Kazakhstan Is Transforming Investment Policy
Yelena Zabortseva, Master of Arts in IR, the Moscow State Institute of International Relations
Successfully fulfilling the strategic task to boost Kazakhstan into the ranks of the world's top 50 most competitive countries, a task set by Kazakh President Nursultan Nazarbayev, means not only conducting a stable and transparent economic policy but also coordinating the activities of the state bodies concerned directly with foreign investors. Large-scale economic forums held in Kazakhstan help Kazakh and foreign businessmen to set up a close exchange of information and to develop direct contacts. The third Kazakh Investment Summit sponsored by the International Herald Tribune discussed investment cooperation, aspects of improving economic growth and investment climate and eliminating obstacles on the way.
Open Dialogue Plus Coordination of Investment Priorities
The investment summit held in Almaty on 8-9 June 2006 inaugurated the launch of another stage in the presidential programme for the country to join the world's most competitive countries. The head of state opened the summit and said the country was successfully creating a favourable investment climate. According to independent international experts, our country has attracted up to 80% of the total foreign investment channelled into Central Asia. The country is a leader in the CIS in terms of foreign direct investment per capita and is the first post-Soviet country that received an international investment rating.
The Kazakh president also noted that the country was interested in increasing foreign investment in its economy. In particular, the government is currently taking steps to attract funds to new cluster projects, including developing non-extractive sectors and the infrastructure. In particular, the head of state specified a number of major projects in the processing sector which are already being carried out with leading transnational companies, including building an electrolysis plant jointly with Corica AG and a gas chemistry facility with Basell and assembling Skoda cars.
At the same time, existing energy projects generate keen interests among foreign investors and this was stressed in a report delivered by Michael Golden, vice chairman of the New York Times Company and publisher of the International Herald Tribune (IHT). Of course, changes in the investment policy are reflected in the level of investors' interests in taking part in new projects. In this connection, the initiative of the IHT, which sponsors similar forums in various countries, turned out to be more timely than ever, as reflected in the joint chairmanship of Michael Golden and Karim Masimov, the Kazakh deputy prime minister and minister for the economy and budget planning.
The summit gathered managers from the world's major investment companies, well-known experts and specialists in the sphere of the economy, finance, business and politics from Europe, Asia and America as well as heads of leading international financial institutions. In his speech, Selami Ahmet Sehsevaroglu, the president of the Big Sky Energy Corporation, said that the possibility of discussing topical issues with the head of state was very important not only for major foreign companies but also for medium-sized companies – potential candidates to occupy investment niches.
Let me recall that similar forums are regularly held not only in Kazakhstan but in foreign countries too, for example the recent Eurasian Summit of the Davos World Economic Forum and a forum sponsored by the Adam Smith Institute in London in March 2006. The specific feature of the IHT forum is that the Kazakh government considered it an ideal platform to present its renewed investment policy.
Mosaic of Kazakhstan's Financial and Economic Policy
The summit's programme included round tables involving foreign businessmen and special sessions on different sectors. This approach enabled major foreign investors to express their views on the country's economic development and discuss new possibilities for investment and law-making in this sphere. Gregory Vojack, managing partner of Bracewell and Giuliani in Kazakhstan, said that at the moment the most topical issues for our country, of course, were problems of implementing and observing the investment legislation. During discussion Michael Wilson, of Michael Wilson and Partners Ltd, stressed the significance of carrying out economic projects stage by stage. Any amendment to the investment legislation results in correcting business plans which often negatively affect rates of return and the efficiency of projects. Foreign investors believe that another priority is to develop venture business in Kazakhstan.
The forum discussed our country's investment policy and repeatedly specified macroeconomic indicators that Kazakhstan has achieved in recent years. The chairman of the Kazakh National Bank, Anvar Saidenov, underlined that GDP per capita was slightly over $700 a decade ago, whereas in 2005 the figure reached $3,700 and "Kazakhstan is now among a group of countries whose incomes are higher than the world average". Mr. Saidenov also noted that the Kazakh government intended to increase the country's GDP by 250% by 2015 against the current level.
In the economic freedom rating, published by the Heritage Foundation in January 2006 (Table 1), Kazakhstan jumped 17 ranks to 113th place in one year, ahead of Russia (112nd place) and just behind China (111th). The World Bank has listed Kazakhstan among the world's 20 most favourable countries for investment.
Over 60 countries have invested in the Kazakh economy now. Over the past 15 years, the country attracted about $42bn in foreign direct investment, most of which (up to 80%) went to the oil sector (Diagram 1). This trend is to be expected because, as Kazakh Energy and Mineral Resources Minister Baktykozha Izmukhambetov noted, Kazakhstan is among the world's top 10 countries in terms of oil reserves and occupies 15th place in the world for gas reserves.
Domestic investment has also been growing. In 2005 alone, about $20bn was invested in basic capital.
All this points to the country's successes in building a modern economic system and proves that Kazakhstan is ready for a qualitative breakthrough in its development.
Aspects of Diversifying and Modernising the Economy
Kazakh leaders explained the new priority aspects of the economic policy and discussed them with foreign investors at the summit. Under the Industrial and Innovation Strategy until 2015, Kazakhstan aims to diversify and modernise its economy and reduce its raw-material orientation.
In order to achieve this goal the country has set up financial and services development institutions, which include the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the National Innovation Fund, the Corporation to Insure Export Loans and Investment, the Fund to Support Small Businesses, the Centre for Marketing and Analytical Research and the Centre for Engineering and Technology Transfer. As of 1 January 2006, the combined registered capital of these institutions exceeded $1bn. In addition, in early 2006 the Kazyna Sustainable Development Fund was set up. The fund, which unites these development institutions, will aim to create new and develop existing hi-tech production lines, support scientific and technical research and attract investment in knowledge-intensive productions. The fund will share risks with investors and co-fund joint projects.
In addition, in order to develop the most important sectors of the economy, the Centre for Marketing and Analytical Research and J. E. Austin Associates Inc., an international consultancy, have studied the competitiveness of a number of sectors of the Kazakh economy. They defined seven sectors – dubbed "clusters" – which are considered the most promising for development. These include agriculture and the food industry, building equipment for the oil and gas sector, tourism, textiles, metallurgy, transport and logistics services and the production of construction materials.
Tax Breaks in Developing Sectors as Incentive to Attract Investment
According to the Law On Investment, investors working in the priority sectors of the Kazakh economy (this includes 237 types of activities at the moment) are offered investment preferences.
One of these sectors that badly need to attract additional investment, including foreign investment, is agriculture because over 43% of Kazakhs live in rural areas. Kazakh Agriculture Minister Akhmetzhan Yesimov said that all the necessary conditions had been created for foreign investors to successfully work in this sector but there were a number of problems, too. For example, "domestic farmers are working in a free market medium and facing competition from foreign producers having minimum support from the state". Mr Yesimov believes that the level of state support in our country is far lower than in rich countries and in many developing countries.
Another sector which, as officials believe, can generate increased interest from investors is tourism. Deputy Tourism and Sport Minister Rashid Musin said the country faced the task of creating a competitive tourist sector and turning Kazakhstan into a centre of tourism in Central Asia by 2010. A State Programme to Develop Tourism and Its Infrastructure is being drafted now. The programme envisages building major technologically-equipped tourist centres in the town of Kapshagay, the Shchuchinsk-Burabay resort zone and around Lake Alakol and Lake Balkhash. The economic potential of tourism in Kazakhstan is almost unlimited but its development demands significant investment and expense. In this connection, the tourist business is regarded as a priority of economic development and it also enjoys tax incentives on corporate income tax. In addition, exemption from property and land taxes, customs duties in importing equipment and state grants in kind are envisaged.
Growth in Commercial Bank's Foreign Borrowing as Reason for Increasing Kazakhstan's Gross Foreign Debt
Developing the country's financial sector is a very topical issue. Olivier Descamps, director of the European Bank for Reconstruction and Development's Southern and Eastern Europe and the Caucasus Business Group, said that regardless of Kazakhstan having the best banking system in the region, the cost of funding still remained high. He focused attention on the necessity to develop the Kazakh stock market further and to offer state support for non-banking financial services. It should be noted that the EBRD is taking part not only in developing economic projects in the country but is also directly involved in them. Its share in the Kazakh State Pension Fund can serve as an example. Mr Descamps noted that the Kazakh Antimonopoly Agency intensifying its activities was a positive factor.
Arman Dunayev, the chairman of the Kazakh Agency for Regulating and Monitoring the Financial Market and Financial Organisations, devoted his speech to using advantages of the Kazakh financial sector to improve the efficiency of investment. In particular, he stressed that developing projects in the extractive sector involving foreign companies ensured a high level of foreign direct investment in Kazakhstan, which exceeded $6.4bn in 2005 alone. Attracting foreign capital to a substantial level helped to boost the domestic loan market and trebled the foreign assets of residents in 2005. The main contribution was made by increasing the funds of the National Fund and the country's banking sector.
At the same time, Mr Dunayev said, growth in commercial banks' foreign borrowing had a negative impact on the macroeconomic situation in terms of increasing the country's gross foreign debt (Diagram 2). In this connection, the agency passed a resolution in May 2006 envisaging certain measures to limit short-term foreign loans attracted by banks to fund long-term projects. The move is expected to have a positive impact on the liquidity of the banking sector and its stability.
The policy to limit foreign borrowing urges Kazakhstan to quickly develop the national stock market, expand internal sources of funding and improve the legal and institutional infrastructure of the securities market. Mr Dunayev also said that the securities market "has not been fully carrying out its main functions to accumulate savings and turn them into investment. However, it has a huge development potential, including in offering investment for the real sector of the economy."
Setting up a regional financial centre in Almaty also caused some debate, and stress was laid on applying successful international models in our country1. Bolat Zhamishev, deputy chairman of the Kazakh National Bank, expressed confidence that scepticism about prospects for developing the financial centre was unfounded and cited corresponding legislative acts. Nevertheless, everyone agreed that the necessity to create a liquid stock market required that such a centre should be set up urgently. Mr Zhamishev suggested that gaps in regulations could be solved by the government when the centre started operations. The discussion proposed that an international council should be set up whose board would be able to take independent decisions on certain aspects of developing the centre. Participants in the discussion also stressed that regional integration was needed to consolidate the interests of potential geopolitical partners and issuers from member countries.
1. After considering the experiences of a number of international and regional financial centres, financial centres in Dubai and Singapore were included in the list of the main models to develop a financial centre in Almaty.
Strategic Aspects of Kazakhstan's Policy in Economic Integration
A separate session at the summit focused on Kazakhstan's role in integration processes in Eurasia. It is well known that our country was and still is an active participant in initiatives such as the CIS, the Eurasian Economic Community, the Single Economic Space, the Shanghai Cooperation Organisation and the Conference on Interaction and Confidence-Building Measures in Asia. Discussing the economic aspect of integration, the session agreed that the most successful institution in developing cooperation was the Eurasian Economic Community. Kazakh Industry and Trade Minister Vladimir Shkolnik emphasised the accord reached by Russia and Kazakhstan this year on setting up the Eurasian Development Bank with a registered capital of $1.5bn. He believes that the bank will become a "powerful integration instrument which will make it possible to solve specific problems and carry out major investment projects".
However, in deciding on the feasibility of certain projects, including existing ones, the government often faces a dilemma of choosing between old and new partners. For example, a project to build a plant to assemble locomotives was first given to Transmashholding but later to General Electrics.
Mr Shkolnik also pointed to a blueprint drafted by his ministry to help the Development Bank of Kazakhstan enter CIS markets. Under this blueprint, studies are underway on opening offices of the bank in some CIS countries and carrying out projects there. It should be noted that Kazakhstan has already been acting as an active investor in post-Soviet countries: Kazakh investment in CIS countries reached $8bn and in some countries Kazakhstan is a major investor.
In general, discussing the potential of organisations such as the CIS and a Union of Central Asian States initiated by Kazakhstan recently, the summit concluded that the main deterring factor here may be a significant gap in the economic development of post-Soviet countries. In particular, commenting on the potential of a CIS common market, Foreign Minister Kasymzhomart Tokayev noted that he had always been pessimistic about this idea, but added: "such concepts can be regarded as demanding serious consideration".
The next forum is expected to be held as a Central Asian event, in particular, the managing director of the IHT for Central Asia, the Caucasus and Iran, Bijan Faramarzi, noted that, perhaps, such an expansion of the format would be reflected in its name and it would be called the Central Asian Investment Summit.
Mr. James T. Hitch III, Managing Partner, Baker and McKenzie – CIS, is one of the most active and constant participants in different conferences, that are devoted to the investment potential of Kazakhstan. We have asked Mr. Hitch to comment on results of the 3rd investment Summit in Almaty.
On reflections of the new ambitious Kazakhstani plan to attract further FDI flows to our Republic: – Mr. Hitch, you have already mentioned, that it is "aggressive in the positive terms". Could you please give more detailed commentaries on the issue?
Kazakhstan has decided to attempt to attract foreign investors by trying to do what, in the opinion of the foreign investors – and in the opinion of the Kazakhstani Government – are the right things to do, namely: to fight corruption, to aggressively take measures to join the WTO, to concentrate on certain industry sectors (through “clusters”) where Kazakhstan has certain natural advantages, to promote its own development of its natural resources in the oil and gas and mining sectors. Kazakhstan has also tried to act as an “international player” from the perspective of global politics, showing its willingness to cooperate with its neighbors in Russia and Ukraine, and with governments from both the East (China) and the West (the USA). This type of approach by the Government creates “investor confidence” among foreign potential investors who still see Kazakhstan as an unknown quantity and who feel more comfortable – and more inclined to invest – the more "normal" and "regular" Kazakhstan behaves itself. In this regard, Kazakhstan’s President and Government are doing an excellent job.
Kazakhstan is on the cross-roads to the development of the further strategic FDI Policy. What is your opinion on risks and perspectives, including political aspects, in terms of the possible influence on the investment climate of the Republic?
Kazakhstan's FDI policy will be strengthened to the extent that foreign investors are able to meet other "private enterprise companies" with which to do business. To the extent that foreign investors only find trading partners and potential joint venture partners in Kazakhstan which are predominantly state-owned and controlled enterprises, this will not bode well for increased FDI. The legislative requirements for WTO accession should be a high priority for Kazakhstan's FDI policy in the short and medium term since such legislative reforms are perceived as "guarantees" by foreign investors. Similarly, the proper functioning of the Kazakhstani judicial system without any taint of corruption will provide confidence to foreign investors that "the rule of law" is respected and enforced in Kazakhstan and that they do not need to fear for the security of their investments.
Shall we expect further increase of investments into new economy spheres, underlined in the New State Programme of the Economy Diversification?
I definitely believe that the President's "clusters initiative" will continue to bear fruit by bringing new investments into new economic spheres within Kazakhstan. What is needed at this time is a better public relations effort on the part of the Government, so that the mass media and, consequently, foreign investors will become better informed of the diverse opportunities already available for foreign investment into the Kazakhstani economy.
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