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  KAZAKHSTAN International Business Magazine №3, 2005
 Foreign Investors Support Kazakhstan's Intention to Join the WTO
Foreign Investors Support Kazakhstan's Intention to Join the WTO
Editorial Overview
The 14th Plenary Session of the Foreign Investors' Council was held on 25 November 2005 in Almaty. The Foreign Investors' Council (FIC) was established in 1998 as an advisory body chaired by Kazakhstan's President. The FIC aims to establish direct and honest dialogue between the government and investors, and to resolve problems related to investment in Kazakhstan. The Council submits proposals to the Kazakhstani President as to how improve investment legislation.
The range of issues under consideration at the FIC's meetings expands every year. According to Nursultan Nazarbayev, the subjects are chosen so that the major investors – 'captains of international business' – can share their views and recommendations concerning Kazakhstan's further development, and help to find the best solution to global problems facing the country. The last meeting of the FIC was devoted to Kazakhstan's forthcoming entry into the World Trade Organisation (WTO).
Pending Admission to the WTO
The meeting participants considered Kazakhstan's prospects of joining the WTO and agreed that this is a prompt decision. Reforms that have been successfully implemented in the country since 1999 have ensured Kazakhstan's rapid economic growth. The annual gain in GDP was over 10% during the past five years. Currently, GDP per capita amounts to US$3,440 (a threefold increase as compared to 1999). According to the Ministry of the Economy and Budget Planning, GDP per capita is expected to amount to US$4,150 in 2006 and US$5,600 in 2008.
The development of foreign trade is obvious: the foreign trade turnover grew by 42% during January-September 2005 compared to the same period in 2004, and amounted to US$33bn. From 1993 to 2005, total foreign investments in Kazakhstan amounted to US$41bn, and the amount continues to increase steadily thanks to the country's favourable investment climate.
Kazakhstan has set itself a new, ambitious task to become one of the fifty most competitive countries. In 2005, the International Economic Forum rated Kazakhstan 61 among 117 countries and first among CIS countries in terms of the competitiveness of its economy. China ranks at 49, India 50, Azerbaijan 69, and Russia 75. The competitiveness of the economy is often associated with a country's integration into the global economy. Thus, membership in the WTO, which controls some 97% of world trade, is vital for Kazakhstan.
The World Trade Organisation is a successor to the General Agreement on Tariffs and Trade (GATT), signed by 23 countries in 1947. GATT was intended to resolve global problems related to trade liberalisation and development. The World Trade Organisation was established on 1 January 1995 following a series of lengthy negotiations, and was the result of the last round, the so-called 'Uruguay Round' (1986-1994). The main principles of GATT/WTO are reciprocal granting of the most favoured nation treatment in trade, reciprocal granting of the national treatment of goods and services of foreign origin, regulation of trade chiefly by tariff methods, abandonment of quantitative and other restrictions, and transparency of trade policy. An important WTO feature is its instruments for settling trade disputes. Currently, the WTO has 148 members and another thirty countries hold observer status.
Kazakhstan submitted the official application for WTO membership in January 1996. That same year, Kazakhstan was granted observer status in the WTO and a working group comprising 38 countries – Kazakhstan's major trade partners, including the U.S., the European Union, Canada, Japan, Australia, Switzerland, and China, inter alia – was set up to help Kazakhstan make preparations to join the WTO. To date, Kazakhstan has signed protocols on the completion of bilateral negotiations concerning access to the goods and services markets with the Sultanate of Oman, Pakistan, Turkey, China, Georgia, Kyrgyzstan, the Republic of Korea, Japan, and Cuba. Similar negotiations with another ten countries are underway. Bilateral negotiations with Mexico and Norway are near to completion. Talks with the EU countries show good progress.
One of the conditions for admitting Kazakhstan as a member of the WTO is further implementation of comprehensive economic reforms and compliance of national legislation and foreign trade regulation practice with WTO rules. To that effect, thirty-one Kazakhstani laws in force are being amended and five new acts of law are being elaborated to ensure application of a new technical regulation system in all industrial sectors. Another important issue to be agreed upon during the multilateral negotiations is a balance between Kazakhstan's obligations assumed after joining the WTO and actions aimed at fulfilling the priority national tasks, such as diversification of the economy and the development of manufacturing industries. The main action designed to promote Kazakhstan's admission to the WTO is expected to be implemented within the first six months of 2006.
The admissions procedure for WTO membership includes several stages. During the first stage, special working groups review the economic policy, and trade and political regimes applied by the candidate member for compliance with WTO regulations. During the second stage, consultations and negotiations are conducted concerning the requirements for admitting the country as a WTO member. These requirements primarily concern 'commercially significant' concessions granted by the candidate member to other WTO members when they access its market, as well as the format and period of its obligations under agreements related to WTO membership. As a rule, the candidate member gains the same rights as other WTO members enjoy; this means trading with no discrimination in foreign markets. (Yet, China, for instance, has never gained complete rights). In the event of unlawful actions by any WTO member, other countries can refer trade disputes to the dispute resolution panel, whose decisions are binding for all WTO members. During the final stage, the legislative authority of the candidate member shall ratify the document package agreed upon by the working group and approved by the General Council. Upon ratification, the specified obligations will be incorporated in WTO legal documents and the national legislation, and the candidate country will obtain WTO member status.
The benefits of membership are obvious: gaining favourable conditions when accessing foreign markets, and predictability and stability of commercial relations with no discrimination, due to the WTO dispute resolution instrument that ensures protection of national interests in the event that they are infringed upon by a partner. Currently, WTO members account for more than 50% of Kazakhstan's total turnover. When Russia and Ukraine join the organisation, that figure will increase to 90%. Thus, it is important for Kazakhstan to ensure cooperation with its major trade partners within the common legal system.
At the last FIC session, Nursultan Nazarbayev outlined Kazakhstan's expectations of WTO membership. Bringing the national legislation in line with the WTO principal agreements will enhance the competitive capacity of domestic producers. Applying the recognised international approaches to technical regulations and standards will ensure Kazakhstani goods access to foreign markets. Moreover, after joining the WTO, Kazakhstan will be relieved from existing trade barriers, and WTO members will not impose any new restrictions on Kazakhstani goods. For instance, currently the European Union applies an import quota of 20,000 tonnes to Kazakhstani steel products. When Kazakhstan becomes a WTO member, this limitation will be eliminated. At the same time, obligations assumed by Kazakhstan in respect to access to its services market imply further liberalisation in the financial, telecommunications and transport sectors. This will foster the development of competition, quality improvement, and price cutting of the aforementioned services to consumers. And finally, bringing the foreign trade regime in line with WTO regulations will enhance transparency and reduce corruption. Simplification of licensing and customs formalities in respect to imports as well as the reduction in the number of goods and services subject to licensing will ensure the predictability of Kazakhstan's economic policy and foster the development of businesses in the country.

Investors' Recommendations
As evidenced by their speeches, foreign FIC members support Kazakhstan's intention to join the WTO. Recognised as a market-oriented country by the U.S. and the European Union, Kazakhstan is now getting a chance to access the world market.
Jean Lemierre, EBRD President, believes that Kazakhstan should make every endeavour to join the WTO as soon as possible. This will increase the volume of capital inflow and enhance the country's investment image. Other positive factors include strengthening the government's credibility, introducing international standards and rules, and gaining safer and more transparent access to domestic and foreign markets.
However, the FIC's members state that Kazakhstan still needs to address a number of serious issues. According to Frank Chapman, BG Group's Chief Executive, investors operating in Kazakhstan's oil and gas industry are particularly concerned about new amendments to the law (such as redistribution of shares in subsoil use operations) and the existing legislation on transfer pricing. The current situation may have an adverse effect on existing contracts and discourage future investment. Mr. Chapman also pointed out the selective application of the law and the lack of preliminary negotiations with investors, which may directly affect their business interests. Another topical issue for our country is the lack of relevant infrastructure, which is why, in order to streamline the supplies of Kazakhstani oil to the world market, it is necessary to develop a diversified and reliable oil transportation system.
Alexander Mashkevich, President of the Eurasian Industrial Association (EIA), elaborated on potential outcomes of the WTO membership for the mining industry. He specifically underlined the need to standardise tariffs on freight forwarding. Currently, Kazakhstan's export rail tariffs are higher than domestic rail tariffs, and WTO rules require these to be standardised. The government intends to bring the tariffs in line in two stages: the first will begin on 1 April 2006; the second will follow three months later. Mr. Mashkevich believes that the second stage should be postponed for at least 5 to 7 years. He states that this should be regarded as a precondition to joining the WTO. The EIA President also insists on discussing with major freight forwarders the effect this step may have on the competitiveness of the mining industry's products, as well as the effect of raising coal transportation rates within the country. In the meantime, to further develop this industry, it is critical to rapidly accept the international technical regulations and develop new qualification and certification requirements towards personnel, which are to be aligned with world practices.
Peter Tils, Managing Director and Chief Executive for Central and Eastern Europe of the Deutsche Bank Frankfurt, elaborated on the liberalisation of Kazakhstan's financial sector. He believes that, although WTO membership will have a marginal direct effect on the banking sector, foreign and in particular European banks will get a chance to seriously influence domestic financial institutions in the long term due to the former's huge capitals and low funding costs. Other financial institutions such as 'young' Kazakhstani leasing and insurance companies should also be ready to compete with their foreign counterparts. On the other hand, international players will offer certain advantages to individual consumers and the economy as a whole. These include the financial sector's consolidation and stability, the inflow of foreign capital, lower interests, enhanced operations, innovative approaches, an increased number of financial facilities, and lower costs. Banking services will become more efficient and significantly cheaper.
James Hitch III, Managing Partner of Baker & McKenzie – CIS Ltd., raised another important issue. As is known, the economic programme of Kazakhstan's Strategy for Industrial and Innovation Development in 2003-2015 includes the so-called 'cluster initiative' aimed at developing clusters in the secondary and tertiary sectors so as to diversify the economy and improve its competitiveness. The government has already approved the creation of seven pilot clusters, namely tourism, food and textile industries, oil and gas mechanical engineering, transport and logistics, metallurgy, and building materials manufacturing. The preferences given to cluster projects are government financing, inclusion in free-trade zones and preferential taxation, inter alia. However, Mr. Hitch believes that, considering Kazakhstan's intention of becoming a WTO member, 'any government support for cluster initiatives should be carefully considered as to whether the WTO may deem it as subsidies'.
The WTO Subsidies and Countervailing Measures Agreement defines subsidies as a 'financial contribution' by a government that provides a benefit to an industry or a group of enterprises. The forms that a subsidy can take include grants, loans, infusion of equity, loan guarantees, tax credits, the purchase of goods or services from the government, government contributions to funding, or authorising natural persons to fulfil the government's functions. The WTO establishes two categories of subsidies: prohibited subsidies and actionable subsidies. WTO members must submit notification of all specific subsidies, estimate their expected effect on imports and exports and describe the circumstances that have led to a need for such subsidising. Subsidies may entail countervailing measures on the part of other WTO members, including import duties on the subsidised imports, if the infringing WTO member does not cancel the prohibited subsidies or remedy the unfavourable trade consequences.
Mr. Hitch put forward a number of proposals as to how to create a government support system that would both foster cluster development and meet WTO policies. He suggests avoiding any government funding proceeding from the efficiency of exports and import substitution. If the Investment Fund continues to purchase minority stock from cluster companies for these reasons, the WTO will deem this activity as prohibited subsidies. Furthermore, government loans to cluster companies should be limited, irrespective of whether they are raised through the Development Bank of Kazakhstan or the Investment Fund. These loans may be replaced with loans from private banks or international financial institutions to which Kazakhstan is a party. Then, to successfully develop clusters, the government needs to lend its support for research and development efforts. Yet, to satisfy WTO requirements, the Innovation Fund and other government support institutions may not fund more than 75% of research expenditures and 50% of development expenditures, if these efforts have not been industrially applied as of the moment of such funding. Mr. Hitch recommended that no special trade zones be formed for clusters, because Kazakhstan's current law establishes a 50% cut in the corporate income tax for their participants as well as exemption from land and property tax, and customs duties. The WTO agrees to such preferences only to a certain extent, e.g. if such a trade zone is an economically unfavourable region (the region's income or GDP per capita does not exceed 85% of the country's average indicator or the unemployment rate amounts to no less than 110% of the country's average rate). If there is no economically unfavourable climate, giving cluster companies tax or customs preferences will be deemed by the WTO as subsidies. Mr. Hitch concluded that instead of directly subsidising certain cluster participants, it would be better to invest in the respective regions' infrastructure. To access domestic and world markets, regions need quality road, rail and air connections. They also should be provided with better communications, including data transmitting and high-speed Internet facilities. To attract qualified specialists, a good social infrastructure needs to be created. All these goals may be attained only through government support.
Many other ideas and proposals were communicated at the FIC meeting. The investors elaborated on the key role of the 'partnership between the government and private institutions', diversification of the secondary sector through the development of small and medium-sized businesses and enhancement of production processes, and the need to improve the competitiveness of research and technology achievements. The FIC's members emphasised that Kazakhstan has all the prerequisites for becoming an axis for Central Asian business activities. After joining the WTO, Kazakhstan could help other countries in the region to restore their economic potential. Eurasia, with the exceptions of Georgia and Kyrgyzstan, comprises the last regional group of countries that are not members of the WTO, and foreign investors hope that Kazakhstan and Russia 'will play a crucial role in this historical process'.
Additional proof of this interest was the suggestion by Leonard Blavatnik, President of Access Industries, Inc., that a special WTO entry group should be formed from the FIC and government members, which would foster the exchange of technical information and negotiations as a whole.
The FIC's activities are not limited to plenary sessions. The Council has five working groups that are engaged in resolving day-to-day matters, enhancing the country's investment image, improving taxation and legislation, and addressing issues related to the oil and gas industry. These working groups have regular meetings and report on their activities in the FIC's plenary sessions. At the last meeting, Alain Langlois, General Manager of the representative Office of Total in Kazakhstan and co-Chairman of the Oil and Gas Working Group, presented the Group's report for 2005. The Group analysed the economic competitiveness of prospective oil projects in Kazakhstan as compared to six countries with similar conditions (Norway, Russia, China, Brazil, Equatorial Guinea and Egypt). The criteria included potential geological reserves, preliminary reservoir characteristics, estimated development costs, geographic factors, and legal and tax treatment. The report concludes that despite having world-class potential hydrocarbon reserves, Kazakhstan's disadvantages are high development and transportation costs. Besides, investors' incomes under the existing Production Sharing Contracts are not competitive with those in other countries in question. Therefore, the Oil and Gas Working Group believes that certain amendments to the Tax Code would provide an additional impetus to investors and contribute to mutually effective economic cooperation.
At the end of the FIC's 14th Plenary Session, Nursultan Nazarbayev thanked all the FIC's members for their active participation and underlined the efficiency of the meeting. Jean Lemierre, President of the EBRD, noted that this session had once again contributed to the Council's image as a common ground providing additional stimuli to investors. The next, 15th Session will be held on 16 June 2006 to discuss Kazakhstan's progress in enhancing transparency and fighting corruption.
Investment Statistics
According to the Kazakhstani Statistics Agency, estimated investments in non-financial assets in Kazakhstan amounted to 1,667.7bn tenge from January to September 2005, of which 96.8% was invested in fixed capital. Over the reported period, total investments in fixed capital amounted to 1,614.3bn tenge, which is 1.2 times above the figure for the same period in 2004. A considerable increase in investments was reported in Atyrau Oblast (by 1.6 times), North Kazakhstan Oblast (by 1.5 times), South Kazakhstan and Karaganda Oblasts (by 1.4 times), Eastern Kazakhstan and Aktobe Oblasts (by 1.3 times), and Almaty, Pavlodar and Kyzylorda Oblasts (by 1.2 times). A decrease in investment was observed in the West Kazakhstan Oblast (by 1.4 times), Zhambyl Oblast (by 7%) and Almaty (by 4.3%), as compared to January-October 2004.
The major sources of investment in fixed capital were funds from enterprises themselves (57.7%) and foreign investments (25.7%); budgetary and loan funds amounted to 11.8% and 4.8%, respectively. Investments in fixed capital were utilised mainly by private companies and organisations (59.9%), foreign market participants conducting business in Kazakhstan (27.3%), and state-owned enterprises (12.8%).
The priority sectors for investment are oil and natural gas production (35.4% of the total investments in fixed capital), real estate activities (21.4%, due to geological and engineering survey operations), transport and communications (13.5%), and manufacturing (10.9%). The maximum investment rate was observed in the chemical industry, where investments in fixed capital have augmented by 5.5 times as compared to the figure for January-October 2004.
According to the National Bank of Kazakhstan, the gross inflow of foreign direct investments in Kazakhstan amounted to US$2.7bn over the first six months of 2005 (an increase by 13.6% compared to the same period of 2004).
The foreign capital inflow was also due to raising foreign funds by Kazakhstani banks and obtaining medium- and long-term loans by non-financial enterprises. Utilisation of new loans from second-tier banks was 11% above the reference period level and amounted to US$2.6bn.
Over the first six months of 2005, the gross foreign debt increased by more than US$2.5bn and amounted to US$34.6bn as of 30 June 2005. The increase in the foreign debt was chiefly due to second-tier banks (some US$2bn) and branches of foreign companies operating in Kazakhstan (approximately US$360m).
As before, foreign creditors grant capital loans mainly to enterprises producing crude oil and natural gas (30.8% of the gross foreign debt). Bank debt is 26.2% of the country's debt burden. Companies conducting geological survey operations account for 15.9% of the foreign debt. The government debt has amounted to 8.2% of the gross foreign debt.
From 1993 to 30 June 2005, Kazakhstan raised US$41,865m in foreign investments, of which US$23,228m was in foreign direct investments (55.5%), US$16,614m in trade loans and other liabilities (39.7%), and US$2,017m in portfolio investments (4.8%).

Table of contents
The Rise of Kazakhstan on the Global Stage  Valentina C. Kretzschmar 
SAP’s Solutions for Kazakh Business  Jacob Korobko, Alnur Zhetbayev 
The Origin of Brands  Al Ries, Laura Ries 
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