Business in Kazakhstan – Nine Reasons to Invest in Kazakhstan
1. Natural Resources – Major Source of Wealth
One of the main treasures of Kazakhstan is its natural resources. Kazakhstan is at the 6-th place in world reserves of natural resources. Out of 110 elements of the periodic table, 99 were discovered in the territory of modern Kazakhstan. Some of the well-known natural resources are oil, gas, uranium, zinc, tungsten, bohrium, silver, lead, ch romites, copper, fluorides, molybdenum, and gold. Mineral resources base of Kazakhstan consists of 5004 deposits, the forecasted cost of which is about $46 billion.
On a global scale, Kazakhstan has established its place as one of the largest producer of tungsten, chrome, phosphate, molybdenum and iron stone, joining the world’s greatest natural resources rich countries such as after Brazil, Australia, Canada, USA, India and Russia.
So far, only about 160 oil and gas deposits have been explored in Kazakhstan. However, not all of these deposits, not to mention the entire pools, are explored. In the event of their competent use, Kazakhstan might even compete with such countries as Saudi Arabia, Kuwait and United Arab Emirates in terms of reserves. Satellite pictures as well as ground geological surveys suggest, that currently used deposits of the West Kazakhstan oilfields that are adjacent to Caspian Sea coastline, are just an “outskirt” of the deep oil pool, the core of which lies in northern part of the Caspian Sea, where total reserves are estimated to be of impressive sizes–3-3,5 billion tons of oil and 2-2,5 trillion cubic gas meters.
In modern Kazakhstan, about 300 significant gold deposits are estimated to be identified and 173 of them have already been in exploration. In case of significant capital investment, in few years time, Kazakhstan might be able to produce 100 tons of gold annually; today it produces only 1 % of its underground proven reserves, which give the right to Kazakhstan to be at 6-th place in the world in terms of proven reserves.
Over 100 coal deposits have already been explored at the territory of Kazakhstan, the largest of them are Ekibastuz field, which is notable for large lignite bed thickness, and Karaganda coal pool with over 50 billion tons of proven reserves of coking coal. In the most successful years of operation, mentioned pools produced only 131 million tons of black coal.
Kazakhstan is also rich in deposits of chemical raw materials: richest deposits of potash and other salts, borates, bromine compounds, sulfates, phosphate chalks, deposits of the most varied raw materials for paint and coatings industry. Huge reserves of sulfur in the composition of complex ore allow to undertake a major production of sulfuric acid and other chemical products. There are unlimited opportunities for production of almost all types of petrochemical synthesis products (especially ethylene, polypropylene and rubber material), synthetic detergents and soap production, feed microbiological protein, chemical fiber, cement, synthetic resin and plastics.
Kazakhstan is also rich in material resources for glass and porcelain industry. Its soils and mountains contain the rarest jewels, various construction and facing materials. Other overwhelming wealth of Kazakh land includes mineral, medicinal, industrial and thermal waters, most of which has not been commercialized yet.
The large majority of experts view extractive industries, including mining and oil and gas as having the highest growth potential over the next 5–10 years for Kazakhstan’s economy. This perhaps reflects a more general perception that Kazakhstan’s economic growth over the last decade has been largely driven by commodities exports, but it underlines the strategic importance of Kazakhstan’s rich resource base. It is also clear that investors find a more diverse range of sectors that are beginning to emerge as attractive investment options.
Despite the efforts for diversification of Kazakhstan’s economy, the most attractive investment sector remains to be the oil and gas industry, which is the backbone of the current economy. Various economic policies has to help to capitalize on this competitive advantage and use it to develop high value-added production and supportive knowledge-based sectors.
To attract strategic and technology intensive FDI projects, the country will have to develop relevant support schemes. These may include state procurement guarantees to initiate construction of high-cost plants, a predictable regulatory environment and modern infrastructure that will allow investors to localize production and reach suppliers and customers.
According to numerous local surveys among foreign investors, Industry sectors with highest potential in the next 5–10 years have been chosen as follows:
1) Oil and Gas
2) Mining and Metals
4) Infrastructure – roads, highways and ports
2. Political Stability – Necessary Element for Economic Growth
Issues of maintaining political stability have always been at the forefront of the country’s government. Primarily was to ensure an interethnic balance in the country.
As a result, of sophisticated political strategy, which provides equal rights and equal opportunities regardless of nationality, Kazakhstan has managed to turn multi-ethnicity from the force of potential risk into competitive advantage.
Political stability enabled the country to create clear and transparent conditions for foreign investment attraction, which broadly predetermined economic success of the country.
Since the independence in 1991, Kazakhstan had zero number of internal conflicts on the base of ethnicity. As we have seen from the experience of our neighboring countries such as Kyrgyzstan and Ukraine, the problem of maintaining a balance interethnic matter is of utmost importance. Kazakhstani government takes an active role in maintain this balance.
3. Sustainable Economic Growth
The nominal GDP of Kazakhstan is growing at a steady pace and reached $216.3 billion in 2014. Beginning from 2000s the GDP growth amounts to 8-10% annually. Kazakhstan has one of the best indexes of GDP per capita among the CIS countries.
4. Industrial and Innovative Development of Kazakhstan
Kazakhstan has established core institutional entities of industrial development that serve as conduits for implementing government tasks for industrial development of the country. Some of the most important entities are:
National fund, which ensures economic stability. The fund is being managed by National Bank of Kazakhstan. Main assets come from the export revenues of oil and gas commodities. The fund is organized in the form of passive guard of assets for future generations.
JSC “FNB “Samruk-Kazyna” consolidating the potential of the state to implement cutting-edge areas. More than 40% of national GDP comes from enterprises owned and operated by Samryk-Kazyna. Samruk-Kazyna consists of almost 85 various companies that are diverse in their industry and capitalization.
Development institutions accompanying the process of economic diversification. The institutions are diverse in terms of target they have to achieve and sectors they operate. Certain fund aim to improve entrepreneurship, while others work on social issues.
The “National Program of Forced Industrial and Innovative Development for 2010-2014” was adopted in 2010, main goals of this program are: creation of new export-oriented high-tech industries, infrastructure development, reinforcement of the national innovative system and enhancement of local personnel qualification.
Within the frame of forced industrial and innovative development, the work is carried out to establish attractive conditions for investors who are ready to implement projects in the following priority sectors of economy:
Oil refining and infrastructure of oil and gas sector, ore mining and smelting complex, nuclear and chemical industries with subsequent transition of rough manufacture to higher processing stages
Mechanical industry, construction, pharmaceutical industry
Agricultural sector, consumer industry, tourism
Information and communication technologies, biological technology, alternative power, space activities.
5. Investor Rights Protection by the State
To attract overseas capital into the economy of the Republic of Kazakhstan, to reduce investment risks, to provide the system that guarantees the protection of foreign investments, overseas investors are given the national resident status, i.e. foreign and domestic companies have equal conditions for investment activities within the borders of Kazakhstan.
Kazakhstan’s investment climate continues to improve. The following are four important factors, that provide evidence that investment climate is improving:
The willingness and commitment of the Government to engage in an open and constructive dialogue with investors.
The ability of the Government to ensure macroeconomic stability during the global economic downturn
Enhanced opportunities with the Customs Union and Economic Space
Consistent reforms, including large-scale industry specific programs and the constructive development of an FDI promotion program
Business Environment: further enhancement of quality factors
Macroeconomic environment is stable: In 2009, the Government launched economic stimulus measures that included the recapitalization of domestic banks, support for the real estate and agriculture sectors, targeted support for small and medium sized enterprises and investment in industrial projects and infrastructure. The government’s response to the crisis of 2008-2009, and its ability to ensure a stable macroeconomic environment, are viewed by many residents as sound achievement.
A more transparent business environment is expected: Significant progress has been achieved in improving the transparency of the business environment, which is underpinned by the country’s steady progress in the World Bank’s Ease of Doing Business Index. As of 2015, Kazakhstan has been ranked 77th place in the rankings. Countries it surpassed are Argentina, Kuwait, China and Azerbaijan.
Entrepreneurship–develop local partners: Entrepreneurship is vital for a sustainable economy, the rise of the middle class and improvement of social and regional disparities. At the same time, it is necessary for investors to ensure there are local businesses with whom they can partner and help to move up the value chain.
A growing domestic market – more opportunities with the Customs Union and Common Economic Space: the single market of Belarus, Kazakhstan and Russia contains nearly 170 million people. The Customs Union and Common Economic Space is generally viewed as a stimulus to enhance the competitiveness of local businesses and develop human capital skills and increase market efficiency. To ensure that Kazakhstan gains a competitive advantage within the Customs Union and Common Economic Space, it needs to offer investors robust infrastructure, skilled human capital and a stimulating institutional environment. This would encourage businesses to start, or expand, production within Kazakhstan, using it as a launching pad for neighboring markets.
Political stability – a key factor in investor confidence: Many experts see the current government as strong and proactive. Numerous large-scale government initiatives have been announced, and it is essential that the envisaged benefits are delivered in practice.
Further reforms expected in transport and telecommunications: the level of transport and logistics infrastructure needs to be enhanced. Particular areas of concern for many foreign investors are: 1. The rail and road transportation network needs further development (including sufficient supply of railcars for cargo and enhancement of logistics centers). 2. Connectivity within the country and with key international locations needs to be enhanced. 3. Investors frequently need to develop infrastructure themselves at the sites of their operations, which is both challenging and costly. The Government acknowledges the importance of infrastructure development and plans to invest around US$26b over the next decade to upgrade and expand transportation infrastructure. Since the mid-1990s, notable progress has been achieved in telecommunications infrastructure, with a stable growth rate in mobile phone coverage and internet connections.
More flexibility is expected in labor regulations: Many experts cite the fact that Kazakhstani labor regulations are not attractive for the investor community. They believe that the work permit and visa regimes require improvement, as inflow of skilled foreign labor ensures timely implementation of investment projects and contributes to local human capital development. Governemnt has taken a number of strategic initiatives in this direction.
The Kazakhstani Government has been consistently implementing measures to address the rising demand in skilled labor. Government initiatives address the prospective needs of the economy and specific industries; ensure partnerships with the world’s best educational institutions and corporate sector leaders and provide students with access to the latest knowledge and new technologies.
6. Investment Preferences and Incentives
Attraction and effective use of foreign investment is one of the main courses of mutually beneficial trade and economic cooperation between the Republic of Kazakhstan and other countries.
Kazakhstan aims to create favorable conditions for successful operation of local and foreign investors in the republic and to attract investments to non-oil and gas sector.
To date, Kazakhstan has created a favorable investment climate with a simplified tax regime, constantly improving legislation, extended package of investment preferences. Government of Kazakhstan have adopted specific programs on attracting foreign investments.
Today Kazakhstan is one of the leaders on the volume of foreign capital invested in economy. From 2005 to 2014, Kazakhstan has attracted approximately 207.6 billion U.S. dollars in foreign direct investments. Dynamics of the last five years shows that more than $125 billion of the total investment was attracted in this period. In the year 2012, total FDI amount attracted was $28 billion, setting the absolute record in terms of FDI attracted. Thereby, even during the global financial crisis, investment climate of Kazakhstan and the macroeconomic situation of the country remained stable in the eyes of investors.
One of the key competitive advantages of Kazakhstan is its geographical location near the fast-growing markets, such as Central Asia, Russia and China. Moreover, Kazakhstan connects major transcontinental routes connecting Asia Pacific, Europe and the Middle East. Since the creation of the Customs Union, among Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan play an important role as well. Customs Union opens a common market with a combined GDP of $2 trillion and with population of about 170 million people, which creates new opportunities for investors and entrepreneurs/investors of countries in the Customs Union.
In order to protect investors’ rights a multilevel dialogue system between the state and investors was established including Foreign Investors Council under the President of Kazakhstan, Council for improvement of investment climate is chaired by the Prime Minister of Kazakhstan, a special body under the chairmanship of the Deputy Prime Minister operating as an investment ombudsman.
State Initiated Programs
In the economic sphere, Kazakhstan has been implementing a number of strategic program documents, such as the State program on accelerated industrial and innovative development, the Concept of transition to “Green economy”. It is estimated that by 2050 up to 50% of the energy created in the country, will be supplied by alternative and renewable energy sources, which will add at least 3% to the GDP growth.
Special Law on Investments and Investors’ Rights
The following guarantees of investors’ rights are fixed in the Law «On Investments»: legal protection guarantees, use of income guarantees, guarantees of investors’ rights during nationalization and requisition (only in exceptional cases). Additional guarantees are provided by bilateral agreements on investment promotion and protection (47 bilateral and 1 multilateral (EurAsEC).
In accordance with the Law «On investments» (from 29.12.2014) a company investing in priority sectors may receive the following preferences and privileges – exemption from customs duties on the import of equipment and raw materials needed for the project as well as state land grants.
For strategic investment projects (production of a high added value high-tech products in priority industries and with the volume of investment not less than 5 million of monthly-calculated index) tax privileges (land and property taxes on a zero rate) for a period of up to 7 years are provided; industrial benefits in regions with low level of social and economic development (compensation and payment for part of expenses for gas, electricity, acquisition of the land plot, acquisition and construction of buildings).
Recent changes to the legislation to make Kazakhstan even better destination for investors. In April 2014, the President stated that Kazakhstan has to attract more foreign investments. On May 2014, the Minister of Economy and Budget Planning announced the initiation of a package of laws to improve the investment climate in Kazakhstan. The package contains a mix of initiatives of tax and non-tax nature. On June 2014, the President signed the Law on improvement of the investment climate. The changes introduced were already in force by January 1 2015, except the tax incentives, which are effective from January 1 2015. The changes are focused on foreign and local investments with capital of approximately $USD20 million.
Simplification of visa regime for foreign investors
First order of business concerned the issue of visas. Visa-free entrance for citizens of “most developed countries” (USA, GB, Germany, France, Italy, Malaysia, Netherlands, UAE, South Korea, Japan and USA) for the period from July 2014 until July 2016 if the stay does not exceed 15 days (general application) had been granted. On the other hand, the term of “investor visas” had been introduced, based on the investment authorities request (single for 90 days and multiple for 3 years).
Simplification of work permits
Additionally, since June 2014, no work permits required for foreign labor for the duration of construction under “investment projects” and one year after commissioning of the investment project.
Investors have been provided with an option of “single window” principle to serve interests/permits/needs/questions of foreign investors at the level of the Committee on Investments under the Ministry of Industry and New Technologies all from one agency, from one location.
Specific Steps of State Support
According to the Law of RK “On Investments” an investor can get:
- Incentives for projects (including priority investment projects*):
– Exemption from customs duties on the import of equipment, its components and spare parts, raw materials and supplies
– Kind grants of not more than 30% of the total investment in fixed assets (land plots, buildings, machinery and equipment, computer equipment, measuring and control devices and equipment, vehicles, production and farm(agricultural implements)
- Incentives for priority investment projects*
– Tax exemptions: Corporate income tax – 0% for 10 years, Land-tax – 0% for 10 years, Property tax – 0%for 8 years.
– Investment subsidies up to 30% for construction and installation works and procurement of equipment after commissioning.
– Guarantee of stability of the legislation: (tax legislation and in the sphere of attraction foreign labor)
– State support of investments by authorized body established by the Government of the Republic of Kazakhstan, which interacts with investors on the principle of “one stop shop“.
– Assistance to investors in providing the guaranteed order from the interested legal entities according to the investment contract signed between the authorized body and the investor.
One other important aspect, was the guarantee long-term purchase plan for goods/services by national holdings, national companies and state institutions. This was created to improve the matter of local content.
Overall, Kazakhstan is known for the stability of tax legislation and foreign workforce attraction rules for the duration of the investment priority contract. It has been previously praised for the practice of long-term predictable tariffs and prices of regulated businesses.
7. Favorable Business Climate for Investors
In Kazakhstan, close enough attention is drawn to all issues of favorable business climate for investors: the reduction of administrative barriers and simplification of procedures, enhancement of the efficiency of law and judicial systems, improvement of customs and tax administration.
According to the rating of the World Bank’s the “Global Competitiveness Index Rankings” Kazakhstan taking the 50-th place in 2014 has left behind its nearest neighbors Russia and India, as well as the Czech Republic and Ukraine.
8. Historical Presence of Multinational Investors in Kazakhstan
Since 1992, foreign investment companies have begun to operate actively within the Kazakh market. Such multinational companies as Chevron, Siemens, General Electric, Danone, Coca-Cola, Henkel, Toshiba, LG Electronics, Shell, Eni, Microsoft, BAE Systems and others successfully operate in Kazakhstan.
Overall, since 1993, Kazakhstan has obtained foreign direct investment in the amount of 207 billion USD.
What International Companies Need To Know About Investing In Kazakhstan
One has no chance but be confident about the future for Kazakhstan. The country enjoys stability, economic growth and international recognition. It is a good environment for business and investment. Current law provides many advantages for making investments for foreigners, while the Government bears investment liabilities.
On a macroeconomic level, the country has significant growth potential. However, the recent collapse in prices for energy resources showed that country economy needs to diversify to avoid being too dependent on energy export prices.
The primary drivers of future economic growth will be diversification, industrial and innovative production and, above all, constant support of small and medium-sized businesses by the government. Private consumption is rising quickly, with double-digit growth in the last five years. This underpins the confidence for the future.
We believe that an attractive investment climate in this country is essential. As a landlocked country, huge attention is being paid to logistics infrastructure. The removal of administrative barriers in trade, customs, transport and logistics would further improve the investment climate – as would liberalization of visa procedures for foreign investors, in particular for top managers. These proposals have been addressed to the Government.
The geographical location of Kazakhstan, at the junction of Asia and Europe, offers unique opportunities for foreign investors. Other strengths are the potential of the people, a diverse climate, different time zones, unique wildlife parks and opportunities for employment and leisure.
One of the most helpful advice to incoming investors, would be to learn both Kazakh and Russian languages, as it will help to understand the culture better.
There is a significant perception gap between existing and prospective investors. Among investors already established in Kazakhstan, 85% see it as the most attractive destination among the CIS countries. However, among investors not established in the country, only 18% share this view, while 39% do not have sufficient awareness of the investment attractiveness of Kazakhstan in particular, and CIS countries in general. Kazakhstan’s attractiveness profile mainly relies on its cost competitiveness and macroeconomic stability: labor costs are perceived as competitive by 44% of respondents and the country’s macroeconomic stability by 39% of respondents. Investors point out the following challenges in the country’s attractiveness profile: labor skills level (35%), transport and logistics infrastructure (45%), transparency and stability of legal and regulatory environment (50%).
9. State of Infrastructure
One of the key factors for effective development of economic sectors is the availability of an adequate communication and transport infrastructure, thus Kazakhstan is constantly working on the improvement of its own infrastructure.
Owing to the investment attraction into various economic sectors, Kazakhstan will continue rapidly develop its infrastructure within the next five or ten years.
Major projects include the construction of highways from Astana to major cities of Kazakhstan.