Doing Business in Kazakhstan

Doing Business in Kazakhstan

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

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

Economic Highlights include:

In addition to the integrated oil firms and oil & gas equipment suppliers and service companies, there are also an increasing number of service sector firms (international law firms, the Big Four accounting firms, and Citibank) as well as telecom, consumer goods, hotels, and others.

Kazakhstan has a healthy appetite for imported goods and in some, not all, cases is willing to pay more for higher quality and innovative technology/service.

The most recent report from the Heritage Foundation’s Index of Economic Freedom rated the country as “moderately free” and ranked it 82 out of 179 countries, well above neighboring Russia and China.  This score is one point higher than last year, primarily reflecting purported improvements in the ability to open a business as well as the country’s low tax rates. The Foundation’s report scored Kazakhstan high in trade freedom, fiscal freedom, and government spending.  However, “challenges to economic freedom remain considerable. The economy exhibits significant shortcomings in three areas: investment freedom, property rights, and freedom from corruption. Red tape and overly burdensome restrictions still hamper business freedom. The weak rule of law allows for significant corruption and insecure property rights.”

Market Challenges

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

As of January 2010, the Customs Union (CU) between Belarus, Kazakhstan, Russia became effective.  It was originally proposed as a way to boost trade and investment in the three countries.  However, Kazakhstan’s trade may be more restricted as it has increased the majority of its tariff levels to match Russia’s and now has similar limitations on certain categories of goods.  Businesses are affected by a poorly planned implementation of the territories’ integration, incomplete development of the common customs code, and unclear documentation requirements.

Competition is strong as Russia and China vie for access to the country’s energy resources and growing buying power.  Investment from these two neighbors remains high while inexpensive products are readily supplied across these borders.  In addition, trade between Russia and Kazakhstan is said to have increased 40% due to the Russia-Kazakhstan-Belarus Customs Union.

Despite the President’s declaration to have Kazakhstan join the World Economic Forum’s “Global Competitiveness” Top 50 economies, Kazakhstan continues to fall in the rankings.  Their 2006 ranking of 56th fell to 61st in 2007, to 66th in 2008, to 67th in 2009, and to 72nd in 2010.

Interpretation of laws by local officials is often at variance with that of the central government, especially in the implementation of Kazakhstan’s system of taxation, collection of revenues, and customs procedures.  U.S. investors report taxation as one of their top concerns, reporting frequent harassments by local and national ‘financial police.

Corruption remains widespread despite the government’s anti-corruption campaigns and dismissals of guilty bureaucrats.  The judiciary, police, and customs are often cited as the source of problems. Kazakhstan ranked 105th of 178 countries in  Transparency International’s Corruption Perceptions Index for 2010 (albeit, a major jump from their 2008 placement of 145).