land in Kazakhstan. (See A.6. Right to Private Ownership and Establishment)

Foreign investors have complained about irregular application of laws and regulations, and investors have interpreted regulatory pressure as an effort to extract bribes. Some report harassment by the Financial Police via unannounced audits, inspections, and other methods. One company reported a request from the Financial Police for confidential information on employees, with no apparent connection to an ongoing investigation. At times, the authorities have used criminal charges in civil disputes as a pressure tactic.

By law and in practice, foreign investors can participate in privatization projects, which should protect investors against discrimination. Many foreign companies, however, cite the need to defend their investments from the near-constant barrage of decrees and legislative changes, most of which do not "grandfather" existing investments. Foreign investors also complain about arbitrary tax inspections, as well as problems in finalizing contracts, delays and irregular practices in licensing, and land fees. Some foreign firms have expressed concern about the failure of government organizations to fulfill their contractual obligations, particularly regarding payments, which can prevent the foreign partner from advancing its investment program. The investor then additionally is exposed to government charges of non-performance, which could allow the government to cancel a contract.

The government regulates foreign labor at macro- and micro- levels. Foreign workers must obtain work permits, which can be difficult and expensive to receive. The government limits issuance of work permits to boost local employment, based on the area of specialization and geographic region. From 2003-2008, the quota for foreign labor steadily increased from 0.14% to 1.6%, but was reduced by half on the heels of the economic crisis. A foreign labor quota of 0.75% of the active labor force remained in force throughout 2009 and 2010, and was slightly increased in 2011 to 0.85%. In 2012, the foreign labor quota will continue to grow to 1% of the active labor force.

A February 2011 amendment to Kazakhstan's Expatriate Workforce Quota and Work Permit Rules mandated that medium and large businesses have 90% local content in workforce for technical personnel and 70% for company executives as of January 2012. Following a concerted, 10-month advocacy campaign by Western oil companies, Kazakhstan passed an October, 2011, decree that exempts Kazakhstan's three largest hydrocarbon projects – Tengiz, Karachaganak and Kashagan – from the requirement for three years. Other businesses that must follow the local content law will find it difficult to meet the onerous demands required to obtain an expatriate work permit, especially in large industrial or highly technical fields where Kazakhstan cannot supply skilled workers in sufficient numbers.

The new 2011 law on migration allows foreign citizens with Kazakhstani residence permits to work in Kazakhstan without additional permission and without being counted against labor quotas. Kazakhstan also opened its labor market for its Single Economic Zone partners Russia and Belarus. As of January 1, 2012, Kazakhstan will no longer have labor quotas for citizens of Russia and Belarus, and labor migrants from those countries will be exempted from registration with the migration police.

Index Ranking Year

Transparency International 120 (score: 2.7) 2011

Heritage Economic Freedom 78(score: 62.1) 2011

World Bank Doing Business Report 47 2012

Foreign Investment in the Extractive Industries

Despite growing investment in Kazakhstan's energy sector, concerns remain about the government's tendency to challenge contractual rights, legislate preferences for domestic companies, and create mechanisms for government intervention in foreign companies' operations, particularly in procurement decisions. Together with vague and contradictory legal provisions that are often arbitrarily enforced, these negative tendencies feed a perception that Kazakhstan is a suboptimal investment environment.

Business associations and investment advisors are concerned that Kazakhstan's Tax Code could undermine tax-stability clauses in existing and future subsoil contracts. The government has stated that it will only guarantee tax stability for existing production sharing agreements (PSAs) and for the one major hydrocarbon project that has a tax and royalty contract (Tengiz). Furthermore, in December, 2011, the Minister of Finance publicly stated that only tax rates, but not tax filing/collection procedures, can be stable. Contracts for Tengiz, Kashagan, and Karachaganak include tax stability clauses that theoretically shelter the operating companies from changes to the tax code or customs regime. In 2008, the government determined that the Karachaganak contract provided it tax stability, but did not exempt the company from export duties. Under duress, the Karachaganak Petroleum Operating Company (KPO) paid more than $1 billion in customs duties, which it contested through arbitration. In the fall of 2009, KPO and the government agreed to suspend international arbitration and enter into negotiations. In December 2011, the government confirmed as a result of these negotiations that KPO does not have to pay crude export duty.

In April 2008, Kazakhstan introduced a customs duty on crude-oil and gas-condensate exports. The government zeroed the customs duty rate in January 2009, but then it re-introduced it at a rate of $20 a ton in August 2010. The customs duty doubled to $40 a ton as of January 1, 2011. Companies that pay "rent tax," a tax on mineral/crude oil exports, are exempted from the customs duty on crude exports.

The government’s "local content" strategy is considered to have a discriminatory effect on foreign investors. Ambiguities in the calculation and implementation of local content requirements present an administrative barrier for subsoil operators. International oil companies complain that implementation is uneven, irregular, and non-transparent, particularly at local levels of government. Representatives of international service companies also report that it is very difficult to obtain Kazakhstani certificates of origin. According to the Local Content Law, a product must carry a certificate of origin issued in Kazakhstan to meet local content criteria.

The 2010 Law on Subsoil and Subsoil Use contains explicit requirements regarding the local purchase of goods and services for all investments in offshore oil and gas exploration and production. A December 2009 Local Content Law also requires that companies set a minimum percentage of local content for goods and services in contracts, but does not limit how to address existing contracts without such quotas. Anecdotally, U.S. businesses privately have reported intense pressure from the government of Kazakhstan to rewrite contracts to meet the revised local content standards. The Local Content Law allows the state to revoke the subsoil-production rights of companies that do not meet local content requirements during a project’s exploration phase. The National Agency for Local Content Development (NALCD), established in June 2010, oversees local content policy.

The Subsoil Law also allows the government to unilaterally amend existing contracts of "strategic significance" or even to terminate contracts deemed to threaten Kazakhstan's economic security or national interests. The government's August 2009 Decree 1213 denoted which subsoil blocks are "strategically significant," and listed over 100 oil and gas fields, including Tengiz, Kashagan, and Karachaganak. Decree 1213 also authorized the government to amend subsoil contracts if the actions of a subsoil user "substantially change" Kazakhstan's economic interests or threaten Kazakhstan's national security.

The Subsoil Law also requires a company to obtain the government's permission to conclude combined exploration and production contracts, shortens the time limits for exploration contracts, and enhances the government's authority to terminate contracts not in compliance with the law. It additionally compels parliamentary approval for tax stability clauses in individual contracts, and precludes the use of production-sharing agreements (PSAs) in the future. Moreover, the Law treats draft work plans containing cost and production volume projections as formal contract commitments. Companies must establish equal terms, conditions, and pay for Kazakhstani and foreign workers, and mandates that the government evaluate subsurface resource bids based on promised social contributions. The Law also severely reduces gas-flaring quotas and imposes harsher penalties for environmental violations.

The Subsoil Law reaffirms the state's preemptive right to participate in equity transactions involving subsurface user rights in oil and gas or mining operations, including, but not limited to, the purchase of shares in new exploration and production projects. The government can also block the sale of oil and gas assets and exclude specific companies from participating in oil and gas tenders, in the interests of "national security." The Subsoil Law establishes transparent procedures for state and private companies to exercise subsurface rights, and clearly defines when the state can exercise its priority right. A December 2010 regulation established an interdepartmental committee to advise whether and how to exercise the government's preemptive rights in extractive projects.

On January 9, 2012, President Nazarbayev signed the Law on Natural Gas and Gas Supply. The Law aims to regulate gas transportation, distribution, and pricing, as well as to create a single, monopolistic operator to purchase natural gas. The government will select a national gas operator, once the law becomes effective. International oil company executives and legal analysts argue that the draft legislation could inhibit the development of a domestic gas market in Kazakhstan, and view it as part of an overall trend toward greater state control and involvement in the management and marketing of the country's natural resources.

Conversion and Transfer Policies

In 1996, Kazakhstan adopted Article 8 of the IMF Articles of Agreement, which stipulates that current account transactions, such as currency conversions or the repatriation of investment profits, will not be restricted. In 1999, the government and National Bank of Kazakhstan announced that the national currency would be allowed to float freely at market rates. After a February 2009 tenge devaluation, the National Bank returned to a managed-float exchange-rate regime and maintained an exchange rate in the corridor 150 tenge/per U.S. dollar plus/minus 3% (See A.9. Efficient Capital Markets and Portfolio Investments). In 2010, the National Bank broadened the corridor of fluctuation, allowing the tenge to float between 127.5 and 165 to the dollar (plus 10%, minus 15%). Due to favorable world oil prices, the National Bank rarely intervened in 2010. Although the National Bank cancelled the corridor of fluctuation and announced a return to a manageable floating exchange rate early in 2011, the exchange rate has not appreciated sharply. The tenge fluctuated between 145.45 and 147.85 to the dollar in 2011.

No distinction is made between residents and non-residents in opening bank accounts. No restrictions require different types of bank accounts for investment or import/export activities. Money transfers associated with foreign investments, whether inside or outside of the country, are unrestricted. Non-residents may pay wages in a foreign currency (Article 16 of the Law on Currency Regulation and Currency Control). Foreign investors may also convert and repatriate earnings in tenge.

In June 2005, President Nazarbayev signed the Law on Currency Regulation and Currency Control. This law lifted restrictions on money transfers and allows individuals to take up to $10,000 in cash out of the country without documentation of the money's origin. The Russia, Belarus, Kazakhstan Customs Union further will liberalize the money transfer regime. Starting later in 2011, any amount in excess of $10,000 must be declared at the border of the Customs Union while amounts less than $10,000 need not be declared. However, the Customs Union removed the requirement for a National Bank to certify money's origin in amounts over $10,000. The National Law on Currency Regulation and Currency Control was amended accordingly in 2011. On January 1, 2007, Kazakhstan eliminated all licensing requirements and procedures for foreign-currency operations, except the licensing of forex operations. Agencies conducting transactions in foreign currency, including bank payments and transfers relating to capital movements, should notify the National Bank of their operations.

2009 amendments to the Law on Currency Regulation and Currency Control continued to liberalize currency control. Individuals now can open bank accounts in foreign banks without notifying the National Bank. The ceiling for capital movement operations subject to notification or registration at the National Bank was raised from $50,000 to $100,000 for capital outflow and from $300,000 to $500,000 for capital inflow. Export-import credits and financial loans with terms longer than 180 days remain under the registration regime. Borrowers or lenders must register credit transactions with the National Bank before making them.

Amendments also have enhanced the responsibility for the non-payment of foreign currency on external trade contracts. In particular, administrative charges will be applied for non-payments exceeding $50,000, and criminal charges can be initiated for non-payments over $10,000 on monthly calculated indexes.

2009 amendments also specified measures for a "special currency regime," which only can be introduced in emergency situations -- when the country's economic and financial stability are in jeopardy. Measures may include requirements for companies to retain a certain percentage of their foreign currency profits in the National Bank of Kazakhstan or other authorized banks, the mandatory sale of foreign currency earnings, and limits on the use of foreign bank accounts. Considered an extreme measure, its application in the foreseeable future appears unlikely.

The National Bank no longer requires so-called transaction passports for export-import operations following December 2011 legislative amendments to the Law on Currency Regulation and Currency Control. Instead, commercial banks will issue a contract registration number for imports and exports that will serve as customs declaration. A registration number is required for all transactions exceeding $50,000, and the procedure to receive a registration number may take a few days.

The National Bank regularly monitors the currency operations of selected non-residents. This procedure primarily affects the oil and gas, construction, and mining industries, as well as companies providing architectural, engineering, and industrial-design services. According to the National Bank, this monitoring provides better statistical data on the balance of payments and external debt.

The U.S. Embassy is not aware of any concerns with regard to remittance policies or the availability of foreign exchange for remittance of profits.

Expropriation and Compensation

The 2003 Law on Investments allows nationalization by the state in emergency cases "as provided in legislative acts of the Republic of Kazakhstan." Unlike its predecessor -- the 1994 Investment Law -- it does not provide clear grounds for expropriation, nor does it require "prompt, adequate and effective" compensation at a fair market value. The 2003 Law differentiates between nationalization and requisition, providing full indemnification in the case of the former, as opposed to payment of market value in the case of the latter. Bilateral investment treaties (BITs) between Kazakhstan and other countries, including the United States, require compensation in the event of expropriation.

There has been only one case of legal expropriation of a foreign investor's property for public purpose. The investor ultimately submitted the case for international arbitration, and the government paid the amount awarded by the arbiter in May 2006.

Dispute Settlement

There have been a number of investment disputes involving foreign companies in the past several years. While the disputes have arisen from unrelated, independent circumstances, many are linked to alleged violations of environmental regulations, tax laws, transfer-pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of the exploration schedule by subsurface users, because costs incurred during this period are fully reimbursed under the terms of a production sharing agreement. In some instances, disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity can exist for interference in judicial cases given a relative lack of judicial independence.

Kazakhstan's Civil Code establishes general commercial law principles. The 2003 Law on Investments defines an investment dispute as "a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor." It states that such disputes can be settled by negotiation, in Kazakhstani courts, or through international arbitration. According to the Law, disputes not falling within the aforementioned category "shall be resolved in accordance with the laws of the Republic of Kazakhstan." While the laws of Kazakhstan favor use of the Kazakhstani judicial system, when contracts include an international arbitration clause it is honored. Moreover, in 2004 Kazakhstan adopted a law on international arbitration.

Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international arbitral award rendered by the ICSID, a tribunal applying the UN Commission on International Trade Law Arbitration rules, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan.

An issue of serious concern for foreign investors is the lack of explicit provisions for international arbitration in the Subsoil Law. International law firms worry that since the Subsoil Law does not expressly provide for international arbitration, the government might choose not to include a provision in contracts to allow resolution of disputes through international arbitration during pre-contract negotiations. That said, in July 2010, Prime Minister Karim Massimov ordered the Ministry of Justice to create a special legal department to defend the country's interests in international courts.

Monetary judgments are normally made in domestic currency, but currency conversion is not a barrier to repatriation of awards.

Even when investment disputes are eventually resolved in accordance with contract conditions, the process of reaching that resolution can be very slow and involve considerable investment of time and resources. Many investors therefore elect to handle investment disputes privately, rather than make their cases public. The U.S. Embassy advocates on behalf of U.S. firms with investment disputes. A Kazakhstani Investment Ombudsman, to be introduced in 2012, was created with the goal of paying special attention to questions related to foreign investors, including protection of their rights and interests, and consideration of investment disputes. The Prime Minister likely will be the Investment Ombudsman and head a specially created commission on foreign investment composed of cabinet members.

Although creditor rights were clearly defined in a 1997 Bankruptcy Law, numerous complex amendments have led to misapplication in practice. The law contains a detailed list of creditors' rights and prescribes a mechanism for their enforcement. The 2008 amendments elaborated a comprehensive list of the governmental authorities involved in bankruptcy procedures and expanded the rights of enterprises during possible rehabilitation procedures.

According to Article 28 of the Civil Code, civil suits concerning the restructuring of financial institutions now fall within the jurisdiction of the Almaty Financial Court. The Court must approve creditor-agreed restructuring plans of financial institutions.

Performance Requirements and Incentives

The 2003 Law on Investments and 2008 Tax Code provide for tax preferences, customs duties exemptions, and in-kind grants as incentives for foreign and domestic investment in priority sectors. The Investment Committee under the Ministry of Industry and New Technologies makes decisions on customs duties exemptions (with notification to customs authorities) and in-kind grants on a case-by-case basis. The Investment Committee also ensures that investors meet their contractual obligations. The law allows the government to rescind such incentives, collect back-payments, and/or revoke an investor's operating license if an investor fails to fulfill its contractual obligations. Tax preferences can be extended upon decision of regional tax authorities.

Largely focused on priority sectors, the government uses preferences to help diversify its economy away from the extractive sector. Priority sectors include agriculture, construction, metallurgy, chemistry and pharmaceuticals, food production, consumer goods, oil refining, oil and gas infrastructure, transport, information communication, power, machinery, tourism, education, and aerospace. The system applies to new enterprises, as well as to existing enterprises making new investments. The duration of tax preferences increases with the size of investment. In light of Kazakhstan's Accelerated Industrialization Program (See A.1. Openness to, and restrictions upon, Foreign Investment), the government plans to amend the Law on Investments in 2011 to broaden the list of priority investment goods subject for customs duty exemption.

There are no known cases in which U.S. or other foreign firms have been denied participation in government-financed or subsidized research and development programs.

The government of Kazakhstan has stated its belief that CES agreements comply with WTO standards and therefore will not damage the interests of existing and potential investors from third countries. If, however, CES agreements are not WTO compliant, WTO commitments will supersede CES rules.

Right to Private Ownership and Establishment

Private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and to engage in all forms of remunerative activity.

Kazakhstan's constitution provides that land and other natural resources may be owned or leased by Kazakhstani citizens in accordance with the law. The 2003 Land Code allows citizens of Kazakhstan (natural and legalized) and Kazakhstani companies to own agricultural and urban land, including the commercial and non-commercial buildings, complexes, and dwelling thereupon situated. Amendments to the Labor Code in 2011 permit foreigners to own land to build industrial and non-industrial facilities, including dwellings. Foreigners may rent, but not own, agricultural land for up to 10 years. Foreigners may also own agricultural land through either a Kazakhstani-registered joint venture or a full subsidiary. The Land Law does not allow private ownership of the following types of land:

  • ­ land used for national defense and national security purposes;
  • ­ specially-protected natural territories;
  • ­ forests, reservoirs (lakes, rivers, canals, etc.), glaciers, swamps, etc.;
  • ­ public areas (urban or rural settlements);
  • ­ main railways and public roads;
  • ­ land reserved for future development and construction of national parks, railways and public roads, subsoil use and power facilities, social infrastructure.

Protection of Property Rights

Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the 2003 Land Code. A credit bureau system is in the very early stages of development. All property and lease rights for real estate must be registered with the Ministry of Justice, service centers of which exist in cities and rural district centers.

Kazakhstan continues to move closer to international IPR standards. Its Civil Code and various IPR laws, in principal, protect U.S. intellectual property. In 2010, the government introduced amendments to trademark legislation that would bring provisions of the law in line with WTO guidelines for trade-related aspects of intellectual property rights (TRIPS). Kazakhstan has also ratified 16 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO). In 2010, Kazakhstan joined the Madrid Agreement on the Repression of False or Deceptive Indications of Source on Goods and the Agreement Concerning the International Registration of Trademarks. It also ratified the Nairobi Treaty on the Protection of the Olympic Symbol. In 2011, Kazakhstan ratified WIPO Patent Law Treaty. In 2006, USTR removed Kazakhstan from the Special 301 Watch list.

In June 2011, Kazakhstan ratified the Agreement of Common Economic Space on unified principles of regulation in the area of IPR protection. As follow-up steps within the framework of this agreement, Kazakhstan intends to join the Singapore Treaty on the Law of Trademarks and the Rome Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations.

In December 2011, the Kazakhstan adopted amendments to IPR laws that enhance the responsibility for copyright violations on the internet and simplify procedures for trade marks’ registration.

Patent protection is available for inventions, industrial designs, and prototypes. Patents for inventions are available for novel processes and products that have industrial applications. The National Institute of Intellectual Property performs formal examination of patent applications. Patents for inventions are granted for 20 years. Patents for utility models are granted for a five-year period with a possible three-year extension. Prototypes are granted a 10-year initial period of protection, with the possibility of an additional five-year extension. Kazakhstani legislation also permits an "innovation" patent, which is granted for inventions for an initial three-year period with a possible extension for two years. Issued after only checking the local novelty of an invention, an innovation patent is expected to boost local-business innovation. Unsuccessful applicants can appeal decisions of the National Institute of Intellectual Property and the Committee for Intellectual Property Rights. Kazakhstan is a member of the Moscow-based Eurasian Patent Bureau and the Munich-based European Patent Bureau.

Trademark violation is a crime in Kazakhstan. While trademarks are protected in Kazakhstan, counterfeit goods can be found at local markets. Marked disparities in fees charged to domestic patent and trademark applicants, as compared to foreign applicants, exist. Applications for trademark, service-mark, and appellations-of-origin protection should be filed with the National Patent Office and approved by the Committee for Intellectual Property Rights. Trademarks and service marks are afforded protection for 10 years from the date of filing. The Law on Copyrights and Related Rights was enacted in 1996. The law largely conforms to the requirements of the WTO TRIPS Agreement and the Berne Convention. One of the latest amendments to the Copyright Law allows licensed vendors to seek damages from unauthorized dealers selling pirated merchandise. Illegal software development and manufacture generally is not conducted in Kazakhstan. Russia and Ukraine are believed to be the local market's primary sources.

Ex-officio authority for customs officials to seize counterfeit products at the border came into force on January 1, 2010, although the Customs Code of the Customs Union restrains its implementation.

Progress in IPR protection through civil courts is less pronounced as the judicial continues to develop the expertise necessary to resolve more complex civil disputes.

Transparency of the Regulatory System

The transparent application of laws remains a major problem in Kazakhstan and an obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. While foreign participation in the economy is generally welcomed, some foreign investors point out that the government is not always even-handed and sometimes reneges on its commitments. Although the Investment Committee of the Ministry of Industry and New Technologies was established to facilitate foreign investment overall, it has had limited success in addressing the concerns of foreign investors. The government of Kazakhstan intends to create a special Investment Commission and Investment Ombudsman (See A.4. Dispute Settlement) to discuss conditions for investors as well as to address controversial questions from foreign investors.

Kazakhstan has taken great pains to ameliorate its business environment and streamline bureaucratic practices, including start-up procedures for businesses and a minimum capital requirement of 100 tenge ($0.70). The government also introduced new building regulations in 2009 and a risk-based approach for permit approvals in 2009 to decrease the onerous nature of attaining construction permits. As a result, Kazakhstan received top reformer honors in the World Bank's 2011 Doing Business Report and moved up 15 places in the rankings to 53 out of 183 countries. In 2010-2011, Kazakhstan continued its business reform and the 2012 Doing Business Report, moving up from 53 to 47.

Kazakhstani law provides for government compensation for violations of contracts that were properly entered into and guaranteed by the government. However, where the government has merely "approved" or "confirmed" a foreign contract, Kazakhstan's responsibility is limited to the performance of administrative acts (i.e., those "concerning the issuance of a license, granting of a land plot, mining allotment, etc.") necessary to facilitate a subject's investment activity. In those cases, commercial arbitration or other dispute commercial resolution mechanisms would need to be followed to in order to redress contract violations.

Kazakhstan's institutional governance is weak, further adding to the problems of transparency in commercial transactions. Senior government officials have a large say in minor and major transactions, and decisions often appear to be made behind closed doors.

A 2007 Licensing Law established the legal framework for licensing activities and simplified procedural requirements. The relevant agency must issue a license within one month of receiving required documents from a company. Although the government continues to ameliorate licensing procedures and reduce the number of licensed activities, the process remains problematic, confusing, and costly, particularly for small- and medium-sized enterprises.

Efficient Capital Markets and Portfolio Investment

Kazakhstan has endeavored to create and implement a sound financial system and stable macroeconomic framework. As a result, the financial system has started to mediate financial resource flows and direct them to the most promising parts of the economy. Official policy clearly supports credit allocation on market terms and the further development of legal, regulatory, and accounting systems consistent with international norms.

Most domestic borrowers obtain credit from Kazakhstani banks, although foreign investors find the bank margins and collateral requirements onerous. It is usually cheaper and simpler for foreign investors to use retained earnings or borrow from their home country. Since 1998, Kazakhstani banks have placed Eurobonds on international markets and obtained syndicated loans to support domestic lending. Leading Kazakhstani banks were able to obtain reasonably good ratings from international credit assessment agencies until the global financial crisis struck. In operation since 1993, the Kazakhstani Stock Exchange (KSE) is an insignificant source of investment, as reaffirmed by the crisis. Decreased capitalization and diminished transaction volumes at KSE have not impacted the overall economic situation or financial markets

In October 2008, the Kazakhstani government announced a stabilization plan that included a $10 billion bailout package for banks. In February 2009, the government, via Samruk-Kazyna, acquired majority stakes in four systemically important banks: 75.1% of common shares in BTA, 100% of Alliance Bank, 19.8% of common shares in Halyk Bank, and 21.24% of common shares in KazKommertsBank. Early in 2011, Halyk Bank bought out its common shares from Samruk-Kazyna. BTA, Alliance Bank, Astana Finance, and Temirbank all defaulted by the end of 2009 and began the debt restructuring processes. BTA alone required $16.65 billion in debt restructuring, while Alliance Bank had to negotiate $4.5 billion in debt. In 2010, Alliance Bank and BTA bank concluded debt restructuring negotiations. 67% of Alliance Bank's common shares were allocated to Samruk-Kazyna and 33% to creditors. Samruk-Kazyna owned 81.48% of common shares in BTA at the end of restructuring, while foreign and domestic creditors held 18.5%, and minority shareholders – 0.02%. At the end of December 2011, BTA bank announced the necessity of a second debt restructuring. BTA bank also failed to make $150 million coupon payment due on January 1, 2012. The second restructuring plan is expected to be presented to shareholders at the end of January 2012.

According to the financial regulator’s statistics, BTA bank formally remains one of the largest banks in Kazakhstan. As of December 1, 2011, the assets of five largest banks, including KazKommertsBank, HalykBank, BTA bank, Bank CenterCredit and ATF-UniCredit bank were valued at 8.4 trillion tenge (approximately $57.2 billion), or 31.9% of GDP. As of December 1, 2011, Kazakhstan had 38 commercial banks.

Although stable, Kazakhstan's banking system is far from recovered. The poor and deteriorating quality of many banking assets, capital constraints, and cautious lending policies remain major challenges. As of December 1, 2011, the share of non-performing loans (NPL) remained high at 22.1%, but analysts also noted initial signs of recovery in Kazakhstan’s banking sector in 2011.

To help the banks to deal with NPLs, the government developed a set of measures, including the creation of a second distressed asset fund, which would be capitalized by the government and private investors. The entire package of measures is expected to be implemented in 2012.

Trading on the KSE is dominated by block trades. The spreads are extremely wide, and the bulk of KSE trade is in forex operations, reaching 52.8% of total annual trade in 2011. Transactions with government papers accounted for 3.8% of KSE trade. In December 2011, the capitalization of the KSE was $43.1 billion. The number of listed companies dropped from 354 in 2010 to 111 in 2011.

Pension funds are potential investors into both the KSE and foreign markets. As of December 1, 2011, 11 pension funds had accumulated 2,606.8 billion tenge (approximately $17.8 billion). According to Kazakhstani legislation, pension assets should be invested in specific categories of securities, including corporate and government bonds, and securities issued by foreign governments and foreign corporate securities. The government is considering options to liberalize the pension funds’ investment rules.

Joint-stock companies may neither cross-hold more than 25% of each other's stock, unless they have an exemption codified by law, nor exercise more than 25% of the votes in a cross-held joint-stock company. Kazakhstani law recognizes companies as "related" if one company or legal entity holds more than 20% of the shares of another. However, the owning company may not vote more than 25% of the total shares at the general meeting of shareholders of the related company, and the general meeting must approve various corporate actions, such as mergers and acquisitions.

There have been few hostile takeovers in Kazakhstan, primarily because there are few publicly-traded firms. Defensive measures are not targeted toward foreign investors in particular. The Civil Code requires a company that has purchased a 20% share in another company to publish information about the purchase. Currently, the government is preparing to make existing legislation against hostile takeovers more efficient.

Competition from State-Owned Enterprises

Officially, private enterprises compete with public enterprises under the same terms and conditions. However, state-owned enterprises enjoy better access to natural resources, markets, credit, and licenses than private entities.

The government of Kazakhstan has actively consolidated state-owned enterprises in recent years. At the end of 2010, five state-owned holding companies existed in Kazakhstan. Kazakhstani law requires national holding companies to publish annual reports and submit their books for independent audit.

1. Samruk-Kazyna - National Welfare Fund (NWF) was modeled on Singapore's Temasek. Kazakhstan's largest national holding company, it manages the state's assets in oil and gas, energy, transportation, telecommunication, and financial and innovation sectors. According to some estimates, Samruk-Kazyna controls more than half of Kazakhstan's economy and is the nation's largest buyer of goods and services. Samruk-Kazyna's official purpose is to facilitate economic diversification and to increase effective corporate governance. However, Samruk-Kazyna spent its first two years spearheading the government's anti-crisis program.

The Prime Minister chairs Samruk-Kazyna's Board of Directors, which includes the Ministers of Finance, Industry and Trade, Economic Development and Trade, and Oil and Gas, as well the assistant to the President of Kazakhstan and three independent directors. In February 2009, President Nazarbayev signed a separate law providing Samruk-Kazyna special status and rights. Samruk-Kazyna can conclude large transactions between members of its holdings without public notification. Samruk-Kazyna also has a pre-emptive right to buy strategic facilities and bankrupt assets. It is exempt from government procurement procedures and has the right to establish its own procurement rules. Moreover, the government can transfer to Samruk-Kazyna state-owned property, simplifying the process to transfer state property to private owners (i.e., state property can be easily privatized without any tender process or observation of privatization legislation).

2. KazAgro manages the state's agricultural holdings, including the National Food Contract Corporation (wheat trade), KazAgroFinance (leasing to farmers), Agrarian Credit Corporation, Corporation on Livestock Development, and Fund of Financial Assistance to Agriculture. Chaired by the Deputy Prime-Minister, the Board of Directors includes the Ministers of Finance, Agriculture, and Economic Development and Trade, as well as three independent directors.

3. Parasat is charged with stimulating the development of scientific research and domestic know-how in the high-tech sector. The holding company manages several scientific institutions and funds. Chaired by the Minister of Education of Science, the Board includes the Vice-Minister of Finance, the Chairmen of State Property Committee and Science Committee.

4. Zerde - National Informative and Communication Holding Company was created to develop modern information and communication technologies and to stimulate investments and innovations in the communication sector. The Managing Board's Chairman is subordinate to the Ministry of Communication and the Prime Minister's office.

5. The National Medical Holding company seeks to implement business-oriented innovative corporate management in the newly built hospitals of Astana. In 2011, the holding company became a part of Nazarbayev University, with the stated goal of creating favorable conditions for medical research and the use of advanced medical technologies in Astana.

National Oil Fund:

Kazakhstan has a sovereign wealth fund, which is called the National Oil Fund of the Republic of Kazakhstan. Established by Presidential decree in 2000, the fund aims to diminish the country's budgetary dependence on fluctuations of world oil prices and to accumulate savings for the benefit of future generations. The Fund accumulates all direct taxes and a percentage of revenues from the oil sector, revenues from the privatization of state property in mining and manufacturing industries, and revenues from sales of farmlands, as well as the Fund's accumulated investment incomes. The Ministry of Finance owns the National Fund. The National Bank is its trustee, and selects external administrators from internationally-recognized investment companies or banks to oversee the fund. Information on external administrators and the assets they manage is confidential.

The National Fund’s money is divided for two parts – stabilization and saving. Stabilization money is expected to be used to maintain macroeconomic stability. The National Fund invests in the domestic economy through "official transfers," although annual transfers from the National Fund to the budget are limited to $8 billion, since 2010. The purpose of saving part is to keep oil money for future generations of Kazakhstanis. The size of saving part depends on investment returns of the National Fund. Additionally, President Nazarbayev decreed that that National Fund should retain a minimum balance of no less than 20% of GDP.

The Ministry of Finance and the National Bank prepare the National Fund's annual report, which the President approves. In addition, the Ministry of Finance and National Bank publish on their websites (www.minfin.kz, www.nationalbank.kz) monthly and annual reports on revenues and use of National Fund monies. Although these reports provide information on the Fund's general financial situation, they do not provide details. As of January 1, 2012, the National Fund's assets totaled $43.7 billion. Kazakhstan's total international reserves, including the National Bank's foreign currency reserves, equaled $73 billion (in current prices).

Corporate Social Responsibility

Although Kazakhstan has not adhered to OECD Guidelines for Multinational Enterprises, the government actively promotes the idea of corporate social responsibility. In his addresses to foreign investors and local businesses, President Nazarbayev has repeatedly asked them to implement socially responsible projects, to provide occupational safety, to pay salaries, and to invest in human capital. The President annually awards "Paryz" ("Honors" in the Kazakh language) for achievements in corporate social responsibility.

Political Violence

There have been no incidents of politically motivated violence against foreign investment projects, and politically motivated civil disturbances remain exceptionally rare. In 2011, Kazakhstan experienced several incidents in which individuals or groups launched violent attacks targeting government offices, with most concentrating on police and national security organs. These attacks have been linked to Islamic extremist groups and represent the first such attacks in Kazakhstan. The violence has remained isolated and has not targeted foreign investment or foreigners working in Kazakhstan. In May 2011, several hundred oil workers in Kazakhstan's Mangystau Oblast went on strike, demanding higher salaries. On December 16, public violence fueled by the long-running strike and other social grievances left a reported 17 dead, over 100 injured and a number of buildings in vandalized. Kazakhstan has good relations with its neighbors, although the government is concerned that borders with Kyrgyzstan and Uzbekistan are vulnerable to penetration by extremist groups.

On April 3, 2011, Kazakhstan held early presidential elections, which Nazarbayev won with 95.55% of the vote. While the Organization for Security and Cooperation in Europe (OSCE) asserted that the election did not meet Kazakhstan's OSCE commitments or international standards for democratic elections, and opposition groups denounced the election as fraudulent, no significant demonstrations against the results occurred. According to preliminary results of the January 15, 2012 parliamentary election, the ruling elite have retained power with relatively broad popular support, and an additional two parties have entered into parliament.


Although the Kazakhstani Criminal Code contains special penalties for accepting and giving bribes, corruption is prevalent throughout Kazakhstan. The President issued an anti-corruption decree in April 2009, which provides whistle-blower protection, punishes state officials who fail to report corruption cases, and tries to prevent conflicts of interests. Amendments to the anti-corruption law were signed on December 7, 2009. These amendments increased punishments for corruption crimes, instituted mandatory asset forfeitures, broadened the definition of corruption crimes to include fraud committed by government officials, and criminalized the acceptance of a bribe on behalf of a third party. The law also extended the definition of government official to managers of companies in which the government holds more than a 35% stake.

The Ministry of Interior, Financial Police, Disciplinary State Service Commission, and Committee for National Security (KNB) are responsible for combating corruption. However, questions of jurisdiction and competition between the Financial Police and KNB have occurred over the past year.

Transparency International (TI) has a national chapter in Kazakhstan. Kazakhstan's rating in TI's annual Corruption Perceptions Index has remained at 2.7 since 2009. In 2011, that rating placed Kazakhstan at number 120 out of 183 countries rated -- a relatively weak score but the best for any country in Central Asia. TI experts have pointed out that corruption is particularly prevalent in the judiciary, police, customs, property rights, land registration, licensing, and construction projects. The government has signed on to the Extractive Industries Transparency Initiative (EITI), and is working to complete the validation process.

U.S. firms have cited corruption as a significant obstacle to investment. Law-enforcement agencies occasionally have pressured foreign investors who are perceived to be uncooperative with the government, a practice that is made possible by the fact that many errors or omissions that would constitute routine civil violations in OECD countries are treated as criminal cases in Kazakhstan. The government and local-business entities are widely aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.

Bilateral Investment Agreements

The United States-Kazakhstan Bilateral Investment Treaty came into force in 1994. In 1992, the United States and Kazakhstan signed an Investment Incentive Agreement.

In 1996, the Treaty on the Avoidance of Double Taxation between the United States and Kazakhstan came into force. Since independence, Kazakhstan has signed treaties on the avoidance of double taxation with 44 countries. Kazakhstan has bilateral protection investment agreements with 45 countries, including Great Britain, Germany, Italy, France, Russia, South Korea, Iran, China, Turkey, and Vietnam. 38 out of those 45 agreements have been ratified. In 2010 and in 2011, Kazakhstan signed investment agreements with Romania, Austria, Serbia, and Estonia. Some foreign investors charge that Kazakhstani tax authorities are very reluctant to refer questions to appropriate bi-national resolution bodies.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC), an independent U.S. government agency that provides project financing, political risk insurance, and a variety of investor services, has been active in Kazakhstan since 1994. OPIC is seeking commercially-viable projects in Kazakhstan's private sector, and offers a full range of investment insurance and debt/equity stakes.

Kazakhstan is a member of the Multilateral Investment Guarantee Agency (MIGA), which is part of the World Bank Group and provides political-risk insurance for foreign investments in developing countries.


Kazakhstan has an educated workforce, although the proportion of highly technically competent workers is fairly small. Demand for skilled labor generally exceeds locally-available supply. Technical skills, management expertise, and marketing skills are all in short supply. Many large investors rely on foreign workers and engineers to fill the void.

The Kazakhstani government has made it a priority to ensure that Kazakhstani citizens are well-represented in foreign-enterprise workforces. In 2009, the government instituted a comprehensive policy for local content, particularly for companies in the extractive industries (See A.1 Openness to, and restrictions upon, Foreign Investment and A.5. Performance Requirements and Incentives). It is particularly keen to see Kazakhstanis hired into the managerial and executive ranks of foreign enterprises. Local content regulations require that a minimum 1% of a project budget should be earmarked for training programs and workforce development, including overseas assignments with the lead operator. Employers' reliance on foreign labor in the face of persistent poverty in rural Kazakhstan has become a political issue in recent years. In 2011, the minimum wage was $109.2, and the minimum pension was $109.5 per month. By government estimates, the unemployment rate by the end of September 2011 was 5.3%. Foreign employers report that a lack of skilled labor requires importation of managers.

A quota system for foreign employees and local content requirements (See A.1. Openness to, and restrictions upon, Foreign Investment) create an additional burden for employers. Several U.S. and other foreign employees doing business in Kazakhstan have informed the U.S. Embassy that immigration authorities increasingly scrutinize foreign work permits. U.S. companies are strongly advised to contact the U.S. Foreign Commercial Service in Almaty for updated information on work permits.

The Constitution and 2007 Labor Code guarantee basic workers' rights, including the right to organize and the right to strike. Following a strike by 70 workers in 2009, in March 2010, 3,000 employees of OzenMunaiGas went on strike, demanding reorganization of the company, new management, removal of the chairman of the trade union, cancellation of the new pay scale, lower annual production targets, and new bonuses. The district court called the strike illegal, because the workers did not receive permission to strike, and demanded that management of KMG EP take actions against officials who had violated the Labor Code. KMG EP's Board of Directors, nonetheless, adopted a number of resolutions to meet the demands of the strikers, including higher wages and bonuses in April 2010. The courts again ruled a May 2011 strike at OzenMunaiGas and KarazhanbasMunai illegal. Following violent protests partially fueled by the strike, Kazakhstan's president publically declared the firing of the striking workers to be illegal and ordered new jobs at an equal wage found for fired strikers (See A.12 Political violence). Also in response to the most recent strikes, the government has stated its intension to amend the Labor Code in early 2012 to make it more difficult to fire striking employees.

Kazakhstan joined the International Labor Organization (ILO) in 1993. As of December 2011, Kazakhstan had ratified 19 ILO conventions, including those pertaining to minimum-employment age, forced labor, discrimination in employment, equal remuneration, collective bargaining, the worst forms of child labor, and safety and health in construction. In 2011, Kazakhstan ratified Asbestos Convention 162. Currently, the Labor Ministry is preparing the basis for ratification of ILO Convention 156 on Equal Opportunities and Equal Treatment for Men and Women Workers: workers with Family Responsibilities.

Foreign Trade Zones/Free Trade Zones

A system of tax preferences exists for foreign and domestic enterprises engaged in prescribed economic activities in Kazakhstan's "special economic zones." The six zones are the "New Administrative Center" in Astana, the Seaport of Aktau, the Alatau Information Technology Park (near Almaty), the Ontustik Cotton Center in south Kazakhstan, the international tourism zone "Borabay" (a resort area 300 kilometers from Astana), and the Atyrau National Industrial Petrochemical Techno park. Kazakhstan plans to create three additional special economic zones (SEZ), including a metallurgical SEZ in the Karaganda region, a transport and logistics SEZ in Khorgos at Kazakhstan-Chinese border, and a SEZ to develop Pavlodar's chemical industry. A new Law on Special Economic Zones approved in 2011 allows foreign companies to establish enterprises in special economic zones, simplifies procedures to attract foreign labor, and establishes a special customs zone regime, not governed by Customs Union rules.

SUMMARY OF Investments as of 2011: As of September 30, 2011, $159.3 billion has been invested in Kazakhstan since independence: 41.5% in business consulting and geological exploration, 15.5% in the financial sector, and approximately 13.8% in the extractive sectors. U.S. firms consistently have ranked as one of Kazakhstan's largest foreign investors. U.S. companies have invested $4.1 billion, or 18.8% of foreign investments in the extractive sector, including billion-dollar investments in Kazakhstan's petroleum sector by Chevron, ExxonMobil, and ConocoPhillips. From 1993 to June 2011, Tengizchevroil, in which Chevron holds a 50% stake and ExxonMobil a 25% stake, contributed approximately $52.4 billion to Kazakhstani entities. These investments include purchases of Kazakhstani goods and services, tariffs and fees paid to state-owned companies, profit distributions to Kazakhstani shareholders, taxes and royalties paid to the government, and Kazakhstani employee's salaries. Other foreign investors in this sector include the Chinese National Petroleum Corporation (CNPC), Shell, British Gas, Total, Agip, Lukoil, Eni, and Inpex. Other major U.S. investors include JP Morgan Chase&Co (over $300 million in business services), Marriott International (around $170 million in construction), and General Electric Transportation (a locomotive facility with $78 million of investment). Other major non-U.S. foreign investors include Arcelor Mittal and BAE Systems.