“Strategically, politically and economically (Eurasia) has become a region to watch—and for many American companies, a place in which to do business.”

                                                                                Former Secretary of Commerce Carlos Gutierrez

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, is also developing into the most important market in Central Asia and is uniquely positioned to serve as an economic and trade leader in the region.  Though often overshadowed by the business press received by neighboring BRIC countries Russia and China, Kazakhstan is developing as the trade and investment gateway for Central Asia and has the potential to play an important role as a transit route between China and Europe.  Kazakhstan 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” emerging markets

Like other former Soviet Republics, Kazakhstan is still going through the long process of developing a transparent and effective business culture that is attractive to foreign investment.  Though the government of Kazakhstan publicly supports economic reform, changes are slow and commerce is plagued by a bureaucracy that is unable to initiate needed change.  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 oil sector, continued corruption, need for increased rule of law, and concentration of political power.

Economic Highlights:

• Kazakhstan’s economic growth has slowed over the last two years, and it will be several years before they can regain the annual 9-10% growth levels experienced from 2000-2006.  The country was impacted by the global liquidity crises as early as August 2007, and as a result final GDP growth in 2007 was 8.5%. The continued downturn in worldwide markets further impacted Kazakhstan’s growth in 2008, as GDP increased by only 3.2%. According to one World Bank economist, much of this growth took place in the first half of 2008, and there was no growth in the last six months. Additionally, it is hypothesized that if the oil rich region of Western Kazakhstan is taken out of the equation, GDP would have been flat or negative for the nation as a whole. GDP is projected to grow by just 2% in 2009.
• Rising GDP per capita reached $5,010 in 2007 (Atlas methodology), or $11,100 in terms of purchasing power parity.  This represents a 32% and 26% increase from 2006, respectively.  This ranks Kazakhstan firmly as the number two country in the former Soviet Union in terms of per capita economic prosperity, and places them ahead of key U.S. export markets like China, Brazil, and India, and on par with developing countries in Eastern Europe, like Bulgaria and Romania.
• Annual foreign direct investment in the Kazakhstani economy grew 66% in 2007 to $17.5 billion according to the National Bank.  Out of South East Europe and the Commonwealth of Independent States (CIS), only Russia and Romania attract more investment, and only Hungary has a higher per capita FDI.  UNCTAD reports FDI inflows of $10.3 billion in 2007, a 65% increase from what the organization reported Kazakhstan received in 2006.
• Over a hundred U.S. firms are active in the country through subsidiaries, joint ventures, representative offices, or as contractors.  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.
• Despite the credit crunch that began in 2007, Kazakhstan continues to have a healthy appetite for imported goods.  U.S. exports to Kazakhstan reached $731 million in 2007, a 15% increase from the previous year, and Kazakhstan reported $32.8 billion in total imports for 2007, a staggering 72% increase from 2006. Jan-Nov 2008 National Bank statistics indicate that import growth will decelerate to 15%, year on year. Based on currently available end of year data, U.S. exports increased by 31% in 2008, reaching $985 million.  Bilaterally, our countries conducted over $2.5 billion in trade in 2008 (25% increase), as Kazakhstan maintained its position as our 79^th largest trade partner.
• The most recent report from the Heritage Foundation’s Index of Economic Freedom rated the country as “moderately free” and ranked it 83 out of 179 countries, well above neighboring Russia and China and just below the global average.  This score is one point lower than last year, primarily reflecting purported declines in freedom from corruption and respect for property rights. The Foundation’s report scored Kazakhstan highly in trade freedom, fiscal freedom, government size, and labor freedom.  “However, challenges to economic freedom remain. The economy has considerable shortcomings in three areas: investment freedom, property rights, and freedom from corruption. Foreign investment is hindered by ad hoc barriers and favoritism toward domestic firms. The weak rule of law allows for significant corruption and insecure property rights.” 

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

• Continuing concerns over interpretation of laws by local officials, which often is at variance with that of the central government, especially in the implementation of Kazakhstan’s system of taxation and collection of revenues.  U.S. investors report taxation as one of their top concerns, reporting frequent harassments by local and national ‘financial police’ and other taxation authorities through generally intrusive inspections.  Quite often, settlement of these cases with the tax authorities has led to criminal charges by local governmental officials as a pressure tactic. On January 1, 2009, Kazakhstan implemented a new, more streamlined tax code, but it is too early to judge whether this will ease the tax burden encountered by most foreign firms doing business here.
• As the Heritage Foundation reports, “the government constantly challenges contractual rights and legislates to favor domestic investors over foreign ones, all of which significantly deters foreign investment.”  The investment climate took a turn for the worse in 2007 with the passage of an amendment to the "Law on Subsoil and Subsoil Use".  According to the amendment, the GOK has the right to force renegotiation of subsoil contracts if an existing contract harms the country's national economic interests.
• Despite attempts to improve the business environment and join the World Economic Forum’s “Global Competitiveness” Top 50, Kazakhstan continues to fall in the rankings.  Their 2006 ranking of 56^th (score of 4.19) fell to 61^st in 2007 (score of 4.14) and to 66^th in 2008 (score of 4.11).
• As elsewhere in the world, the once weak dollar has gained strength, making U.S. exports less price competitive.  Though the tenge had been loosely pegged to the US dollar over the last two years, staying in a KZT 119-122 band, a week before this report went to press the Kazakh tenge devalued to KZT 150/USD1.  The National Bank reports that their intent is to stabilize the tenge at KZT 150/USD1, with a +/- 3% variation.
• Though the World Bank reported that Eastern Europe and Central Asia led among world regions in regards to reforms to business regulations, Kazakhstan demonstrated little improvement on the World Bank’s Ease of Doing Business Report for 2009, ranking 70^th out of 181 countries (though still well ahead of Eurasia’s other dominant economies, Russia and Ukraine).  Of the various indicators used, Kazakhstan experienced lower rankings in “Starting a Business,” “Employing Workers”, and “Protecting Investors”, while showing significant improvement in “Registering Property” and “Getting Credit”.  Kazakhstan saw little change to the report’s other indicators, with near bottom rankings in “Trading Across Borders” and “Dealing with Licenses”. The government is using the newest World Bank report as a justification to redouble its commitment to reforms and to improve the legal environment for business.  In November 2008, Prime Minister Masimov ordered each relevant ministry to prepare a comprehensive action plan to improve the business environment through a focus on the indicators used in the report.
• Corruption increases the cost and difficulty of doing business for foreign and local firms alike, especially as it relates to customs.  Corruption remains widespread, and the judiciary is often perceived as an arm of the executive branch rather than as an enforcer of contracts and guardian of property rights.  Kazakhstan is ranked 145 out of 180 countries in Transparency International’s Corruption Perceptions Index for 2008.  The country was ranked 150^th in 2007.
• In a new credit analysis report, Fitch warned of the impact of weaker commodity prices and the global financial crisis on Kazakhstan’s economy and its credit profile.  Kazakhstan's ratings remain supported by low public debt and net creditor status, reflecting previous prudent saving of energy sector revenues.  However, these strengths are likely to be eroded by lower commodity prices and by deployment of sovereign resources to support the domestic economy and banking sector, which are going through a sharp slowdown, adding to downward pressure on Kazakhstan's ratings and warranting a Negative Outlook.
• Kazakhstan is beleaguered by a customs regime that is hampered by the incomplete implementation of customs codes, regulations and instructions, excessive and unclear documentation requirements and the necessity to provide ‘facilitation payments’.  Though Kazakhstan boasts the most improved customs administration in Central Asia, it is far from effective.  The government is currently working on developing a new customs code that will streamline the process and decrease the opportunity for corruption from local officials.
• Government spending and new government programs are expected to take a hit from the decline in oil prices and the need to create an economic stimulus package. In late 2008 the government of Kazakhstan modified its three-year budget with revenues recalculated applying $40 per barrel as the average oil price in 2009 and USD 50 per barrel in 2010 and 2011 (down from $60 per barrel in the initial draft).   The revised price projections decrease what the government had been hoping to earn over the next three years by a third. Additionally, the government expanded its economic stabilization program to $18.1 billion, a portion of this going to purchasing major stakes in the country’s largest banks.
• Competition is increasing, as Russia and China vie for access to the country’s energy resources and growing buying power.  The EU is also a major player, and as a group is Kazakhstan’s single largest investor.  Turkey is another formidable competitor, using its strong presence in the construction and retail sector to better position itself.
• The ability to create a modern trade route through Central Asia is hampered by the reluctance of Central Asian countries to work together to increase cross-border traffic.  This impacts Kazakhstan’s plans to position itself as a transit area for goods between Asia and Europe, and the government of Kazakhstan is increasingly pursuing its own plans of developing road and rail links between China and Russia.

Kazakhstan's strategic aspiration is to become a modern, diversified economy with a high value-added and high-tech component, well integrated in to the global economy, and they are cognizant of the need for foreign expertise to accomplish this.  Like other former Soviet republics, Kazakhstan’s infrastructure is underdeveloped, especially roads, transportation, and telecommunications.  Likewise, areas such as health and environment need an infusion of investment to reach European standards.  There is no question that the global economic crisis will impact Kazakhstan’s goal of attracting FDI outside the oil and gas sector, the pace at which it repairs its crumbling infrastructure, and the appetite for consumer products that its growing middle class has demonstrated.  However, firms that seize this moment to explore the country’s many business opportunities may be rewarded in the long term.

A complete copy of the Country Commercial Guide for Kazakhstan, as well as commercial guides to other countries, is available (free for U.S. companies if registered) on http://www.export.gov