2016 Guide to Kazakhstan for American Businesses

1

A G U I D E T O

K A Z A K H S TA NFOR AMERICAN BUSINESSES

2016

WASHINGTON, DC

3

ZaysanAyagoz

Lepsi

PanfilovQapshaghay

ShuZhangatas

Saryshaghan

Balqash

Temirtau

AtbasarEsil

Rudnyy

Ekibastuz

Turkistan

Orsk

Aral

Leninsk

Shalqar

Embi

Beyneu

Aqsay

Shymkent

Zhambyl

Taldygorghan

Oskemen

Oaraghandy

Koksnetau

Petropavl

Qostanay

Arqalyq

Zhezqazghan

Qyzylorda

Aqtobe

Oral

Aqtau

Pavlodar

For more information on investing or doing business in Kazakhstan, visit www.trevianinternational.com

Astana

Atyrau

Almaty

K A Z A K H S T A NF O R A M E R I C A N B U S I N E S S E S

A N I N T R O D U C T I O N T O

Kazakhstan is home of the apple. Scientists have used DNA evidence to locatewhere the first eating apple grew. The wild variety, Malus Sieversii, which grows on the slopes of the Tien Shan mountains, is the apple’s true ancestor.

K

Chicago-based Adrian Smith + Gordon Gill Architecture (AS+GG) was announced winner of the design competition for Astana EXPO-2017. AS+GG’s website explains "EXPO-2017 will embrace the Future Energy concept by becoming the first Third Industrial Revolution city, where energy consumed by the Expo community will be provided from renewable sources. Buildings will become generators of power and their energy will be stored using innovative technologies while being distributed by a smart grid. The Expo community will provide infrastructure to encourage and support the use of vehicles that use renewable fuels." - http://smithgill.com/work/expo-2017

A G U I D E T O

K A Z A K H S T A NFOR AMERICAN BUSINESSES

2016

5

INTRODUCTION

This is our second year publishing a Trevian International guide to Kazakhstan for American businesses. Last year’s booklet was very much an introduction to Kazakhstan. We covered broad topics that we thought a businessperson would want to know if they had no prior knowledge of Kazakhstan. I think we accomplished our goal to give enough content and context for readers to decide if Kazakhstan was worth a closer look. This year’s booklet intends to give a summary of 2015 (which was a good year for Kazakh – American commercial ties) and important domestic/regional initiatives, like Nurly Zhol and the New Silk Road. We highlight the robust foreign investment infrastructure and economic incentives that Kazakhstan has established – and enhanced - over the last decade, and talk about a few SME success stories.

I’m grateful to Marcia Favale, a senior advisor to Prime Minister Massimov, and board member of the Kazakhstan Development Bank for contributing here a thorough explanation of Kazakhstan’s response to the global financial crisis (and why that should give foreign investors confidence). I’m also grateful to Ambassador Umarov for being available for an interview.

Readers will come across Allen Global and Allen Filtration Eurasia in these pages. I’m particularly proud of Trevian’s work with Allen. I was privileged to accompany Ambassador Umarov to Springfield, Missouri in the fall of 2014. Ambassador Umarov easily convinced Allen CEO Jerry Nichols that Kazakhstan is where he should manufacture his used oil recycling equipment. One month later, Nichols and I were in Astana. Today, Allen Filtration Eurasia is a Kazakhstan-registered company that will assemble American-made component kits in Kazakhstan into final equipment for export throughout Eurasia. Allen proves the US – Kazakhstan commercial potential can be an economic win-win for the workers in both countries.

I hope this booklet results in more American – Kazakh commercial ties.

Josh Studl Trevian International

INTRODUCTION

7

KAZAKHSTAN TODAY

8

WTO ACCESSION

24

EXPO 2017

18

KAZAKH-USYEAR IN REVIEW

20SPECIAL

ECONOMIC ZONES

40

Q&A WITH AMBASSADOR

UMAROV

26

HOW A 70-YEAR OLD AMERICAN COMPANY CHOSE KAZAKHSTAN

30

APRIL 26TH PRESIDENTIAL

ELECTION

44

INVESTMENT CLIMATE

36

KAZAKHSTAN: A CASE STUDY IN RESTRUCTURING STRATEGY

58NURLY ZHOL

“BRIGHT PATH”

46

PRIORITY SECTOR

CALL OUT

52

OPINION BY FOREIGN MINISTER IDRISSOV

64

ATYRAU – HOUSTON SISTER CITIES

56

THE NEWSILK ROAD

48

SAMRUK KAZYNA IN SILICON VALLEY

34

550TH ANNIVERSARY OF

KAZAKH STATEHOOD

50

9

KAZAKHSTANTODAY

QUICK FACTS ON KAZAKHSTAN

Kazakhstan is a landlocked country located in the middle of the Eurasian continent, sharing borders with Russia, China, Kyrgyzstan, Uzbekistan, Turkmenistan and the Caspian Sea. It is near equidistant from the Atlantic and Pacific Oceans, and is four times the area of Texas. Kazakhstan was the stage for the ancient “Silk Road” and strong political relations between Eurasian powers. Today, Kazakhstan is a link between Europe, Central and South Asia, East Asia, and the Asia-Pacific.

Modern Kazakhstan is built on 3,000 years of history. The country’s development has been influenced by historical legends such as Alexander the Great, Tamerlane, Genghis Khan

and Kerey Khan

For centuries, the Silk Road through Kazakhstan served as one of the world’s oldest and most historically significant trade routes. All of this has contributed to the richness of Kazakh culture and its capacity to adapt and develop. Today, Kazakhstan is the most politically stable state in Central Asia and a leader among CIS states with its open, constructive and multi-vectored foreign policy approach.

Following the emergence of the Soviet Union (USSR) in 1917, the Kazakh Autonomous Soviet Socialist Republic was formed within the authority of Russia, becoming in 1936 the Soviet Republic of Kazakhstan. Since its independence from the Soviet Union in 1991, Kazakhstan has consistently moved towards a stable, democratic transition, which resulted in the establishment of a secular constitution in 1995. The Kazakh constitution, modeled after Western notion of the separation of powers, outlines the responsibilities of the executive, legislative and judicial branches. The President of the Republic elected through a direct, popular vote for a five-year term. The constitution gives the president the power to appoint and dismiss the prime minister, with parliament’s approval.

Kazakhstan’s population is around 17.3 million.

KAZAKHSTAN TODAY

2016 GUIDE TO KAZAKHSTAN FOR AMERICAN BUSINESSES 2016 GUIDE TO KAZAKHSTAN FOR AMERICAN BUSINESSES

11

Kazakhstan’s population is around 17.5 million. The main ethnic groups present in the country are Kazakhs (66.01%), Russians (21.05%), Uzbeks (3.07%) Ukrainians (1.7%), Uighurs (1.44%), Tatars (1.17%), Germans (1.0%) and other ethnicities (4.56%). There are over 140 different ethnic groups in Kazakhstan and the country is well-known for its lack of interethnic

tensions and peaceful coexistence. Kazakhstan has put great efforts in place to maintain peace among its ethnic groups, which is essential for the internal stability of the country. When visiting the country in 2008, former UN General Secretary, Kofi Annan, declared, “Kazakhstan may serve as example of a peaceful multiethnic country where ethnic diversity is a blessing, but not a curse”. Kazakh is the official state language. Russian is the second official language in Kazakhstan and is widely used. English is the third language supported by the Government of Kazakhstan within the “Trinity of Languages” policy to promote the simultaneous command of these three languages by all Kazakh citizens.

Many different sports such as boxing, skiing, basketball, football, and wrestling are popular in Kazakhstan and the country boasts a world-class set of athletes that have made a name for themselves. One athlete in particular, the boxer Gennady Gennadyevich Golovkin (or GGG), made the headlines in the past couple of years with his victories and is ranked amongst the best boxers in the world.

Team sports are also popular in the country. In August 2015, FC Astana became the first Kazakhstani soccer team to make the UEFA Champions League Group Stage. The competition is the highest-level soccer competition in Europe and is contested by top club teams in the continent.

In addition to its rich culture and tradition, Kazakhstan is also home to a diverse and intriguing cuisine. Aside from the delicious meat-based dishes and specialties, the country is also the birthplace of one of the most popular fruits in the world, the apple. Centuries ago, the territory of modern Kazakhstan was filled with apple trees and DNA analysis in the book The Story of the Apple by Dr. Barrie Juniper shows that apples are in fact from Kazakhstan. According to the analysis, malus sieversii, which is the biological predecessor to the domestic apple, malus domestica, originated in the Tien Shan Mountains in southeastern Kazakhstan. It was then transported and traded along the Silk Road, and gained popularity in the Middle East, Europe and Asia.

KAZAKHS

RUSSIANS

UIGHURS

The main ethnic groups present in the country are:

OTHER

UKRAINIANS

TATARS

VOLGA GERMANS

21.1%

1.7%

1.2%

4.6%

UZBEKS

3.1%

66%

1.4%

1.0%

POLITICALGovernment Type: Presidential Republic

Head of State: President Nursultan Nazarbayev

Head of Government: Prime Minister Karim Massimov

Legislative Branch: Bicameral Parliament - the Senate (47 seats) and the Mazhilis (107 seats)

Legal System: Civil Law System

Capital: Astana (pop. 800,000)

Largest City: Almaty (pop. 1.5 million)

ECONOMICGDP: $218 billion (No.49 in the world)

GDP growth rate (annual): 4.3% (2014), 6.8 % average since 2004

GDP per capita: $13,000 (19 fold increase since 1993)

Unemployment Rate: 4.9% Youth Unemployment: 3.8%

Inflation: 1.8% (Aug 2015)

FDI Stock: $123.5 billion (2013)

International Reserves $98 billion (45% of GDP)

Agricultural Products: grain (mostly spring wheat and barley), potatoes, vegetables, melons, livestock

Main Industries: oil, coal, iron ore, manganese, chromite, lead, zinc, copper, titanium, bauxite, gold,

silver, phosphates, sulfur, uranium, iron and steel; tractors and other agricultural machinery, electric

motors, construction materials

Exports: $79 billion

Imports: $41 billion

DEMOGRAPHIC & SOCIALPopulation: 17.5 million

Population Growth Rate: 1.16%

Life Expectancy: 71.6 years (2014)

Median Age: 29.7 years (2014)

Ethnic Groups: Kazakh 66.01%, Russian 21.05%, Uzbek 3.07%, Ukrainian 1.7 %, Uighur 1.44 %, Tatar 1.17%, German 1.0%, other 4.56% Religion: Muslim 70.2%, Christian 26.2% (mainly Russian Orthodox), other 0.2%, atheist 2.8%, unspecified 0.5% (2009 est.)Major Languages: Kazakh , Russian Health Expenditure: 3.9% of GDP (2011)Literacy: 99.7%Urban Population: 57.0% of total population

KAZAKHSTAN TODAY


13

KAIRAT UMAROV : AMBASSADOR OF KAZAKHSTAN TO THE UNITED STATES

Ambassador Kairat Umarov has served as Kazakhstan’s Ambassador to the United States since January 2013. Ambassador Umarov is one of the most active diplomats in Washington. He is often on the road speaking to students at American universities, meeting with city and state officials, or presenting Kazakhstan’s attractive business climate, investment incentives and Expo 2017 to American companies. The ambassador has advanced commercial ties on visits to Springfield, Missouri, Raleigh, North Carolina, Los Angeles, California and Silicon Valley. The ambassador personifies Kazakh hospitality and

regularly opens the doors of the embassy for public events that build people-to-people ties between Kazakhs and Americans. Over the last year, the embassy has welcomed people for events on the 550th anniversary of the Kazakh Khanate, a series of talks with authors on books about Kazakhstan and other receptions with distinguished visitors. When in Washington, the ambassador is deepening the bilateral commitment of the Kazakhstan-United States Strategic Partnership.

From 2009 to 2013 he was a Deputy Foreign Minister overlooking bilateral relations with the United States, Kazakhstan’s engagement with international organizations and was responsible for raising international awareness about Kazakhstan. Over his distinguished career in the foreign service, he has held various positions at the Foreign Ministry and Presidential Administration, including two stints as Counselor and Deputy Chief of Mission at the Kazakhstan Embassy in Washington D.C., Ambassador-at-Large at the Foreign Ministry, and Chief Inspector at the Center for Foreign Policy of the Presidential Administration. From 2004-2009, he served as Ambassador to India.

THE MACROECONOMIC SITUATION

Following its independence in 1991, Kazakhstan has quickly become a regional economic powerhouse thanks to its macroeconomic stability, favorable business environment, and vast energy and mineral resources. Kazakhstan’s economy grew at an impressive average of 8% per year over the past decade, supported by strong macroeconomic fundamentals, oil exports and the country’s political stability. Today, investors value Kazakhstan’s macroeconomic and sociopolitical stability, its competitive corporate tax rate and the government’s various investment promotion incentives and programs. Despite this impressive story, Kazakh economy has slowed significantly over the past year due to a number of external factors such as low oil prices, and the spillover from Russian economic malaise and China’s slowdown. The tenge came under strong pressure, which prompted the central bank to take action through various mechanisms on numerous occasions.

As of October 2015, Kazakhstan’s long-term credit ratings are as follows:

Moody’s – Baa1 stable outlook

Fitch – BBB+ stable outlook

Kazakhstan weathered the global financial crisis well through a dexterous response, combining fiscal relaxation with monetary stabilization. During the global economic crisis, Kazakhstan’s economic growth slowed down to 1.2% in 2009, while the annual growth rate subsequently increased to 5% and 6% in 2012 and 2013, respectively. The country still managed a healthy GDP growth rate of 4.3% in 2014 amid significantly weaker oil demand and prices and geopolitical turmoil in its neighborhood. Growth in 2015 is expected to slow to the 1-2% band largely as a result of the dramatic drop in oil prices and other external factors such as the deteriorating economic conditions in Russia and China. The Kazakh economy grew at 1.7 percent in the second quarter. Amid these testing times, Kazakh government has been actively pursuing reforms to maintain sustainable growth and launched two economic support programs in 2014 in order to improve access to finance and infrastructure for the private sector. The country’s economic diversification and industrialization initiatives are expected to help economy establish robust growth rates over the medium term, following a slowdown in 2015. The government has initiated the Economic Support Package (Nurly Zhol), a multi-year fiscal stimulus

INVESTMENT OPPORTUNITITES FOR U.S. BUSINESSES 32

14

10.5

7

3.5

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GDP GROWTH CONSTANT PRICES (ANNUAL %)

KAZAKHSTAN TODAY


15

package financed by the national oil fund and multilateral development banks. Credit ratings agency Moody’s praised the Kazakh government for the successful implementation of the newly planned structural reforms, which Moody’s expect would strengthen the country’s economy and institutions in the medium- to long-term.

The program is expected to provide $9 billion to the economy over the next three years. The same amount of investment will also be attracted from the EBRD, World Bank and other international financial institutions. The involvement of multilateral development banks in various project finance and budget support programs in the country will build further momentum for the government to push forward with the implementation of structural reforms in different priority areas such as human capital, institution building, rule of law, and business climate.

Kazakhstan has been taking steps to ensure it remains competitive amid a challenging external backdrop. In a response to sharp falls in commodity prices so to maintain its export competitiveness, the government decided to further liberalize the Tenge’s rate through inflation targeting in late August 2015. As a result of the central bank’s decision to float the tenge, the currency’s value plummeted by 25% in a single day. The devaluations in the region including large economies like China and Russia forced Kazakhstan to act as demonstrated by Prime Minister Karim Masimov’s comments emphasizing Kazakhstan’s desire to compete better in the region.

The decision to float the tenge was aimed at improving Kazakhstan’s financial stability in the medium- and long-term. The tenge had come under pressure since the second half of 2014 due to external developments led by the

fall in oil prices. The government’s willingness to act swiftly and decisively was interpreted as an important signal reassuring foreign investors. Prime Minister Masimov highlighted the importance of free floating tenge on the country’s finances and said that the government will raise funds on the local market to cover the 2016 budget deficit. The central bank spent $28 billion in the past two years to support the tenge and continuing with the currency peg would have jeopardized the country’s finances. Given the currently low levels of crude oil prices and similar expectations going forward, other oil and gas producing countries could follow Kazakhstan’s example and abandon control of their exchange rates.

Despite difficult short term prospects and a challenging external environment, many institutions including World Bank and IMF expect growth in Kazakhstan to rebound to levels of 3-4% within the next couple of years. The oil price and economic developments in China and Russia will be important factors affecting Kazakhstan’s economic growth in the short- and medium- term. The government’s efforts to improve transport infrastructure and strengthen public and market institutions in order to enhance economic diversification and attract investment into the non-oil economy have been praised by many international observers.

100 STEPS INITIATIVE & THE FIVE INSTITUTIONAL REFORMS

Today, Kazakhstan is a middle-income country with a per capita GDP of $13000, on par

with that of Russia ($14,611), and surpassing the level of Ukraine ($3,000) and of Belarus ($7,800). Kazakhstan is fully integrated into the global economy, as a member of the UN system, World Trade Organization (WTO), Organization for Security and Cooperation in Europe (OSCE) and the Eurasian Economic Union (EEU). In order to avoid the “middle-income trap” Kazakhstan’s future development is contingent on its ability to realize institution reforms that enhance the country’s overall welfare and create the foundation for sustainable growth.

The reelection of President Nursultan Nazarbayev on April 26, 2015 augured a new wave of reforms focused on institutional development, capacity-building and structural transformation. This reform agenda came to fruition in the “100 concrete steps” program introduced by the President at the Astana Economic Forum in May 2015. As its name indicates, the program includes 100 specific action items supporting the five priorities President Nazarbayev identified during a speech in April 2015 for the country’s institutional reform process:

1Professionalization of the civil service

2 Strengthening the rule of law

3 Industrialization and economic diversification

4 Promotion of a united citizenry

5 Enhancing transparency and accountability in government

KAZAKHSTAN TODAY


17

The reform agenda is in line with the country’s plans to become one of the thirty most developed countries in the world. The new reform program comes at a particularly timely moment for Kazakhstan, as external environment becomes less accommodating amid global economic crises, low oil prices and different geopolitical threats in Kazakhstan’s neighborhood.

The program is designed to improve the efficiency of public services by putting emphasis on meritocracy, improve business environment, guarantee rule of law, and promote development of a national Kazakh identity based on multiculturalism and social mobility. All of these factors are crucially important for foreign investors and will ensure Kazakhstan remains a stable, predictable, and lucrative country to invest in. In July, former U.S. Ambassador to Kazakhstan and current President of the Kazakhstan-U.S. Business Association, William H. Courtney stated, “Kazakhstan has put forth an ambitious economic reform plan, called 100 Steps. They are intended to provide a margin of safety in a difficult period. If implemented, the reforms would help Kazakhstan make its WTO membership more meaningful and substantive.”

The National Commission for Modernization under the President of Kazakhstan designed the program, and will oversee its implementation. The Commission, which contains five working groups, will coordinate with the Office of the Prime Minister, legislature and local Akimats and Maslikhats, to implement all 100 concrete steps.

Astana has ramped up support for educational exchange programs in order to promote a united citizenry and promote the professionalization of the civil service. Step #76 calls for the implementation of a 12-year secondary education program, following the models and standards of OECD countries.

Over the last few years Kazakh civil servants have attended Duke University’s Duke Center for International Development.

This year’s graduates included officials from the Agency for Civil Service Affairs and Anti-Corruption, the Ministry of Culture and Sport, and the Ministry of Investment and Development.

The 100 concrete steps program will require time and patience to implement, and to witness the results. That said, the 100 steps program creates a clear roadmap for future government programs and potential areas for cooperation and business. American companies looking to do business in Kazakhstan would do well to be familiar with the 100 concrete steps and five institutional reforms.

From June 10 to September 10, 2017, Astana, the

UNESCO-declared “City of Peace,” will be the first city in

the Commonwealth of Independent States (CIS) to

host the World’s Fair exhibition, EXPO 2017.

The theme of EXPO 2017 is the ‘Future Energy’, and will showcase innovations and

best practices for alternative and zero-carbon energy

applications.

EXPO 2017 will serve as a basis for multinational

scientific, technical, political and cultural exchange, and as impetus for Kazakhstan’s own transition to a greener

economy.

The event will be held during Astana’s 20th anniversary as the nation’s capital and will

celebrate the emergence and successes of independent

Kazakhstan. The hosting of such an important event

affirms the growing recognition of Kazakhstan as

a strong actor in international affairs.

EXPO 2017 will not only increase global recognition of Kazakhstan as a leader in alternative energy solutions,

but also reinforce the country’s integration into the

global community and economic marketplace.

EXPO 2017 will generate significant urban

development advances in Kazakhstan. The Government

has already allocated $325.25 million to build the

exposition site, ground infrastructure and transit

routes.

Officials anticipate an additional $1.3 billion in FDI into infrastructure projects –

roads, railways, and buildings. This should create

jobs and have lasting economic impact.

In August 2015, First Deputy Minister of Foreign Affairs and Expo Chairman Rapil Zhoshybayev visited New

York, Washington, D.C. and San Francisco. In Washington Minister Zhoshybayev meet with officials from the U.S.

energy and state departments, and confirmed

the World Bank’s participation. In San

Francisco, with an invitation to participate, Minister Zhoshybayev visited

Google’s headquarters. Earlier this summer,

Ambassador Umarov visited Tesla headquarters with an

invitation to participate.

As of this writing 45 countries have confirmed their official participation, and more than five million people from 100 countries

are expected to attend. This would make EXPO 2017 the

largest international gathering in Central Asia ever, and could start a

snowball effect for tourism in the years to follow.







applications.


scientific, technical, political and cultural exchange, and as impetus for Kazakhstan’s own transition to a greener

economy.



Kazakhstan. The hosting of such an important event

affirms the growing recognition of Kazakhstan as

a strong actor in international affairs.

EXPO 2017 will not only increase global recognition of Kazakhstan as a leader in alternative energy solutions,




development advances in Kazakhstan. The Government

has already allocated $325.25 million to build the

exposition site, ground infrastructure and transit

routes.


roads, railways, and buildings. This should create

jobs and have lasting economic impact.

In August 2015, First Deputy Minister of Foreign Affairs and Expo Chairman Rapil Zhoshybayev visited New

York, Washington, D.C. and San Francisco. In Washington Minister Zhoshybayev meet with officials from the U.S.

energy and state departments, and confirmed

the World Bank’s participation. In San

Francisco, with an invitation to participate, Minister Zhoshybayev visited

Google’s headquarters. Earlier this summer,

Ambassador Umarov visited Tesla headquarters with an

invitation to participate.

As of this writing 45 countries have confirmed their official participation, and more than five million people from 100 countries

are expected to attend. This would make EXPO 2017 the

largest international gathering in Central Asia ever, and could start a

snowball effect for tourism in the years to follow.







applications.


scientific, technical, political and cultural exchange, and as impetus for Kazakhstan’s own

transition to a greener economy.



Kazakhstan. The hosting of such an important event affirms

the growing recognition of Kazakhstan as a strong actor in

international affairs.

EXPO 2017 will not only increase global recognition of

Kazakhstan as a leader in alternative energy solutions,




development advances in Kazakhstan. The Government has already allocated $325.25 million to build the exposition

site, ground infrastructure and transit routes.


roads, railways, and buildings. This should create jobs and

have lasting economic impact.

The World Bank has confirmed its participation in Expo 2017

As of this writing 45 countries have confirmed their official participation, and more than five million people from 100 countries are expected to attend. This would make EXPO 2017 the largest

international gathering in Central Asia ever, and could start a snowball effect for

tourism in the years to follow.

21


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This was evident this summer when U.S. Commercial Services hosted its first U.S.-Kazakhstan Business Forum in Astana in June. The forum focused specifically on the sectors of infrastructure, energy and agriculture, and included an official American delegation of 20 U.S. companies conducting or seeking business in Kazakhstan led by Mr. Arun Kumar, the Director-General of the U.S. and Foreign Commercial Service of the U.S. International Trade Administration. Mr. Kumar also serves as the Assistant Secretary of Commerce for Global Markets.

KAZAKHSTAN, U.S. MARK YEAR OF GROWING BUSINESS

Kazakh-U.S. trade experienced a strong year in bilateral economic cooperation, further emphasizing the importance of these ties in maintaining relations with Central Asia and creating the foundation for future foreign investment into a new and untapped market. United States exports agricultural goods, machinery, aircraft, vehicles and railway craft. Imports from Kazakhstan included mineral fuels, oils, iron and steel, and uranium ores. According to statistics of Kazakh Government, the trade turnover between our two countries over half a year is $1.30 billion (Kazakh exports - $307,9 million, imports - $ 993.9 million). Trade turnover in 2014 - $2.39 billion, Kazakh exports - $411 million, imports - $1.9 billion. If one compares this figure with Kazakhstan’s trade turnover with Russia ($20 billion), China ($17 billion) and EU ($53 billion), one can see that there is much room for improvement and potential to be exploited.

While trade turnover is projected to continue, there is growing interest from both sides to increase commercial ties between small- and medium-sized companies, where the transfer of knowledge, specialization and technology may be facilitated more easily, and where business can move across boarders more speedily and efficiently.

KAZAKH-USYEAR IN REVIEW

32

KAZAKH-US YEAR IN REVIEW


23

Featured at the forum was U.S. pre-cast concrete manufacturer Spancrete, which has had good experience doing business in Kazakhstan in a short amount of time. Waukesha, WI-based Spancrete was founded in 1946 and sets the standard in precast concrete industry. Spancrete attended the first Eurasian Congress of Construction Industry in December 2014 where Global Sales Director Terence Dittrich identified a Kazakh manufacturing partner. Spancrete soon had a deal, and now Spancrete technology is guiding a precast manufacturing facility in West Kazakhstan.

Also at the U.S. Kazakhstan Business Forum in Astana, Allen Global announced that they created a Kazakhstan-based company, Allen Filtration Eurasia LLP, to serve the Eurasian market. Allen Global is a 65-year old Missouri company and its entry into Kazakhstan is another strong example of an American company bringing specialized knowledge and technology to Kazakhstan. CEO Jerry Nichols said the new firm will follow the GE Locomotive model of importing U.S.-made components, or kits, to be assembled in Kazakhstan. Finished equipment will be exported to customers throughout Eurasia and the CIS. This model creates multiple wins for all stakeholders involved – skilled jobs in both the U.S. and Kazakhstan are created through export-driven manufacturing.Perhaps the most promising development in

the sphere of Kazakh-U.S. economic ties is Kazakhstan’s formally accession to the World Trade Organization, completing a nearly 20-year-long process. WTO membership will encourage member states to increase trade with Kazakhstan, and improve Kazakhstan’s GDP growth. It will also strengthen Kazakhstan’s position on the global value chain (particularly within the China – EU transport corridor), which will encourage future foreign investment and spur the development of Kazakhstan’s emerging SME sector in the long run.

The U.S. government seems to be on track to soon establish Permanent Normal Trade Relations with Kazakhstan, and thereby, legislatively exclude Kazakhstan from the Soviet relic Jackson-Vanik Amendment.

THE KAZAKH - U.S. DIPLOMATIC FRONT

Over the past year, the U.S. filled its diplomatic vacancy in Astana, Kazakh President Nursultan Nazarbayev had several interactions with U.S. President Obama, and Kazakhstan’s Prime Minister Karim Massimov visited U.S. Secretary of State John Kerry in Washington. On November 2, 2015, U.S. Secretary of State John Kerry visited Astana where he co-chaired with Foreign Minister Erlan Idrissov the fourth meeting of the U.S.-Kazakhstan Strategic Partnership Dialogue. According to the State Department readout, “Secretary Kerry expressed the United States’ unwavering support for Kazakhstan’s sovereignty and territorial integrity, and congratulated Kazakhstan on the 550th anniversary of the Kazakh Khanate.” The statement went on to affirm US support of Astana’s effort to advance regional security and economic integration, combat violent extremism, strengthen non-proliferation and strengthen rule of law. In early January 2015, the U.S. Senate confirmed Ambassador George Krol as the

country’s newest ambassador to Kazakhstan, filling a vacancy since September 2013 when Ambassador Kenneth Fairfax left the post for a position in the International Energy Agency. Ambassador Krol previously served as U.S. ambassador to Uzbekistan for four years. Ambassador Krol, who speaks Russian fluently and has a commanding knowledge

of Kazakh language, extolled the potential of Kazakhstan in July 2014 remarks to the Senate Foreign Relations committee. “Our strategic partnership with Kazakhstan has become increasingly important as Kazakhstan takes its rightful place on the world stage as a country of consequence,” he told the committee. “Kazakhstan has emphasized economic reform and, as a result, is now a middle-level-income nation with a financial system that largely meets international standards.” He emphasized the U.S.’ growing trade with the country, calling Kazakhstan “our most important economic partner in the region.”

Kazakhstan is a strong strategic partner of the U.S. in terms of aiming for peaceful resolution in the post-Soviet sphere, as evidenced by President Obama initiating a call to Nazarbayev on January 22 as tensions in Ukraine were

continuing to escalate. Kazakhstan had been urging Germany and France, as well as Russia, to come to Astana for talks on how to stabilize eastern Ukraine, reflecting the Kazakh ‘multivector’ foreign policy approach to be open to more global partners.

When Nazarbayev was re-elected on April 26, 2015, President Obama sent a letter of congratulations and vowed to continue working with Kazakhstan on issues of global security. In April, Kazakh Prime Minister Karim Massimov visited Washington and held a meeting with Secretary Kerry, underlying Kazakhstan’s importance to supporting Central Asian stability and maintaining good ties with the United States. Prime Minister Massimov also met with National Security Advisor Susan Rice, who thanked him for the role that Kazakhstan had played in the recently concluded P5+1 negotiations with Iran. They also discussed the Ukraine conflict and Kazakhstan’s hosting the Conference on Countering Violent Extremism in Astana on June 29-30 designed to tackle violent extremism.

This year, the U.S. State Department has launched a new strategy for Central Asia, focused on three clear goals: strengthening partnerships for security, establishing closer economic and trade ties, and supporting advances in governance and human rights. The U.S. has emphasized that it is more interested in working with these countries on a more permanent basis, as opposed to the transitory interest it took in the region in previous administrations. The U.S. has also been a staunch supporter of Kazakhstan’s bid to join the World Trade Organization, and to host the IAEA-backed uranium fuel bank.

U.S. Ambassador Krol

25


KZ – U.S. COMMERCIAL TIES - YEAR IN REVIEW SECTION

WTO ACCESSION

WTO ACCESSION AND THE NEW PLAYING FIELD FOR KAZAKH-US COMMERCIAL TIES

Following almost two decades of negotiations, Kazakhstan became the 162nd member of the World Trade Organization (WTO) in June 2015 by agreeing to the WTO accession package.

The great potential offered by Kazakhstan for US companies and investors will be further augmented by Kazakhstan’s accession into the WTO. It will increase opportunities for American investors, who are looking to export to Kazakhstan, as reduced import tariffs on goods will decrease barriers to entry.

In addition to reducing trade barriers, WTO membership will also bring many additional benefits such as lower costs of doing business for U.S. companies and use of WTO dispute resolution mechanisms. Membership will contribute to economic growth, encourage good governance, help make the economic system more efficient, and contribute to raising incomes in the country -- all factors that will benefit U.S. companies doing business in Kazakhstan.

WTO membership will boost Kazakhstan’s economy through increased transparency and predictability, and an improved investment climate. Further integration with the global trading system will help diversify its economic partners. Kazakhstan’s WTO accession should boost

regional trade and further strengthen the country’s ties with its neighboring countries. Russia, Kyrgyzstan and Armenia, countries that are members of the Eurasian Economic Union (EAEU), are also members of the WTO. Following Kazakhstan’s accession, a vast majority of trade in Central Asia will be conducted among WTO members. Furthermore, Kazakhstan’s top trading partners such as China, France, Russia, the Netherlands, and Germany are all members of the WTO, which should remove barriers and support trade alignment.

WTO helps members establish a rules-based system, which benefits smaller companies more than the large ones and is therefore a boon for SME development. Membership will remove barriers of internalization for Kazakh SMEs and will provide the right context for American SMEs to access the Kazakh market. Furthermore, it helps overcome certain bottlenecks by providing predictability and access. The WTO system offers multiple opportunities for SMEs to export by lowering tariffs, protecting intellectual property, and providing an effective system of dispute settlement. It will also make it easier for Kazakh SMEs to join global value chains, and improve confidence for investors not yet compelled by Kazakhstan’s many opportunities.

27


Q&A WITH AMBASSADOR OF KAZAKHSTAN TO THE UNITED STATES KAIRAT UMAROV

Trevian International had the privilege to

interview Kazakh Ambassador to the United

States, His Excellency Kairat Umarov.

Mister Ambassador, thank you for

meeting with us.

My pleasure.

Kazakhstan became the 162nd

member of the World Trade

Organization (WTO) in June 2015.

How does Kazakhstan’s WTO

membership affect business in the

country?

Achieving WTO membership was

a huge victory for Kazakhstan.

We were involved in intensive

negotiations for almost twenty years,

so when we finally became a full-

fledged WTO member, this reflected

thousands of hours of hard work by

a host of civil servants.

At one level, it is business as usual in

Kazakhstan. We have been working

to improve our business climate

and adopted many of the norms

and practices observed by WTO

members since 1991. Particularly after

the reforms of the 1990s, when many

formerly state-owned enterprises

were privatized and the financial

sector was stabilized with the

assistance of international financial

institutions, Kazakhstan implemented

many reforms that sought to

remove non-trade barriers and lower

customs tariffs in various sectors.

Kazakhstan has also joined many

international trade organizations. For

example, Kazakhstan is an Extractive

Industries Transparency Initiative

(EITI) Compliant Country and is a

member of the World Intellectual

Property Association, the UN system

and the World Customs Organization

(WCO). These organizations

each have specific membership

requirements that Kazakhstan has

satisfied. So at one level, WTO

membership reflects many of our

accomplishments.

At another level, membership in

the WTO means that Kazakhstan

is a formal member of the rules-

based system of international trade.

Kazakhstan is now legally within

the purview of the WTO’s system

of policy monitoring and dispute

resolution. The impact will be

that foreign investors gain more

confidence in doing business in

Kazakhstan in general.

Kazakhstan is one of the founding

members of the Eurasian Economic

Union (EAEU or EEU), but many

people are not familiar with the

organization. Please explain what it

does.

Regional economic zones and

special trade zones are a part of

globalization. Today, there are

integrated economic areas all over

the world – NAFTA, the European

Union, ECOWAS, ASEAN and

Mercosur, to name a few. The EAEU

is too purely an economic union - a

single economic space of more than

Q&A WITHAMBASSADOR

UMAROV

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29SPECIAL ECONOMIC ZONES 29Q&A WITH AMBASSADOR UMAROV 29

183 million consumers. Kazakhstan

sees the EAEU as a means to

harmonize trade, standards,

procedures and processes with our

neighboring markets in order to

foster commercial growth.

Kazakhstan’s foreign policy is based

on multivectorism, and given this

policy orientation and Kazakhstan’s

land-locked geographic position

in the middle of Eurasia, it is only

sensible that Kazakhstan seeks

closer economic cooperation with its

neighbors and largest trade partners

– in this case Russia.

It is important to note that

Kazakhstan’s membership in the

EAEU neither conflicts with nor

contradicts its membership in the

WTO. After all, Russia, Kyrgyzstan

and Armenia are members of the

WTO.

In which sectors are you interested in

attracting investment?

All sectors, of course. We will not

turn away any interested investor,

or any new idea. That said, as you

may know, Kazakhstan is hosting

the World EXPO in summer of 2017

with the featured theme of “Future

Energy.” Kazakhstan is particularly

interested in attracting high

technology and highly innovative

investors. We hope to attract firms

with specialties in energy, power,

efficient manufacturing processes

and “green technology” – from

energy consumption to recycling

services. Kazakhstan’s priority

sectors include agribusiness,

transportation and logistics, health

care, tourism, and information

technology. We want forward-

looking companies and investors.

For an American company interested

in doing business in Kazakhstan, how

do you recommend they enter?

I always advise American companies

to find a local partner in Kazakhstan.

Companies like Trevian International

are great for this. Second, one must

visit Kazakhstan. The Kazakh culture

values inter-personal relationships,

especially in matters of business.

Visiting will give the investor an

opportunity to build trust with a

local partner and to gain insights

into Kazakhstan’s rich culture.

First-time travellers to Kazakhstan

should attend the Astana Economic

Forum in May, or one of the many

conferences and events throughout

the year. You can refer to the website

of the Embassy of Kazakhstan for

more information.

In August 2015, the National Bank of

Kazakhstan made the historic step

to move the tenge to a free-float,

rather than a managed float. Many in

Kazakhstan called the move “another

devaluation.” Could you tell us more

about this?

The decision to free-float the

tenge was made by the National

Bank (Central Bank) after seriously

investigating the fundamentals of

the Kazakh economy. While there

may be short-term fluctuations

in the exchange rate associated

with external factors – primarily

global commodity prices – we are

confident that in the long run the

decision to free-float the tenge was

the right one, and will contribute

to the stabilization of Kazakhstan’s

financial system. We believe that

short term pains will bring long

term gains. Of course, the National

Bank will use the various monetary

policy mechanisms at its disposal to

regulate the value of the tenge at

a rate that is conducive to internal

growth and international exchanges.

President Nazarbayev has introduced

several policy initiatives. Can you

please describe in more detail “Nurly

Zhol” and “Kazakhstan 2050”?

Broadly speaking, “Nurly Zhol” and

“Kazakhstan 2050” represent policy

visions for the future of Kazakhstan.

“Nurly Zhol” – Kazakh for “the

bright path” – is an economic

policy that is based on the goal of

Kazakhstan becoming one of the

top 30 most developed economies

by 2050. Under the “Nurly Zhol”

program, the state is focused on

infrastructure development so as

to convert Kazakhstan from land-

locked to land-linked, and not

land-locked. So far, Astana has

implemented budgetary reforms

and policy changes that empower

local governments that allow for

efficient and targeted policies to

be implemented. The Nurly Zhol

policy places a particular emphasis

on infrastructure development. By

developing infrastructure routes,

and supporting industries such as

metallurgy, factories that produce

machines, equipment, cement

and bitumen, among other things,

Kazakhstan will not only increase its

role as a regional transportation hub,

but Kazakhstani entrepreneurs can

help to realize this goal. We have

already introduced tax incentives

and special financing programs to

induce indigenous small and medium

enterprises to participate.

The Kazakhstan 2050 Strategy calls

for industrialization, diversification of

single-industry towns, measures that

make the tax system more efficient

and improvements to the national

education system.

By realizing the Kazakhstan 2050

Strategy and Nurly Zhol, it is hoped

to strengthen small and medium

enterprises, and make Kazakhstan

an economic and political leader for

many years to come.

Thank you very much, Mister

Ambassador.

My pleasure.

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31

HOW A 70-YEAR OLD AMERICAN COMPANY CHOSE KAZAKHSTAN FOR ITS EURASIA EXPANSIONBy Jacqueline Cote

Jerry Nichols is used to working on an international sphere, having taken his company

Allen Global to over 60 countries worldwide. But he acknowledges that he was a latecomer to the Central Asian state of Kazakhstan.

In March, the company - which produces a system that recycles used and dirty crankcase and lubricating oils - announced it would be setting up operations in Kazakhstan after high-level discussions with Kazakh officials, including the Kazakh Ambassador to the U.S., Kairat Umarov.

There were two main reasons why Nichols opted to set up operations in Kazakhstan, he said.

“I went through Finland, Moscow, Belarus, Kazakhstan, and Turkey, and I ended up on Kazakhstan because they have good EU trade relations, and are set to join the World Trade Organization, so they’re basically neutral from a military-political standpoint. They’re the Switzerland of Commonwealth of Independent States countries,” he said.

“Kazakhstan is also very pro-business. The country might have had the same president since independence, but his policy is very pro-business, provides stable political environment, and is requiring the divestment of industries that are being brought from outside. It seemed like the perfect opportunity.”

Kazakhstan offers a host of incentives for companies looking to launch operations in the country, Nichols added, including property tax abatement, tax deferrals and reimbursements. But a major appeal of the country was the opportunity it offered for working within the same language, one of the factors that Allen Global was seeking out.

From their base in Kazakhstan, the company “can deal with the Russian Federation, the CIS, Belarus, all in one language,” Allen said. Being in Kazakhstan also makes it easier to handle the company’s operations in Turkey and north Africa, “in a very profitable environment from property tax to employment tax to warehouse and manufacturing allocation.”

The opportunities are rife for companies eager to break into the private sector.

“We’re in oil and gas,” he said. “The gas sector is very big, but we’re finding that one

HOW A 70-YEAR OLD AMERICAN COMPANYCHOSE KAZAKHSTAN


INVESTMENT CLIMATE


33SPECIAL ECONOMIC ZONES 33Q&A WITH AMBASSADOR UMAROV 33HOW A 70-YEAR OLD AMERICAN COMPANY CHOSE KAZAKHSTAN 33

of the focuses of our company is the private investor, and there’s a fairly significant private investment market in Kazakhstan, whether in modular refineries, oil recycling systems or filtration equipment, there’s a lot of opportunity here and so we’re taking advantage of that.”Kazakhstan, to Nichols’ mind, is a better base from which to break into the CIS than Russia.“I’d already been to the Kremlin and dealt with the possibility of basing our Eurasian hub there, but the problem is with sanctions,” he said. “Since we’re a 100% U.S. exporter, there’s no telling what the trade situation [between Russia and the U.S.] would be at any given time. So Kazakhstan is perfectly poised to deal with Russia, the CIS, Belarus and Europe regardless of political considerations. The probability that Kazakhstan will be part of an international problem is minimal.”

Allen is eager about the future development of his Kazakhstan-based operations.

“We have a manufacturing company based in [Kazakh capital] Astana called Allen Filtration Eurasia LLP. We’re preparing to build an assembly facility in Astana,” where the company will import U.S. parts and assemble finished equipment in the Kazakh facility.

Nichols, who purchased the company a year and a half ago, said the company has already developed a new zero-carbon footprint oil recycling technology, and that the first sales to Kazakh customers are scheduled to take place by the end of 2015. The company has been invited to present the technology at Expo 2017 in Astana.

Nichols became interested in Kazakhstan after meeting Ambassador Umarov in Springfield, Missouri. “Ambassador Umarov made a compelling pitch as to why I should give Kazakhstan a good look.”

Nichols committed to doing business in Kazakhstan after visiting Astana in October 2014 with Josh Studl and the Trevian International team. “Trevian arranged excellent meetings for me in Astana on my first visit, and they understood how to navigate the business and political environments there. With Trevian as a partner, I felt I had the right team to be successful in Kazakhstan, and I think that’s proving out.”

Nichols plans to return to Kazakhstan by the end of 2015 to oversee the site selection in Astana for the assembly warehouse. Once assembly is up and running, Nichols expects to be in Kazakhstan once a quarter to oversee operations.

The CEO laments that more U.S. entrepreneurs aren’t in Kazakhstan to take advantage of the opportunities there, he said.

“American companies, in my opinion, are afraid of the region because of the instability between Russia and our country, and frankly - from an American standpoint - most of the CIS is a mystery,” he said.

“When you look at Kazakhstan - with its enormous natural resources, its non-proliferation leadership, building a Western-type free market economy while keeping in tune with their political situation - it’s the perfect environment” for American investment.

Between Kazakhstan’s multi-vector foreign policy and their business strategy to actively develop their private industry, the country is “a very vibrant and business-friendly environment.”

35


SOVEREIGN WEALTH FUND SAMRUK KAZYNA TO ESTABLISH A CENTER IN SILICON VALLEY

The sovereign wealth fund Samruk Kazyna announced plans to establish a subsidiary in Silicon Valley during a visit by the fund on April 9-10, 2015. The delegation, led by the organization’s chairman Umirzak Shukeyev, met with leading companies in Silicon Valley and Stanford University, Tesla Motors, and SolarCity. The planned subsidiary is expected to focus on agriculture and energy cooperation and will be supported by the synergies created through other innovation projects such as the Science Park Astana Business Campus.

Samruk Kazyna is the Kazakh state’s sovereign wealth fund and joint stock company that fully or in part owns many large state-owned companies in Kazakhstan including KazMunaiGas, Kazatomprom, Air Astana, Kazakhtelecom, Kazakhstan electricity grid operating company and others.

SAMRUK KAZYNAIN SILICON VALLEY

37

INVESTMENT CLIMATE


Kazakhstan is a rapidly growing market for American companies willing to service the country’s priority sectors or export to meet the growing consumer demand for Western brands and products. Given its favorable geographical location close to many growth markets in Europe, Eurasia, South Asia and the Middle East regions, the country also provides an important hub for American companies to access third markets through joint ventures, distributorships, and other partnerships.

Decreasing its dependence on hydrocarbon exports and adopting a more balanced model of economic development does not only call for higher investment in the non-oil sector, but also for further improvement in the quality of education and logistics infrastructure, as well as promotion of research, entrepreneurship, and innovation. All these trends are poised to create need for foreign investment, and more SME commercial ties. American investors are well positioned to take advantage of these opportunities, especially in industries defined by the government as priority sectors such as agriculture, logistics, tourism, infrastructure, renewable energy, and information and communication technology (ICT).

Kazakhstan has institutions to promote and support investment, including KazNexInvest,

Holding “Baiterek, the Entrepreneurship Development Fund “DAMU”, the Foreign Investors’ Council, and the role of an

investment ombudsman that helps facilitate communication between investors and the government and help investors address their issues. In recent years, government-supported enterprises have also entered joint ventures as an effective means to bring in foreign expertise and capital necessary to co-fund projects in construction, logistics, petrochemicals, manufacturing and IT.

Despite a difficult external environment marked by economic crises and geopolitical risk factors, different government agencies such as Ministry for Investment and Development are implementing different initiatives to attract next generation technology and equipment. To that end, the government has prioritized reinvestment in order to ensure that investors working in Kazakhstan continue to increase production and establish high-quality jobs to support tomorrow’s economy.

The government also passed other legislation aimed at improving trade and investment ties with the United States. A visa-free regime with the United States and eighteen other countries was expanded in July 2015. Today, American businesspersons or tourists don’t need a visa to stay in Kazakhstan for up to fifteen days.

Additionally, Kazakhstan plans to launch a new Astana International Financial Center in January 2016. The center will focus on several areas including the development of capital market with an emphasis on foreign investments, asset management services, and Islamic finance. The center will offer several incentives including tax and customs benefits, free movement of capital and labor, and more. It will also establish an international dispute mechanism led by a financial court and will allow participation of foreign judges as well as use of Anglo-Saxon legal system and English language in the proceedings.

AIFC was presented at President Nazarbayev’s


INVESTMENT CLIMATE


39

meeting with CEOs of American corporations on September 27, 2015 in New York City.

A NEW SET OF INCENTIVES

In 2014, the Kazakh government revealed a new set of measures designed to attract large-scale FDI. Among the new policy measures are 10-year corporate tax exemptions, provision of investment subsidies and easing of barriers to employing foreign skilled workers. The new policy measures will provide for greater stability and predictability in the area of governance, thus protecting foreign investors. In addition to the creation of an investment ombudsman office, the Government aims

to reduce the regulatory and administrative burdens on new businesses by creating “one-stop shop” investment vehicles. Kazakhstan has established a highly preferential regime for those investment projects classified as “priority investment projects”. The primary criterion for a Project is investment of not less than approx. USD 20 million in one of the areas specified by the government.

MAKING IT EASIER TO DOING BUSINESS ENVIRONMENT

Kazakhstan has made significant efforts to remove bureaucratic obstacles to investment

and to create an attractive business environment. The country ranks 41st in the World Bank’s 2016 Ease of Doing Business Index (an improvement of 16 positions from 2015), and 42nd in the World Economic Forum’s Competitiveness Ranking – moving up 8 spots from last year. Kazakhstan’s ranking is higher than China which ranked 90th in the Ease of Doing Business Index.

Since 2005, Kazakhstan has attracted over $215 billion in FDI and the US is the 4th largest FDI investor in the country. Over this period of time, American companies have invested more than $22.1 billion in Kazakhstan. The country has a comprehensive system promoting inflow of FDI into domestic-oriented production and export-oriented local production. Many additional factors such as the EXPO 2017, expanded infrastructure development, the government’s diversification initiatives, regional integration process, and the EEU and WTO membership further contribute to investor interest.

The Kazakh Constitution affords foreign companies the same rights and obligations as Kazakh nationals. The Investment Code guarantees legal equality between local and foreign investors, protects investor’s rights, allows for the legal arbitration of disputes, guarantees against nationalization and affirms the right to repatriate profits. Thanks to these, the country ranks 25th in the Protecting Minority Investors Index of the World Bank in 2015.

In addition, the country operates 10 special economic zones where companies enjoy special legal and taxation regime. The status is locked-in for 20 years. (See Special Economic Zones section for more details) The 2015 edition of the World Bank’s Ease of Doing Business report highlights Kazakhstan’s welcoming environment for investors and businesses as the

country scores especially well in areas such as “starting a business”, “paying taxes”, “enforcing contracts”, “registering property”. Kazakhstan’s brand perception is at its highest in several years with increased awareness from established and non-established investors as many investors see the country as the most attractive post-Soviet investment destination. The country’s biggest strengths have included macroeconomic and sociopolitical stability, competitive corporate tax rate, business-friendly environment, and a reformist government.

KAZAKHSTAN RANKINGS

#Kazakhstan moved up 16 positions to rank

41st on World Bank's Doing Business Report

55TH (OUT OF 189)

Ease of Starting a Business – World Bank’s Ease of Doing Business Report 2015

25TH (OUT OF 144)

World Economic Forum Macroeconomic Environment Ranking 2015-2016

41ST (OUT OF 189)

World Bank’s Ease of Doing Business Ranking 2016

42ND (OUT OF 144)

World Economic Forum Competitiveness Ranking 2015-2016

25TH (OUT OF 189)

Protecting Minority Investors Index of the World Bank 2015

41


GUIDE TO THE SPECIAL ECONOMIC ZONES The government is working diligently to maintain the country’s status as the prime destination for FDI in the region. The creation of the Special Economic Zones (SEZs) was one of the most important steps in that direction.

There are 10 special economic zones in Kazakhstan where specific FDI incentives and tax preferences are offered to foreign investors. Companies in SEZs enjoy a special legal and taxation regime that is locked in for 20 years. Investors in priority sectors are exempt from the corporate income tax and land tax for a period of 10 years, and property tax exemption is offered for 8 years. Additionally, the government offers subsidies up to 30% of the total capital expenditures for construction and other costs to investing within priority sectors.

Companies consuming mineral resources, producing excisable goods, applying special tax regimes, companies benefiting from investment tax incentives, and companies operating in gambling industry cannot be part of the SEZs.

The SEZs are under the purview of the Ministry of Industry and New Technologies, SEZ Managing Authority (formed by member companies of each SEZ and can include foreign entities), Department of the Tax Committee (part of the Ministry of Finance), and the Department of the Committee for Custom Control (part of the Ministry of Finance).

The ten special economic zones in the country are as follows:

SEZ “Astana – new city” http://www.zhana.astana.kz/en/ Established: June 29, 2001 Remains in force: 2027 Location: Astana city Area: 7 562,3ha Specialty: Construction, mechanical engineering, light industry

SEZ “Seaport Aktau” http://www.sez.kz/en/ Established: April 26, 2002 Remains in force: January 1, 2028 Location: Mangistau region Area: 2 000 ha Specialty: Oil and gas engineering, metalworking

SEZ “Saryarka” Established: November 24, 2011

Remains in force: December 1, 2036 Location: Karaganda region Area: 534,9 ha Specialty: Metallurgy

SEZ “Chemical Park Taraz” Established: November 13, 2012 Remains in force: January 1, 2037 Location: Zhambyl region Area: 505 ha Specialty: Chemicals

SEZ “Innovation Technologies Park” http://www.aitc.kz/en/ Established: August 18, 2003 Remains in force: January 1, 2028 Location: Almaty region Area: 163,02 ha Specialty: IT, innovation

SEZ “Burabay” Established: January 15, 2008 Remains in force: December 1, 2017 Location: Akmola region Area: 370 ha Specialty: Tourism

SEZ “Pavlodar”Established: November 29, 2011 Remains in force: December 1, 2036 Location: Pavlodar region Area: 3 300 ha Specialty: Petrochemicals

SEZ “National Industrial Petrochemical Technology Park”http://www.atyrau-sez.kz/ Established: December 19, 2007 Remains in force: December 31, 2032 Location: Atyrau region Area: 3 475,9ha Specialty: Petrochemicals

SEZ “Khorgos – Eastern Gates” http://www.mcps-khorgos.kz/ Established: November 29, 2011 Remains in force: 2035 Location: Almaty region Area: 5 740 ha Specialty: Logistics & dry goods

SEZ “Ontustik”http://www.textilezone.kz/ Established: July 6, 2005 Remains in force: July 1, 2030 Location: South-Kazakhstan region Area: 200 ha Specialty: Textile

SPECIALECONOMIC ZONES


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43SPECIAL ECONOMIC ZONES 43

BURABAY

NIPT

PAVLODAR

ASTANA

SARYARKA

SEAPORT AKTAU

CHEMICAL PARK TARAZ

ONTUSTIK

PARK OF INNOVATIVETECHNOLOGIES

KHORGOS

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APRIL 26TH ELECTION AND WHAT IT MEANS FOR AMERICAN COMPANIES & INVESTORS

Kazakhstan’s President Nursultan Nazarbayev was reelected on April 26, 2015 to a five year term. Voters opted for stability and consistency amid multiple political, security and economic crises that have affected Kazakhstan’s neighborhood. According to the Central Election Commission, the turnout in the election was 95.22%.

The election victory is reassurance to foreign investors by indicating that Kazakhstan will maintain its stable and predictable business environment in a complicated region dealing with multiple crises. Astana’s business-friendly stance, sociopolitical stability and progressive development agenda are important factors in it becoming the leader among all CIS countries for attracting FDI. The established notions of stability and continuity provide the suitable environment foreign investors are seeking in developing and frontier markets.

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ELECTION

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In November 2014, Kazakh President Nursultan Nazarbayev announced a new economic stimulus policy entitled ‘Nurly Zhol’ (Bright Path), aiming to open more sectors of the Kazakh economy for development and growth. In so doing, Nazarbayev signaled a move away from focus on extractives, such as oil and gas, which have dominated the economy for the bulk of the country’s post-independence period.

The Nurly Zhol stimulus program will total around $9 billion U.S. dollars. Even more importantly, Nurly Zhol has vowed to improve access to bank loans for SMEs, an integral factor in supporting the burgeoning sector. The program forecasts 4,500 new jobs as SMEs grow in number.

Moreover, international financial institutions are also providing support to improve SME development in the Central Asian state. The European Bank for Reconstruction and Development (EBRD) signed an agreement with the Kazakh government in May to provide €41 million ($45.4 million) to provide technical support and advisory services to aid SMEs in improving competitiveness. An estimated 850 SMEs will receive support under this program.

In March 2015, the World Bank committed $40 million over five years to strengthen the sector, focusing on improving the capacity of local officials to target and support certain economic sectors for growth.

Nurly Zhol will also work to improve the country’s infrastructure– critical for a state the size of Western Europe. The program aims to complete the construction of highways connecting the country’s largest sectors and manufacturing hubs, connecting commercial capital Almaty to political capital Astana, western oil-producing Atyrau to Astana, and industrial hub Karaganda to agricultural producer Kyzylorda.

This massive push for infrastructure development is an golden opportunity for American firms. Foreign investment in Kazakhstan in 2014 totaled $129.5 billion, with the majority of those funds headed to the oil and gas sector. But the proposed improvements in the Nurly Zhol approach will open up previously unexplored industries in Kazakhstan, while improved transport networks will make it easier for manufacturers and producers to bring their products to different markets within and through Kazakhstan. These factors are likely to boost domestic consumption, and expand the sectors where foreign investors can flourish.

NURLY ZHOL“BRIGHT PATH”

NURLY ZHOL “BRIGHT PATH”

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NEW SILK ROAD AND PLANS FOR REGION-WIDE FOREIGN INVESTMENT

The New Silk Road is State Department-backed initiative for Central Asia and Afghanistan that aims to use energy, transport, trade, and infrastructure projects to integrate the region, provide regional stability and boost its potential as a transit area between Europe and East Asia. South and Central Asia remains one of the least economically integrated regions in the world, presenting an untapped opportunity for American investors. As such, the initiative targets to improve this by accelerating the flow of goods, services and people throughout the region to promote cross-border collaboration and trade.

The Silk Road referred to the ancient trade networks between the 200 BC and 2nd century AD, that connected the territories of modern Central Asian countries, Afghanistan, Pakistan, and India, with Europe. Today, Kazakhstan is a key economic integration point in the Eurasia region thanks to the country’s robust economic growth, reformist attitude, and steadfast commitment to regional prosperity.

U.S.-Kazakhstan economic and investment ties are set to grow in the near future with the New Silk Road initiative through various bilateral dialogues and mechanisms such as U.S.-Kazakhstan Energy Partnership, agreement on science and technology cooperation, agricultural cooperation, and the Strategic

Partnership Dialogue. Kazakhstan has already played an important role in economic recovery of Afghanistan and efforts to integrate the country into the region within the initiative. Kazakhstan established a $50 million scholarship program to educate one thousand Afghan students at Kazakhs universities. It co-chaired the Istanbul Process, opened a trade office in Kabul, contributed to the development of Afghan National Security forces, and established KazAID – an aid agency focusing on Afghanistan and Central Asia. Kazakhstan also constructed several infrastructure projects in Afghanistan, including schools, hospitals, bridges, water supplies and the Kunduz-Talukan road.

The efforts to improve Kazakhstan’s and the region’s infrastructure and transportation connectivity have already started bearing fruits. The Trans-Caspian Railway, covering more than 3,500 km between China and the Caspian Sea, was launched in August 2015 as the first cargo train arrived in Baku after a five-day journey that started in Shihezi, a city in China’s Xinjian region. Kazakhstan’s geostrategic location is important for the network as the actual rail link ends in Kazakhstani port Aktau, which is then connected to Azeri port in Alyat through a rail ferry.

The Trans-Caspian Railway will play a critical role in bolstering trade between Asia and Europe and will benefit Kazakh economy as a critical transit country in the process. Additionally, the rail network opens up new possibilities in connecting Central Asia to Caucasus, Turkey, and Europe and could provide a vital link through the connection to the planned Kars-Akhalkalaki-Tblisi-Baku Railway. The local authorities expect the container shipping capacity of the Trans-Caspian Railway to reach 300 thousand TEU by 2020.

THE NEW SILK ROAD

KAZAKHSTAN TODAY


51

550th AnniversaryOF KAZAKH STATEHOOD

Kazakhstan’s rich culture and history go back to the 15th century, when Kazakh Khans Kerey and Zhanibek created the first Khanate in 1465. In 2015, Kazakhstan celebrated the 550th anniversary of statehood to honor of the foundation of the first Kazakh state and the legacy of its first Khans. It was back in 1459 when Kerey and Zhanibek left their native land to the valleys of rivers Shu and Talas. Earlier referred to as “Kazakhs”, meaning “free men”, the name remained with these tribes, which later on became the name of the Kazakh state and its people. It took another century for the name to appear in Western Europe, as it was only during the second half of the 16th century when the Kazakh Khanate was referred to for the first time on a European map as “Cassackia”.

The 550th anniversary celebration in 2015 recognized Kazakhstan’s multicultural and multiethnic society living together in peace and harmony, an admirable achievement in a region marked by many challenges. At different

stages of history, the territories that are modern day Kazakhstan today, received different waves of migrants of Slavic, Turkic, German, Polish, Korean, and Chechen origin. In fact, Kazakhstan is well known today as a “melting pot” or “alphabet soup”, as it is a home to 140 different ethnic groups that build the future together. This achievement was recognized by former UN Secretary General, Kofi Annan, who praised the country as an example of a peaceful multiethnic coexistence.

“In 1465, [Kazakh Khans] Kerey and Zhanibek created the first Khanate and it is to that time that [Kazakh statehood traces its roots]. Perhaps, it was not a state in the modern sense of this term, within the present borders, and without fame and prestige in the world. But these words can be said about all of the other states of that era. The important element is that the foundation was laid, and we are the followers of the great deeds of our ancestors,” – Nursultan Nazarbayev

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PRIORITY SECTOR CALL-OUT: AGRICULTURE AND ICT

AGRICULTURE

Kazakhstan offers many opportunities for agricultural investment. Over 80% of the country’s total area classified as agricultural land, 70% of which is occupied by pasture lands. The availability of arable land per habitant in the country is the second highest in the world after Australia (2.1 hectares).

Kazakhstan’s agriculture production has almost doubled in the past five years and agricultural exports have reached $3 billion. After transitioning to a market economy after Soviet collapse, Kazakhstan managed to substantially increase its production and trade capacity in agro food products, becoming one of the top grain exporters in the world. Russia, China, Caucasus, and Gulf countries are the major export destinations for Kazakhstan’s wheat.

Kazakhstan’s agribusiness sector shows strong

potential for growth. The rapidly growing economy and increasing disposable income have translated into growing demand for higher value and quality food products. The highly attractive end-consumer market shows early signs that will lead to advancement of a market for packaged foods, branded products and retail private labels. The suppliers present in the market include The Coca-Cola Company, Procter & Gamble, Nestle SA, and Unilever. The current undercapitalization of local players and limited competition in the sector opens up attractive opportunities for new entry of U.S. companies with promising growth prospects.

In addition, the drive to increase the currently limited capacity of local suppliers will generate demand for agricultural productivity. Opportunities for U.S. companies include: feeds and feed mix, pedigree animals and genetic material, grain infrastructure, agricultural machinery and software, farm management technologies and services, agricultural consulting services, water saving technologies, sustainable irrigation/water

PRIORITY SECTORCALL-OUT

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55PRIORITY SECTOR CALL-OUT 55

supply systems development, and organic agriculture standards development.

Rich soil, favorable weather conditions, and a long growing season in the south, render Kazakhstan an attractive place for large-scale agriculture. Kazakhstan has identified three agricultural sub-sectors with a high growth potential: crop production, livestock production and infrastructure and machinery. To date, 21.3 million square hectares are devoted to crop production and include a variety of products from grapes to cotton.

The government has multiplied its efforts to attract local capital and foreign investment and knowledge into Kazakhstan’s agriculture sector. Among these include the provision of subsidized loans to agricultural enterprises, subsidies for machinery upgrades and construction, state-funding of organizations

developing veterinary and phytosanitary sectors, the provision of subsidies for industrial energy costs, waved import duties on farm

equipment, raw materials and spare parts, and exemption from corporate income and property taxes. The Ministry of Agriculture also introduced a special tax regime for agricultural cooperatives in July 2015.

Organic agriculture also provides significant opportunities for U.S. investors. The government is currently working on a national plan for organic agriculture in cooperation with the Food and Agriculture Organization of the United Nations (FAO) and the sector is of high priority as part of the government’s green economy initiative.

In order to promote and develop the agro-industry, in 2006 the government created KazAgro, a national agency that encompasses different companies and affiliated structures, oversees various investments in agriculture

projects, and ensures their success and sustainability. Its mission is to implement the government agriculture policies and ensure the effective management of investment assets and state resources by joint stock companies. It also provides budgets and establishes a medium-term financial plan. Moreover, it is responsible for implementing efficiency norms and management motivation. It also plays a major role in attracting foreign companies by providing state incentives for an eventual investment in Kazakhstan.

INFORMATION AND COMMUNICATION TECHNOLOGY (ICT)

Technological innovation is at the forefront of efforts to diversify Kazakhstan’s economy. The government aims to become a major technological hub in Central Asia, focusing on ICT. High literacy and education levels and a population with a median age of 30 years render Kazakhstan’s workforce highly capable to work in this sector. The country’s GDP per capita, much higher compared with its neighbors, demonstrates the potential demand for ICT products. This potential was underlined by many ICT company executives, including Kevin Wu, Vice President at Kingston Technology, who highlighted the recent positive trends in the country in specific areas such as talent development, human capital, and increasing demand for high technology products. Strong growth in Internet activity, the liberalization and expansion of the telecom sector, and a high penetration rate will support ITC sector growth.

Kazakhstan recognizes the role of technological innovation in the diversification of the economy. The SEZ Park of Information Technologies in Alatau facilitates transfer of

technology and fosters innovation. Microsoft, Hewlett Packard, Sun Microsystems, and

Cisco Systems have demonstrated interest in the Alatau technology park, as well as Thales (France), Siemens (Germany), LG (South Korea), and Samsung (South Korea). Oracle maintains an office in Almaty, while Samsung’s headquarters for all Central Asia and Mongolia is in Almaty.

Kazakhstan’s plans to build a technology innovation center at Nazarbayev University in Astana underlines the government’s emphasis on innovation and high technology manufacturing. Agreements have been signed with six major technology giants (General Electric, Microsoft, Intel, Hewlett Packard, Samsung and Huawei) and more international companies plan to be represented at the center officially called Science Park Astana Business Campus. The center aims to bring together foreign and domestic ICT companies, high tech enterprises, venture capitalists, innovators, scientists, and students in order to boost innovation and competitiveness in Kazakhstan. It will be a tech cluster where innovative ideas can be generated and support the government’s aim to position Kazakhstan as a technological leader in the CIS region. Back in 2013, Kazakhstan sent ten Kazakh startups to the Silicon Valley in an attempt to gain knowhow and financing. During a visit by Samruk Kazyna delegation to the Silicon Valley in April 2015, Tesla Motors executives were invited to take part in the Astana Economic Forum and EXPO 2017 in Astana.

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ATYRAU – HOUSTON SISTER CITY TIES

The Kazakh city of Atyrau took the first step towards sister city ties with Houston during a meeting between the Kazakh Ambassador to the United States Kairat Umarov and Houston Mayor Annise Danette Parker in December 2014. The sister city association aims to promote people-to-people ties and enhance mutual understanding and cooperation through long-term commercial, cultural, educational, and humanitarian exchanges. In addition to the mutual focus on energy, the bond also makes sense culturally as Kazakhs represent the third largest ethnic community in the Houston area.

ATYRAU – HOUSTONSISTER CITY

59


KAZAKHSTAN’S RESPONSE TO THE FINANCIAL CRISIS IS A CASE STUDY IN RESTRUCTURING STRATEGYby Marcia Elizabeth Christian Favale

Marcia Favale was the Senior Advisor to

the Prime Minister of Kazakhstan from

2009-2013. She devised the Burden-

Sharing restructuring and implemented

the programme as an Independent

Restructuring Advisor for BTA Bank, Alliance

Bank and Temir Bank.

The financial crisis was a challenging period for Kazakhstan. The country was dealing with several macroeconomic challenges. Hit by the global credit crunch that followed the Lehman collapse, liquidity shortage and deteriorating banking sector asset quality combined to cause banks to reduce their credit intermediation activities. Kazakhstan was also dealing with pressure on its international reserves given the neighboring currency devaluations. The needed devaluation of the KZT further pressured the balance sheets of the banking sector that relied on the international capital markets for a substantial part of its funding. The Kazakhstan bank restructuring program is now a case study published by the University of Oxford by Ansar and Ahearn (25 May 2015) and is considered an international benchmark when bank restructuring programs are discussed and analyzed amongst policy-makers and experts.Aware of the banking sector’s vulnerabilities and the particular capital challenges of Alliance Bank, BTA Bank and later Temir Bank, the Government acted to prevent a disorderly collapse of it’s banking system. Liquidity, through a mixture of capital injections, debt, and the channeling of state-owned enterprise deposits, was directed into the operations of these banks allowing them to continue to perform routine liquidity transactions.

At the height of the crisis, as illustrated below, Kazakhstan was facing a loss of investor confidence with credit default swap (CDS) market re-pricing the Sovereign to historic highs of over 1600 bps, from spreads at less than 200 bps before the crisis. The widening of the spreads indicated that investors were concerned that the financial crisis and the precarious situation of the banking system could place substantial pressure on the fiscal position of the sovereign. The work-narrative attempting to be imposed upon Kazakhstan followed six main strategies. Four of these work-narratives places the banking sector burden on the Sovereign and the other two could exacerbate the crisis domestically:

KAZAKHSTAN:A CASE STUDY IN

RESTRUCTURING STRATEGY1government support such as Sachsen LB’s

take over by a Landesbank (IMF Country Report; July 2011) or JP Morgan, benefiting from a loan provided by the New York Federal Reserve, acquisition of Bear Sterns.

2 Direct government assistance which was typically effected through liquidity support provided by a sovereign to a financial institution. Global examples include Iceland, the United Kingdom, Greece, Ireland, among others.

3 Emergency loans such as the $85 billion disbursed by the US Government to maintain AIG solvent (Ibid) or through holding company structures utilized by Goldman Sachs and Morgan Stanley and widely reported.

4 Conservation which is a mechanism of transferring powers ordinarily ascribed to Company directors, officers and shareholders to a designated Conservator and employed to rescue Freddy Mac and Fanny Mae that were government-sponsored enterprises (GSE).

5 Emergency Guarantees that depending on the developed country extended to liabilities other than deposits


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61SPECIAL ECONOMIC ZONES 61Q&A WITH AMBASSADOR UMAROV 61HOW A 70-YEAR OLD AMERICAN COMPANY CHOSE KAZAKHSTAN 61KAZAKHSTAN: A CASE STUDY IN RESTRUCTURING STRATEGY 61

KAZAKHSTAN SOVEREIGN DEBT (5-YEAR CDS) SPREAD HISTORY

The aforementioned narratives did not suit the Kazakhstan Government and in 1Q09 these were publicly rejected, adopting instead a bail-in strategy that became known as the Burden Sharing Restructuring Framework. This approach, ignoring the notion of bailing out creditors, public or private, and relieving the

Sovereign from incurring debt, was “firstly and foremost a political one” with the intention of circumvented a ‘’beggar thy neighbor” position that would place creditors needs ahead of the Country, potentially requiring the later to adopt a post-restructuring onerous expansionary fiscal policies or an austerity program. The Kazakh bank restructuring had four pillars: liquidity support, preservation of the Sovereign’s fiscal profile, curtailment of moral hazard and improvements in corporate governance. In addition, and a driver of value given the alleged fraud, asset recovery was enveloped into the restructuring strategies of Alliance and BTA Bank. As a result, asset recovery notes were issued that allows, amongst other, for the banks and creditors to benefit from a successful asset recovery process. Kazakhstan did not set out to create a global benchmark with its restructuring. However its successful restructuring is being analyzed as a possible framework for other

restructuring cases, which raises the question of transferability of this restructuring model.

What makes the Kazakh bank restructuring program of note is that most banks restructuring across Europe favored a sovereign bailout. As a consequence, sovereigns have been laden with debt, having to implement unpopular austerity programs. Instead of following this model, in February 2009, the Kazakh Government took a decisive step in restructuring its banks. Kazakhstan rejected the bailout strategy, and also rejected a bad bank-good bank framework. Instead it imposed a burden sharing and a ‘true trade finance’ approach. Of the $15.74 billion in recapitalization needs, $10.22 billion was the total creditor support exacted through debt reduction or haircuts.

As part of the restructuring package, creditors were offered, according to their asset class, a mixture of cash, debt, equity and asset recovery notes and Samruk Kazyna maintained majority ownership of each bank.

What remains to close the restructuring chapter is for the three banks to be sold either through a strategic sale or through a capital market transaction or a combination of both. However for this stage to be successful Kazakhstan still needs to tackle the non-performing loan situation in the country and the banks need to return to active lending.

As a result of the successful implementation of the burden-sharing restructuring strategy,

Kazakhstan avoided the ‘’beggar thy neighbor” situation that often favors creditors to the detriment of expansionary fiscal policies. Given the burden-sharing approach, debt holders became partners in the process of recapitalizing the banks. This allowed funds to be channeled to the more productive activity of providing liquidity to the banks, allowing for operations to be maintained without impairing the sovereign.

The strategy is deemed successful not only for alleviating sovereign fiscal pressures, and hard-currency external liabilities in the system, but also it addressed balance sheet weakness, at the source rather than transferring the management of non-performing loans unto the Government or its agents. Furthermore, moral hazard was mitigated and corporate governance improved as charters were modified and board membership granted and supervisory committees strengthened. Although investors initially threatened Kazakhstan with closed international capital markets and a ‘pariah state’ status, the restructuring strategy received over 90% creditor approval for each of the three banks and Kazakh issuers such as Halyk Bank, KazAtomProm and KazMunayGas have received a warm welcome from international investors.

The restructuring success is attributed to a series of decisive steps taken by Government. In a clear signal of Government’s commitment to a fair and transparent restructuring process, independent advisors were hired to provide unbiased restructuring and asset recovery advice and to devise alongside Government, the appropriate restructuring strategy. Thereafter, teams of financial and legal advisors were assembled to ensure that the execution process adhered to market standard practice.

To ensure a fair playing field, a ‘cram-down’ law was passed that adhered to the UNICTRAL framework and has been subsequently

6 Bankruptcy which has as Lehman Brothers as they widely reported and most spectacular financial crisis example of the risks involved in allowing a bank to fail in an uncontrolled manner.

7 Kazakhstan Sovereign Debt (5-Year CDS) spread history


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recognized, on a case-by-case basis, in the Unites States and United Kingdom. Most recently, the harmonization of restructuring laws has been put forward by the E15 committee of the World Economic Forum.

As part of the process, no bi-lateral agreements were entered and all creditors were treated equitably and fairly within their asset classes. Essential to the process, and an imposition from Kazakhstan, was the active participation of the debt-holders through a steering committee process representing all categories of creditors. Engaging creditors as partners was an essential and fundamental part of the successful restructuring process. Not only did the steering committee process arrive at a consensual agreement but also it maintained the creditors as partners in the banks’ futures through their exposure to debt and equity, and board member representation. By actively encouraging investors to remain invested in the banks, corporate governance improved through charter enhancements and board representation and committee supervision.

During the Kazakh restructuring, Alliance Bank and BTA Bank working with the relevant members of the Steering Committee of Creditors, created specific eligibility criteria for the election of “True” Trade Finance debt from the total trade finance stock. Documentation underlying trade-related transaction had to be proven in order to qualify as Trade Finance debt. Where there were no specific underlying import or export trade transactions, these were excluded from the Trade Finance debt portfolio. To ensure a transparent process, Alliance Bank and BTA Bank, appointed an Independent Adjudicator to adjudicate Trade Finance Claims. The result was that Alliance Bank, with an initial US$293 million of claims, after adjudication process, trade claims were confirmed at US$97 million to be repaid over

a 12 month period. In BTA Bank’s case, of the nearly US $ 3.0 billion of trade finance claims, US$1.10 billion private sector Trade Claims were confirmed. Of the adjudicated amount, $700 million is to be repaid over a 36 month period, without a haircut, and US$400 million private sector Trade Claims restructured pari passu with other senior claims.

KAZAKHSTAN’S BURDEN-SHARING

RESTRUCTIRING FRAMEWORK GRAPH

Financial crises are becoming more impactful given the interconnectivity of markets and participants. Cross border funding and the globalized structure of economic growth, places crises within the realm of inter-country policy considerations. The Kazakhstan Burden-Sharing restructuring of the banks created legacy effects that are of note for sovereigns. Government was able to curtail moral hazard and preserve the fiscal profile. The Country neither turned into a pariah state nor suffered an investor shut-out from capital markets. Rather in the midst of the restructuring, in May 2010, Kazatomprom, a government-owned entity, issued a $500 million five-year Eurobonds at a coupon rate of 6.25%, which was at a relatively historic low costs for a Kazakhstan issuer.

The banking system did not collapse and creditors remained participants in the banks transferring corporate governance knowledge and expertise. Kazakhstan was able to brand its investment image, improve its economic profile, reformulate the operational environments for banks with management buy-in and strengthen the banking sector through targeted rule-based modifications.

From the perspective of policy and decision makers there are three main legacy effect; these include the role of law in advancing corporate governance, regulatory legacy effects and the

importance of the political-economy construct of Kazakhstan in the process-success of the Burden-Sharing Restructuring Program.

The first is within the legacy effects of corporate governance and the discourse that the structure of capital markets and a country’s corporate governance are influenced by law and that markets that display strong minority investor protection encourage a more diverse and dispersed ownership structure. Kazakhstan by passing the Restructuring Law took an instrumental step in harmonizing its legal structure with world best practices and in placing the Sovereign as a responsible participant within the globalized financial markets.

The second is regulatory legacy effects. Kazakhstan began an exercise of improving

board level corporate governance through charter modification and through retaining investors as partners in the process of restructuring the banks. This initiative then transpired to strengthening the regulatory bodies oversight of the banks through a series of rule-based modifications.

Kazakhstan’s successful restructuring is a benchmark providing a framework for other restructuring cases, which raises the question of transferability of this restructuring model. A key to the Kazakh restructuring success was its unwavering commitment to the restructuring strategy and the commitment to a transparent restructuring process that adhered to best market practices. And that the restructuring strategy was a domestic lead effort rather than an international imposition.

LIQUIDITY SUPPORT

• funds used to sustain banks operating activities

PRESERVES SOVERIGN’S FISCAL PROFILE

• economy not hampered by Sovereign indebtedness

MORAL HAZARD

• severely curtails the risk of moral hazard

CORPORTATE GOVERNANCE

• creditor involvement enhances corportate governance

CREDITORS SAMRUK KAZYNA

Addresses BS weakness and Banks as a going concern

Partners in the Process

Transparency & Disclosure Fundamental to the Process

TOTAL RECAPITALIZATION

Creditors Support Creation of Equity

(debt cancellation and bond conversion into equity)

Samruk-Kazyna SupportEquity Issue

(bond conversion into equity)

Asset Recovery; a means for creditors to recuperate losses

65


THE GREAT GAIN NOT THE GREAT GAME: HOW KAZAKHSTAN IS CHARTING ITS OWN COURSE IN THE WORLDBy Foreign Minister Erlan Idrissov

It is a sign of Central Asia’s and Kazakhstan’s increasing role and importance in the world that more and more is written about our region. But what is striking – and at times frustrating – is how reporting and analysis can be distorted to fit narratives which have little relationship to what’s actually happening. It has, for example, become increasingly popular for journalists to see events in our region through the prism of a

revival of the Great Game in Central Asia. It is through this narrative of major powers fighting for influence that recent visits by the leaders of China, Russia, India, Pakistan, Japan, as well as the U.S. Secretary of State are seen.

I can see why this makes a neat headline but that does not make it true. Kazakhstan is not a silent by-stander in anyone else’s strategy. We are a country successfully making its own independent way in the world.

We have purposely built good relations and strong economic ties with countries, big and small, to the east and west, south and north. We have close links with both Russia and China. Europe is our biggest trading partner

and the US our second biggest foreign investor after Europe.

This is not an accident but the result of our multi-vector foreign policy. Our economic progress – which has seen our GDP rise 19-fold since independence – is also based on being open to trade, investment and ideas. This commitment continues which is why, in the last year, we have helped found the Eurasian Economic Union and become full members of the WTO.

Far from being at the centre of a re-run of the Great Game, Kazakhstan is, if you like, at the heart of what could be a Great Gain for all in terms of regional and global stability and prosperity, and is adamantly promoting this vision for all to embrace. This is why, in the last couple of months alone, President Nazarbayev has held extremely productive meetings with President Xi Jinping, President Vladimir Putin, President Barack Obama, Prime Minister

Shinzo Abe – and has had very successful back-to-back visits to London and Paris as well, for example, to Qatar.

These countries and their leaders all want to strengthen their relationships with Kazakhstan – as we do with them – as a partner and friend. As Secretary Kerry explained, for example, the U.S. is not pursuing a “zero-sum game” in

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IDRISSOV

KAZAKHSTAN TODAY


67PRIORITY SECTOR CALL-OUT 67OPINION BY FOREIGN MINISTER IDRISSOV 67

central Eurasia but believes greater engagement by all will benefit all. This is a message which we wholeheartedly welcome and which I hope all those watching and commenting on Kazakhstan will hear.

Curiously, at the same time, we can continue to see the focus, when discussing Central Asia, on how remote the region is. It is again a narrative which neglects how our world has changed. For as economic power shifts eastwards, bringing revived trade links, fast-growing markets and new areas of prosperity, it is not our remoteness but our position at the heart of the new emerging world which is most striking.

It is Kazakhstan’s size and unique geography which are enabling us to provide a land bridge linking the economic powerhouses to the east and west. It is an opportunity that, together with our partners, we are working hard to maximise.

New road links will cut by more than half the time it takes goods to be shipped by sea between China and Europe. Modern rail and road connections – linking to new port facilities on the Persian Gulf – are also providing fresh opportunities for trade and new markets to the south.

These developments form part of the $9 billion domestic investment in improved connectivity that we are making through the Nurly Zhol – or Bright Path – programme which, through major infrastructure spending,

is Kazakhstan’s version of the New Deal. More importantly, these connectivity lines will not only serve just as transit “conduits” between east and west, north and south but will come as life-lines for local communities all along the way in terms of creating and boosting local markets, empowering local businesses and private sectors, thus promoting well-being and prosperity, peace and stability in the entire area.

The idea of Central Asia linking east and west and being at the heart of global trade is not new. We have played this role for many centuries. And it was one of the fathers of modern geopolitics – Sir Halford Mackinder – who spoke of our region as the ‘Heartland’ and predicted as far back as the turn of the last century that the old Silk Road would soon be revived “with a network of railways.”

At that time, Sir Halford did not foresee the divisions in our world caused by war and ideology, which put a brake on cooperation in the heart of Eurasia for decades. But as the divisions disappear, his predictions are finally coming true as the ancient Silk Road is rebuilt and modernised. Our geography is now an advantage not a disadvantage – enabling us not only to boost our economy but provide a wealth of opportunities for the region and wider world. So, the common goal should be to turn Central Asia from being landlocked into being land-linked and a connecting bridge between continents, cultures and trade.

There is, of course, another common narrative when talking about Kazakhstan and Central Asia. It is one which ignores what our citizens have together achieved and focuses instead simply on what more needs to be done. It is a view which suggests Kazakhstan somehow believes that after less than 25 years as an independent country, we believe we are the finished product. We do not and we are not.

We know there is a lot more to be done and remain ambitious for the future including in our commitment to continue democratic reform. We do not claim, as should no country, to be a perfect Jeffersonian democracy. It would, however, be remarkable if we were. Our young nation had no tradition of democracy or democratic institutions to build on and was starting from scratch.

But we are determined to step up the pace of reform, as shown by the comprehensive 100 Concrete Steps reform programme introduced by President Nazarbayev following his re-election in April. These measures focus on human capital development, the enhancement of good governance and the rule of law, cementing transparency and accountability in all layers of the government and society.

Just as outside support has been crucial in driving our economic progress, we want our international partners – both countries and NGOs – to help us build our democracy and build our nation. We will continue to be open to dialogue and welcome all constructive dialogue and advice.

But we expect in turn that the achievements of Kazakhstan in creating a prosperous country from the wreckage of the Soviet Union and in building a harmonious society in a population of many different backgrounds in an often-troubled region are not overlooked. It shows, if nothing else, why we are confident that our country will keep progressing.

This originally was published in the Diplomatic Courier on November 13, 2015

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2016 Guide to Kazakhstan for American Businesses

Business

Transcript of 2016 Guide to Kazakhstan for American Businesses