This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 19 ALMATY 000282 
 
SIPDIS 
 
DEPARTMENT FOR EB/IFD/OIA 
 
E.O. 190356: N/A 
TAGS: PREL KTDB USTR ECONOMIC
SUBJECT: 2006 INVESTMENT CLIMATE STATEMENT -- KAZAKHSTAN 
 
REF: 05 STATE 201904 
 
¶1.  The following information is provided in response to 
reftel request. 
 
Openness to Foreign Investment 
------------------------------ 
 
Kazakhstan has made significant progress toward creating a 
market economy since its independence in 1991. The European 
Union in 2000 and the U.S. Department of Commerce in March 
2002 recognized the success of Kazakhstan's reforms by 
granting it market economy status. Kazakhstan also has 
attracted significant foreign investment since 
independence. By July 2005, foreign investors had invested 
a total of about $36.8 billion in Kazakhstan, primarily in 
the oil and gas sector, during the country's fourteen years 
of independence. Following independence, the government 
created a favorable regime for oil and gas investments at 
the same time that it undertook other liberalizing economic 
measures and began an ambitious privatization program. 
 
This record of market-oriented reform and successful 
attraction of investment has been progressively undermined 
over the last five years by a growing tendency on the part 
of the government to challenge contractual rights, to 
legislate preferences for domestic companies, and to create 
mechanisms for government intervention in foreign 
companies' operations, particularly procurement decisions. 
Together with vague and contradictory legal provisions that 
are often arbitrarily and inconsistently enforced, these 
negative tendencies feed a growing perception that 
Kazakhstan is becoming less open to investment. 
 
Since 1997, there has been a growing trend to favor 
domestic investors over foreigners in most state contracts. 
Amendments passed in 1999 to the Oil and Gas Law required 
mining and oil companies to use local goods and services. 
According to "local content" regulations, subsurface users 
in Kazakhstan are obligated to purchase goods and services 
from Kazakhstan entities -- provided that the local goods 
meet minimum project standards -- and to give preference to 
the employment of local personnel. Prospective subsurface 
users are required to specify in their tenders the 
anticipated local content of their work, goods, and 
services. 2004 amendments to the Law on Subsurface Use also 
require that tender proposals specify the user's commitment 
to developing regional infrastructure and contributing to 
the provision of social services. 
 
In January 2003 President Nazarbayev signed a new law "On 
Investments" that superseded and consolidated past 
legislation governing foreign investment. The law 
establishes a single investment regime for domestic and 
foreign investors. It guarantees the stability of existing 
contracts, with the qualification that new ones will be 
subject to amendments in domestic legislation, certain 
provisions of international treaties, and domestic laws 
dealing with "national and ecological security, health and 
ethics." 
 
The new law provides for dispute settlement through 
negotiation, Kazakhstan's judicial process, and 
international arbitration. However, the law narrows the 
definition of investment disputes and lacks clear 
mechanisms for access to international arbitration. U.S. 
investors should note that the U.S.-Kazakhstan Bilateral 
Investment Treaty, as well as the New York Convention, 
protect U.S. investor access to international arbitration. 
Additionally, Kazakhstan's constitution, as well as the new 
law "On Investments," specifies that international 
agreements have precedence over domestic law. The May 2005 
Law on International Agreements appears to contradict this 
legal hierarchy; however, the government has informally 
indicated that a clause which seems to subordinate 
international agreements to domestic legislation was passed 
in error and will be amended.  Finally, in December 2004 
Kazakhstan adopted a law "On International Commercial 
Arbitration" (see "Dispute Settlement" for full discussion). 
 
The 2003 law contains investment incentives and preferences 
based on government-determined sectoral priorities, and 
provides for investment tax preferences, customs duties 
exemptions, and in-kind grants. The law also provides 
exemptions for customs duties on imported 
equipment/components if Kazakhstan-produced stocks are not 
available or do not meet international standards. 
 
Kazakhstan has made several amendments to the 2003 law. The 
amendments, which were accepted and came into force in May 
2005, will eliminate five-year corporate income tax 
exemptions and replace them with a modified set of ten-year 
exemptions. Customs duties exemptions will be limited to 
equipment that is destined for use in production processes 
exclusively in Kazakhstan. 
 
In 2001, the GOK passed transfer-pricing legislation, which 
gives tax and customs officials the authority to monitor 
export-import transactions in order to prevent the 
understatement of earnings through manipulation of export 
prices. Foreign investors are concerned that the government 
specifically rejected the use of OECD standards for 
determining a proper market price under the transfer- 
pricing legislation, creating instead a methodology that 
fails to fully account for all cost and quality 
differences. The government in effect holds that transfer- 
pricing can take place even in transactions between 
unrelated parties, because the practice is defined by 
transaction prices that differ from market prices by a 
certain percentage. Kazakhstan's deviation from 
international methodology on this complicates the ability 
of firms to obtain relief under treaties on avoidance of 
double taxation from their home countries. This remains a 
contentious issue with investors. 
 
Four major pieces of existing legislation affect foreign 
investment. These are: 1) the 2003 law "On Investment"; 2) 
the 1997 law "On Government Procurement"; 3) the 2001 Tax 
Code; and 4) the 2003 Customs Code. These four laws provide 
for non-expropriation; currency convertibility; guarantees 
of stability in the legal regime; transparent government 
procurement; and incentives in certain priority sectors, 
including electrical infrastructure, telecommunications, 
light manufacturing, health and tourism. However, 
inconsistent implementation of these laws and reforms at 
all levels of government remains the key obstacle to 
business in Kazakhstan. 
 
Kazakhstani law holds that no sectors of the economy are 
fully closed to investors, although there are some sectoral 
limitations, such as a 20% ceiling on foreign ownership of 
media outlets and 49% restriction of foreign ownership in 
the telecommunications sector. Plans to liberalize the 
telecommunications sector did not materialize in 2005. 
However, a December 2005 law lifted the restrictions on the 
participation of foreign capital in the banking sector. 
Finally, the 2005 Production Sharing Agreement law mandates 
that the state oil company be a minimum 50% participant in 
offshore projects. 
 
The government plays a large role in overseeing foreign 
investment. Government officials, sometimes at the highest 
levels, screen major foreign investment proposals. Major 
projects, such as the Production Sharing Agreement (PSA) 
for Kashagan, Kazakhstan's super-giant offshore Caspian oil 
field, and the Karachaganak (oil and gas field) PSA, bear 
the President's personal imprimatur. 
 
In 2004, the government adopted amendments to the law 
governing oil and gas exploration, assigning to the state a 
right of first refusal on the purchase of shares in PSAs in 
the extractive industries. The law as written applies to 
pre-existing as well as future contracts and thus, in the 
government's view, supersedes any pre-emptive rights 
consortium partners might have negotiated in the original 
contracts. 
 
The "pre-emption law," which has its origins in the 
government's attempt to purchase British Gas (BG)'s stake 
in the Kashagan oil field, is a disturbing development in 
the area of contract sanctity. Although the government has 
not yet tested the law in practice, its apparent 
willingness to dispense with contractual arrangements 
through fiat is discouraging. In 2005, the Kazakhstani 
government broadened its claim of priority purchase rights 
to include shares of companies that have invested in the 
oil and gas sector. 
 
Tax experts consider Kazakhstan's tax laws to be among the 
most comprehensive in the former Soviet Union. The latest 
Tax Code, which entered into effect on January 1, 2002, 
applies taxes universally and allows only a limited set of 
exemptions. The code applies an international model of 
taxation, based on the principles of equity, economic 
neutrality and simplicity. This code is an improvement over 
its predecessor and a step forward in establishing a 
transparent and effective tax system. VAT, as of January 
2004, is set at 15%. The maximum rate of personal income 
tax is 20%. Also in 2004, the government introduced a 
regressive scale for social taxes (applied to the income of 
foreign citizens seconded to companies in Kazakhstan and to 
payments made to individuals under certain legal 
arrangements), with rates ranging from 20% to 7%. 
 
In 1996, the Treaty on the Avoidance of Double Taxation 
between the United States and Kazakhstan came into force. 
Since independence, Kazakhstan has ratified treaties on the 
avoidance of double taxation with 36 countries. 
 
Foreign firms operating in Kazakhstan frequently report 
harassment by the Financial Police via unannounced 
inspections and other methods. In 1998, the government 
limited the number of visits that can be made by government 
bodies to small businesses in the course of a year, but tax 
inspections were excluded from this limitation. A 
"moratorium" on inspections of small and medium firms 
decreed in late 2002 has never been fully observed; it 
resulted in at 50% decrease in the number of audits, but, 
reportedly, no reduction in overall penalties assessed. The 
2002 Tax Code provides a basis for improvement because it 
limits the powers of tax authorities and defines the rights 
of taxpayers more clearly. 
 
It is important to note that in practice the application of 
tax laws has been uneven, and in some cases blatantly 
unfair. This has particularly true in cases where a company 
is involved in another, unrelated dispute with the 
authorities. 
 
Investors should not assume that agreeing to a settlement 
with tax authorities following an investigation or civil 
case will prevent the pursuit of charges under criminal 
provisions. At times the authorities have used criminal 
charges in civil disputes as a pressure tactic. 
 
The 2003 Investment Law provides for, inter alia, 
guarantees of national treatment and non-discrimination for 
foreign investors. In general, Kazakhstan allows investment 
in all sectors, with certain exceptions, such as a 
limitation of 20% foreign ownership of individual media 
companies. Kazakhstani law does not subject foreign 
investment to any prior authorization requirements. 
 
Despite the general guarantee, national treatment is also 
denied in the petroleum and subsurface utilization 
(minerals) sectors. In June 2002, the Prime Minister signed 
a decree with regulations to implement domestic content 
requirements, which were originally enacted in 1999 through 
amendments to the Oil Law and the Subsurface Use Law. The 
laws require investors to contract with Kazakhstani service 
providers, and to purchase Kazakhstani equipment, goods and 
raw materials, so long as these meet the requirements for 
participating in government tenders. The 2002 decree 
required that a designated government body approve all 
tender documents, participate in tender committees and 
approve the decisions of those tender committees in order 
to ensure compliance with these requirements. The 2005 law 
on offshore PSAs also has local content requirements for 
goods, services and employees, and obligates prospective 
subsoil investors to address these requirements in their 
tender proposals. 
 
These requirements are being challenged in connection with 
Kazakhstan's forthcoming WTO accession negotiations, as 
they appear to breach GATT and GATS rules and the Agreement 
on Trade Related Investment Measures. They also appear to 
contradict the 1994 U.S.-Kazakhstan Bilateral Investment 
Treaty, which states in Article II, paragraph 5, that 
"neither party shall impose performance 
requirements...which specify that goods be purchased 
locally..." 
 
By law and in practice, foreign investors are allowed to 
participate in all privatization projects. There appears to 
be no discrimination against foreign investors after an 
investment is made. However, many foreign companies cite 
the need to protect their investments from a near-constant 
barrage of decrees and legislative changes, most of which 
do not "grandfather" existing investments. In addition to 
arbitrary tax inspections, foreign investors also complain 
of problems with closure on contracts, delays and irregular 
practices in licensing, land fees, etc. Some foreign firms 
have expressed concern that government organizations fail 
to live up to their side of the contract, particularly 
regarding payment. This often prevents the foreign partner 
from moving ahead with its investment program. When this 
occurs, the investor is exposed to government charges of 
non-performance and the real possibility that the 
government will cancel the contract. 
 
U.S. firms can participate in government-financed research 
and development projects on a national-treatment basis. The 
Kazakhstani government has recently taken a strong interest 
in dedicating state resources to the support of research 
and development. 
 
Foreign workers are required to have a work permit to work 
legally in Kazakhstan. Obtaining these work permits can be 
difficult and expensive. The government cites the need to 
boost local employment by limiting the issuance of work 
permits to foreigners. U.S. companies should consult legal 
firms for assistance (see A.5 for details) in obtaining 
work permits. The work permits quota system is based on the 
1998 Law on Employment of the Population. Under this 
system, the government limits the number of work permits 
available to foreigners, based on the area of 
specialization and geographic region. Since 2001, the 
annual number of work permits has been subject to a 
government-established quota. In January 2003 the 
government issued a decree (no. 55) which sets forth new 
procedures for the annual determination of this quota. 
Local authorities submit estimates of the required number 
of foreign work permits for the upcoming year to the 
Ministry of Labor and Social Protection. The Ministry then 
establishes the quota and issues permits based upon a 
proven lack of qualified Kazakhstani citizens to fill the 
positions in question. In 2003 the government set the work- 
permit quota at .14% of the active labor force. The quota 
has steadily increased: in 2004 the quota was .21%; in 
2005, 0.32%. The quota assumes an active labor force of 8 
million people. 
 
Conversion and Transfer Policies 
-------------------------------- 
 
There are minimal restrictions on converting or 
transferring funds associated with an investment into a 
freely usable currency at a legal market-clearing rate. 
 
In 1996, Kazakhstan adopted Article 8 of the IMF Articles 
of Agreement, which stipulates that current account 
transactions, such as currency conversions or the 
repatriation of investment profits, will not be restricted. 
In 1999, the Government and National Bank of Kazakhstan 
announced that the national currency would be allowed to 
freely float at market rates, thus abolishing the previous 
managed exchange rate system. 
 
There is no distinction made between residents and non- 
residents when opening bank accounts. There are no 
restrictions whereby different types of bank accounts are 
required for investment or import/export activities. For 
non-residents, money transfers in currency associated with 
foreign investments, whether inside or outside of the 
country, can take place without restriction. The National 
Bank permits non-residents to pay wages in foreign 
currency. Foreign investors may convert and repatriate 
tenge earnings made inside Kazakhstan. 
 
The National Bank has established procedures and licensing 
arrangements to cover bank payments and transfers relating 
to capital movements. Inward capital flows are basically 
unrestricted. However, a resident company in which there is 
foreign investment exceeding $100,000 must register the 
transaction for statistical purposes. There are 
restrictions on capital movements when a non-resident sells 
or disposes of an interest in a resident company to another 
resident company. These are dealt with under the licensing 
arrangements of the National Bank. 
 
The procedure for licensing foreign currency transactions 
related to capital movements is governed by Regulations 
Numbers 129 and 130 of the Procedure for Licensing 
Activities Related to the Use of Foreign Currency of April 
24, 1997. 
 
In June 2005 the President signed the law "On Currency 
Regulation and Currency Control". This law lifted 
restrictions on money transfers: both residents and non- 
residents are allowed to take up to $10,000 in cash out of 
the country without documentation of the money's origin. 
The transfer of amounts exceeding $10,000 must be 
accompanied by the certification of the National Bank. 
 
The following types of capital movements from residents to 
non-residents are subject to licensing: 
 
--investments of residents in the business of non-residents 
abroad. (The professional activity of authorized banks on 
the securities market -- e.g., broker and dealer activity 
with state securities of non-residents -- is exempted.); 
 
--transfers from residents to non-residents for property, 
including real estate, transactions; 
--repayments of loans extended by residents to non- 
residents for a period of more than 180 days. Obtaining the 
license is sometimes quite slow. 
 
The Customs Committee and the National Bank require an 
"Import [or] export transaction passport," ostensibly for 
the purpose of currency control. The document, which re- 
states information from other documents, complicates import 
and export processing, and there is a real question whether 
it is effective for its stated purpose - to ensure that the 
proceeds from export sales are returned to Kazakhstan, and 
to prevent fraudulent over-invoicing of imports. 
 
The U.S. Embassy is not aware of any concerns with regards 
to remittance policies or availability of foreign exchange 
for remittance of profits. 
Capital inflows and commodity exports have enabled the 
National Bank to accumulate foreign exchange reserves, and 
at the same time to lower interest rates and control 
inflation. 
 
As of October 2005, the net gold and hard currency reserves 
of the National Bank stood at $8.7 billion; the total gold 
and hard currency reserves of Kazakhstan, including the 
National Bank reserves and reserves accumulated in the 
National Fund, reached $14.5 billion. 
 
The National Bank has pursued market-based policies that 
have contributed to financial sector development and to 
exchange rate stability. In 1999 the National Bank created 
a deposit insurance system in order to attract the nearly 
$1 billion in cash it estimated people were hoarding at 
home. In the six years following the launch of deposit 
insurance, private deposits grew thirteen-fold, from less 
than $300 million in November 1999 to $3.93 billion in 
September 2005. In 2001, the government announced an 
amnesty for all Kazakhstani citizens repatriating cash or 
transferring money during a 30-day period. The legalized 
money was not taxed and it became available to its owners 
at the end of the amnesty period. Kazakhstan is repatriated 
$480 million under this amnesty, of which almost 90% was 
brought to banks in the form of cash. 
 
The main sources of inflows are revenues from exports of 
oil, gas, and metals as well as foreign direct investment. 
In 2004, in response to rising inflationary pressures in 
the economy, the Government directed the National Bank to 
focus monetary policy primarily on the achievement of price 
stability. 
 
In October and November 2005, the National Bank adopted 
several rules relating to the control of currency turnover 
and capital flows.  In particular, starting from 2006, the 
National Bank will regularly monitor currency operations of 
selected non-residents.  This procedure will primarily 
affect the following sectors: oil and gas industry, 
construction, mining, as well as companies, rendering 
architectural, engineering and industrial design services. 
According to the National Bank, this monitoring will 
furnish the Bank with better statistical data on the 
balance of payments and external debt. 
 
Expropriation and Compensation 
------------------------------ 
 
The New Investment Law of 2003 represents a step back from 
the clarity of the 1994 law. The 2003 law allows 
nationalization by the state in cases "as provided in 
legislative acts of the Republic of Kazakhstan." Unlike the 
1994 law, it does not provide clear grounds for 
expropriation. Similarly, the 1994 law required "prompt, 
adequate and effective" compensation at fair market value, 
with interest. The new law differentiates between 
nationalization and requisition, providing full 
indemnification of the investor in the case of the former, 
but only payment of market value in the case of the latter. 
Bilateral investment treaties (BITs) between Kazakhstan and 
other countries, including the U.S., also refer to 
compensation in the event of expropriation. 
 
There has been one case of legal expropriation of a foreign 
investor's property for public purpose. The investor 
ultimately submitted the case for international 
arbitration.  In late 2005, after lengthy delays and 
negotiations, the government agreed to pay the amount 
awarded by the arbiter. 
 
Some foreign investors have encountered serious problems 
short of expropriation. In one instance, in 1996, three 
foreign companies were forced to relocate their offices 
under pressure from the government. In 1997, investors, 
after reviving an important mine, found they could not 
obtain export licenses for their ore, although the right to 
export was written into their contract. The same year 
another investor alleged forgery and fraud by government 
officials, claiming its employees had been physically 
threatened in a management dispute at its ferro-alloy 
venture in northern Kazakhstan. 
 
The Embassy is aware of one case, in 1992, of government 
action tantamount to expropriation, when a U.S. company was 
deprived of its rights to explore and develop an oil 
deposit in Atyrau Oblast. In 1999, the Stockholm Arbitral 
Court found that the government's action was tantamount to 
expropriation. After the U.S. Embassy raised the case with 
the government, it paid in full the amount of compensation 
called for in the arbitral award. 
 
Under the Law on Insurance (December 18, 2000), foreign 
legal entities, including foreign insurance organizations 
and foreign citizens, are permitted to participate in 
insurance and re-insurance organizations in Kazakhstan. 
However, the total registered charter fund of general 
insurance companies with foreign participation may not 
exceed 25% of the overall registered charter fund of all 
general insurance companies in Kazakhstan. In the life 
insurance sub-sector, this limit on foreign participation 
is set at 50% of the overall registered charter fund of all 
life insurance companies operating in Kazakhstan. 
 
Insurance supervision and licensing powers are exercised by 
the National Bank. After enactment of the insurance law, 
which granted the National Bank greater powers to supervise 
the insurance industry, the number of insurance companies 
dropped from 68 in May 2000 to 37 in May 2005. Total 
capital of insurance companies is $208.3 million as of the 
same date. Restrictions also exist on foreign ownership of 
land in Kazakhstan. See below (A.6 "Right to Private 
Ownership and Establishment"). 
 
Dispute Settlement 
------------------ 
 
There have been a number of investment disputes involving 
foreign companies in the past several years. While the 
disputes have arisen from unrelated, independent 
circumstances, many are linked to alleged breaches of 
contract or non-payment on the part of Kazakhstani state 
entities. Some disputes relate to differing interpretations 
of joint-venture agreement and production sharing agreement 
(PSA) contracts; one questions the legality of the 
government's use of ex-post facto regulations governing 
value added taxes. The disputes involve, in some instances, 
hundreds of millions of dollars. 
 
Kazakhstan is still in the process of building the 
institutional capabilities of its court system. Until this 
is complete, the performance of courts in the country will 
be less than optimal. Further problems exist in enforcing 
judgments. The Ministry of Justice is only beginning to 
establish a judicial executory system. Given this lack of 
development, there is ample opportunity for interference in 
judicial cases. 
 
General commercial law principles are established in 
Kazakhstan's Civil Code. 
 
The January 2003 law "On Investments" defines an investment 
dispute as "a dispute ensuing from the contractual 
obligations between investors and state bodies in 
connection with investment activities of the investor." It 
states that such disputes can be settled by negotiation, in 
Kazakhstani courts, or through international arbitration. 
According to the law, disputes not falling within the 
above-noted category "shall be resolved in accordance with 
the laws of the Republic of Kazakhstan." While some 
investors find this legislation problematic since it does 
not address disputes between private entities, others 
believe that Kazakhstan's Civil Code and Civil Procedure 
Code provide private parties with recourse to foreign 
and/or third party courts. 
 
Additionally, in December 2004, Kazakhstan adopted a law on 
international arbitration. The law appears to give broad 
authority for judicial review of arbitral awards in 
Kazakhstan. It remains to be seen how this law will affect 
the integrity of the arbitral process as applied to 
business in Kazakhstan. However, an early test case did not 
yield positive results. In 2005 a U.S. company became 
embroiled in a dispute over payment for the sale of its 
shares in a joint venture to a group of Kazakhstani 
companies. The London Court of International Arbitration 
(LCIA) issued a preliminary ruling ordering that the shares 
be frozen pending its final decision. The acting 
Kazakhstani court, however, ignored the LCIA's ruling, and 
proceeded with its own hearings. The case was ultimately 
decided by the Superior Court of Kazakhstan in the U.S. 
company's favor.  In January 2006, however, the Astana 
Economic Court declined to enforce an LCIA ruling awarding 
legal costs to the U.S. firm on the grounds that doing so 
would be detrimental to "public order" in Kazakhstan. 
 
The United States has also raised concerns about the May 
2005 Law on International Agreements. On its face, the law 
seems to state that international agreements signed by 
Kazakhstan are subordinate to post-agreement domestic 
legislation. The government has informally indicated that 
the relevant clause contains an error and will be amended 
in 2006. 
 
The Committee for Investments of the Ministry of Industry 
and Trade should be consulted before entering into any 
contracts with government entities, since the agencies 
authorized to act on behalf of the government may change. 
In order for a dispute to qualify as an investment dispute 
and therefore qualify for foreign arbitration, the state 
body itself must have been authorized to act or contract. 
 
Any international arbitral award rendered by the 
International Center for the Settlement of Investment 
Disputes (ICSID), any tribunal applying the United Nations 
Commission on International Trade Law Arbitration rules, 
the Stockholm Chamber of Commerce, or the Arbitration 
Commission at the Kazakhstan Chamber of Commerce and 
Industry should, by law, be enforced in Kazakhstan. The 
U.S.-Kazakhstan Bilateral Investment Treaty can serve to 
buttress the law "On Investment" in this area. Kazakhstan 
ratified the New York Convention on the Recognition and 
Enforcement of Foreign Arbitral Awards in 1995. 
 
Despite such safeguards, foreign investors continue to face 
great practical difficulties in enforcing arbitral awards 
against government enterprises in Kazakhstan, particularly 
given the poor financial health of many such enterprises. 
The U.S. Government can support investors through 
encouraging the Government of Kazakhstan to honor arbitral 
awards. 
 
Creditor rights are set forth clearly under the current law 
on bankruptcy. However, the 1997 bankruptcy legislation is 
hindered by its complexity and numerous subsequent 
amendments, resulting in considerable misapplication in 
practice. 
 
Kazakhstan's bankruptcy agency became a self-financed 
government-owned enterprise in 1997. 
 
In general, the Government of Kazakhstan has a mixed record 
of addressing investment disputes. Foreign investors have 
often had to endure protracted negotiations. Most investors 
prefer to handle investment disputes privately, rather than 
make their cases public. In addition, the law "On 
Investments" restricts recourse to international 
arbitration and places more reliance on the Kazakhstani 
judicial system for dispute resolution. The U.S. Embassy 
advocates on behalf of U.S. firms with investment disputes. 
 
Performance Requirements/Incentives 
----------------------------------- 
 
Performance requirements, with the exception of domestic 
content requirements, are negotiated as part of a contract 
between the individual investor and the Committee for 
Investments, which is now part of the Ministry of Industry 
and Trade. They are the quid pro quo for tax, customs duty, 
or other privileges and benefits. Typically, an investor's 
obligations might include financial obligations, 
obligations to train local specialists, and contribute to 
social funds. 
 
Performance requirements, in some cases, are central to 
investment or privatization contracts. Companies are 
frequently required to pay back wages, rebuild factories 
and plants, and meet certain production targets. In several 
instances, the government has revoked contracts because 
firms did not meet their performance obligations. 
 
The Committee for Investments is responsible for monitoring 
the fulfillment of obligations undertaken by investors. If 
the committee determines that a company has not complied 
with its financial or other contractual obligations, the 
government may revoke the operating license of the company. 
 
In order to obtain the benefits and privileges of investing 
in Kazakhstan, an investor is typically required to provide 
the agency with detailed information on technical and 
financial matters of the proposed project. In many 
instances companies consider this information confidential 
or proprietary. 
 
With the exception of investments in oil production or 
mining, rules on local content and local sources of 
financing vary from contract to contract. 
 
With the exception of the banking, media and 
telecommunications sectors, and new offshore oil projects, 
there are no legal requirements that Kazakhstani nationals 
own shares in foreign investments. There is no general 
requirement that the level of foreign equity be reduced 
over time. In practice, however, investors may find that a 
joint venture with a well-connected local partner is a 
prerequisite to navigating the legal and political 
complexities of operating in Kazakhstan. Technology 
transfers frequently occur and sometimes are written into 
contracts, but are not explicitly required for foreign 
investment. 
 
The Investment Law of 2003 includes investment incentives 
that allow for preferences based on government-determined 
priority activities and provides for investment tax 
preferences, customs duties exemptions, and in-kind grants 
to legal entities of the Republic of Kazakhstan only. Under 
the law, the government may rescind such incentives, and 
collect back payments on duties, etc. including fines, if 
the investor fails to fulfill contractual obligations. 
Because the application process calls for a business plan 
and is, therefore, largely based on forecasting, virtually 
all projects are potentially subject to having their 
incentives removed. 
 
The government has liberalized its trade policies and has 
passed legislation to begin bringing its legal and trade 
regimes into conformity with World Trade Organization (WTO) 
standards. Kazakhstan submitted its Memorandum on the 
Foreign Trade Regime (MFTR) in 1996 and the first round of 
consultations on WTO accession took place in 1997. In June 
2005 Kazakhstan's WTO Accession Working Party met for the 
eighth time. Kazakhstan has signed bilateral protocols on 
market access for goods and services with several of its 
major trading partners. Kazakhstan also hopes to 
synchronize its accession with that of the Russian 
Federation, to the extent that this is possible. 
 
The Eurasian Economic Community was established in 2000 as 
a successor to an unsuccessful customs union between 
Kazakhstan, Russia, Belarus, Kyrgyzstan, and Tajikistan. 
The EAEC was created in order to harmonize customs duties 
and promote free trade between the partners. The EAEC has 
made little progress in creating a free trade zone, as had been 
the case with the now defunct Customs Union. 
 
Kazakhstan permits the importation of goods from EAEC free- 
trade partners and certain developing or less-developed 
countries free of duty or at a reduced rate within the 
framework of the Generalized System of Preferences. 
 
There are very few quotas and duties on exports affecting 
foreign investors. Among the more important is an agreement 
signed with the EU concerning quotas on textiles. 
 
There are no special requirements for engaging in trade- 
related activities. In keeping with internationally 
accepted practices, registration as an entrepreneur, legal 
entity, or branch/representation office is required. 
 
There are no known cases in which U.S. or other foreign 
firms have been denied participation in government-financed 
or subsidized research and development programs on 
anational treatment basis. 
 
Right to Private Ownership and Establishment 
-------------------------------------------- 
 
Foreign and domestic private entities have the right to 
establish and own business enterprises and to engage in all 
forms of remunerative activity. Private entities can freely 
buy and sell interests in business enterprises. Public 
enterprises sometimes enjoy better access to markets, 
credits, and licenses than do private entities. However, 
this is changing as Kazakhstan has privatized a large part 
of its economy. 
Kazakhstan's constitution provides that land and other 
natural resources may be owned or leased by persons who are 
Kazakhstani citizens according to conditions established by 
law. The 2003 Land Code allows citizens of Kazakhstan to 
own agricultural land and urban land with commercial and 
non-commercial buildings and complexes, including dwellings 
and land used for servicing these buildings. Under the 2003 
Land Code, only Kazakhstani citizens (natural and 
legalized) and Kazakhstani companies may own land. The Land 
Law does not allow private ownership for the following 
types of land: 
 
-- land used for national defense purposes; 
-- specially protected natural territories, resorts; 
recreational land and territories of a historical and/or 
cultural significance; 
 
-- forests, water reservoirs (lakes, rivers, canals etc.); 
glaciers, swamps, etc.; 
 
-- public areas (urban or rural settlements); 
 
-- lands that belong to the state land reserve. 
 
The law permits only state-owned entities to permanently 
use land. Short-term land leases may last for up to five years. 
The maximum period for long-term land leases are 49 years. 
Foreigners may rent agricultural land for up to 10 years. 
Foreigners may also own agricultural land through a 
Kazakhstan-registered joint venture or a full subsidiary. 
 
Protection of Property Rights 
----------------------------- 
 
Secured interests in property (fixed and non-fixed) are 
recognized under the Civil Code and the 2003 Land Code. 
Mortgage lending is still a relatively new phenomenon in 
Kazakhstan but it is a rapidly growing sphere of financial 
activity. The development of credit risk assessment tools 
for banks, including credit bureaus, will help mitigate the 
risks inherent in mortgage banking. The National Bank has 
created a national mortgage agency, which issues bonds 
secured by mortgages purchased from banks. All property and 
lease rights for real estate must be registered with 
special government-owned Real Estate Centers, which exist 
in cities and rural district centers. 
 
In principle, Kazakhstan's Civil Code protects U.S. 
intellectual property. In addition, the U.S.-Kazakhstan 
Trade Agreement, which came into force in 1993, obliges 
Kazakhstan to protect intellectual property rights (IPR.). 
In the last two years Kazakhstan has taken positive 
legislative steps to improve its IPR regime. In 2004, 
Kazakhstan ratified the 1997 World Intellectual Property 
Organization (WIPO) Copyright Treaty and the WIPO 
Performances and Phonographs Treaty, and amended the 
Copyright Law to affirmatively protect pre-existing works 
and sound recordings. In 2005, Kazakhstan amended its 
Criminal and Civil Codes to make IPR crimes easier to 
prosecute and to toughen penalties for violators. While the 
legislative environment has improved, only time will tell 
whether the legislation will translate into stronger 
enforcement. 
 
Patents and trademarks: Patent protection is available for 
inventions, industrial designs and prototypes. Patents for 
inventions are available with respect to processes and 
products that are novel and have industrial applications. 
However, patent protection for certain types of products 
and processes -- such as layout designs and plant variety - 
is not yet available. A National Patent Office, established 
in 1992, performs formal examination of patent 
applications. Existing Soviet patents are being converted 
to Kazakhstani patents. 
 
Patents for inventions are granted for a period of 20 
years; patents for industrial designs are granted on a 
preliminary basis for five years. This period may be 
extended for an additional 10 years if the preliminary 
patent is converted to a patent. Prototypes are granted a 
five-year initial period of protection, with the 
possibility of an additional three-year extension. 
Unsuccessful applicants have the right to appeal decisions 
of the National Patent Office. 
 
Trademark violation is a crime. Enforcement has 
historically been questionable, but in 2004 US companies 
were generally confident that their trademarks were 
protected in Kazakhstan. There are marked disparities in 
fees charged to domestic patent and trademark applicants, 
as compared to foreign applicants. Applications for 
trademark, service mark and appellations of origin 
protection may also be filed with the National Patent 
Office. Trademarks and service marks are afforded 
protection for a period of 10 years from the date of 
filing. In 2004 the Embassy received anecdotal evidence 
from US companies that the situation with respect to 
trademarks is improving. 
 
Copyrights: The Law on Copyrights and Related Rights was 
enacted in 1996. The law is largely in conformity with the 
requirements of the WTO TRIPS Agreement and the Berne 
Convention. 
 
In 2000, the government amended the Customs Code to provide 
ex-officio authority to Customs Committee officials to 
seize contraband at the border, as required by the WTO 
TRIPS Agreement. Moreover, amendments to the 
Administrative, Criminal and Civil Procedural Codes have 
been adopted to bolster enforcement capabilities. 
Nevertheless, systematic violations persist and enforcement 
remains sporadic. According to the IPR Agency, 1475 IPR 
cases were identified in the first 10 months of 2005. 
Criminal proceedings were initiated in 1358 of them, 
including 1098 cases of copyright violation and 260 cases 
of trademark violation. By November 1, 2005, 1169 cases had 
been heard in court. 
 
As a result, 206,111 counterfeit items, estimated in value 
at KZT 60.558 million, had been withdrawn from the market, 
and fines totaling KZT 8.11 million (about $60.3 thousand) 
had been imposed. 
 
Illegal software development and manufacture generally is 
not conducted in Kazakhstan; Russia and Ukraine are 
believed to be the major sources of bootleg software to the 
local market. 
 
Kazakhstan ratified the Berne Convention for the Protection 
of Literary and Artistic Works in 1998 and the Geneva 
Phonograms Convention in 2000. 
 
Piracy of copyrighted products is widespread and there have 
been only limited enforcement measures to date. Although 
Kazakhstan enacted a number of laws and changed many 
policies during the last few years, a number of additional 
changes are still required. Bilateral negotiations must be 
concluded in order to comply with WTO standards. Since 
2000, USTR's Special 301 review has put Kazakhstan on the 
Watch List for intellectual property rights violations, 
primarily for the country's lack of enforcement of 
copyrights. 
 
Transparency of the Regulatory System 
------------------------------------- 
 
Transparency in the application of laws remains a major 
problem in Kazakhstan and an obstacle to expanded trade and 
investment. Foreign investors complain of changing 
standards and corruption. While foreign participation is 
generally welcomed, some foreign investors point out that 
the government is not always even-handed and sometimes 
reneges on its commitments. Although the Committee for 
Investments of the Ministry of Industry and Trade was 
established to facilitate foreign investment, it has had 
limited success in addressing the concerns of foreign 
investors. 
 
Often, contradictory norms hinder the functioning of the 
legal system. While Kazakhstan has recently defined more 
clearly which laws take precedence in the event of a 
contradiction, it has become clear that stability clauses 
granted investors under previous versions of the Foreign 
Investment Law or other legislation may not necessarily 
protect investors from changes in the legal and tax 
regulatory regime. The 2003 law "On Investments" holds that 
contracts signed subsequent to its enactment may be subject 
to amendments in domestic legislation and international 
treaty provisions that change "the procedure and conditions 
of the import, manufacture, and sale of goods subject to 
excise duties." As an additional complication, oblasts 
often take a very liberal view of national laws and 
policies (especially licensing and permitting), 
implementing their own regulations and thereby increasing 
instances of conflict with the law. 
Kazakhstan, by law, will provide compensation for 
violations of contracts that were properly entered into and 
guaranteed by the government. Where the government has 
merely "approved" or "confirmed" a foreign contract, 
Kazakhstan's responsibility is limited to performing 
administrative acts necessary to facilitate the subject 
investment activity (acts "concerning the issuance of a 
license, granting of a land plot, mining allotment, etc."). 
 
Kazakhstan's institutional governance is weak, further 
adding to the problems of transparency in commercial 
transactions. Senior government officials have a large say 
in minor and major transactions, and decisions are often 
made behind closed doors. 
 
A 1995 Licensing Law established the legal framework for 
licensing activities in Kazakhstan. It requires the 
relevant agency to issue a license within one month of a 
company's submitting all required documents. Unfortunately, 
the implementation of this law has been inadequate. For 
example, the government has not yet approved most of the 
qualification and procedural requirements for issuing 
licenses. This situation has left some businesses 
vulnerable to inspection bodies, which have threatened them 
with fines and shutdowns for not having licenses that are, 
in many instances, impossible to legally obtain. In 1998, 
several additional procedural acts were adopted to 
implement the requirements of the Licensing Law. However, 
many areas still lack implementing legislation. The number 
of licenses required for most activities is also an 
obstacle to business. 
 
Nevertheless, the Government intends to streamline the 
licensing rules. In particular, the amendments to the 
Licensing Law were passed in the first half of 2005. The 
new law excluded a wide variety of business activity from 
licensing requirements, including aircraft repair, airport 
services, sale of topographic and geodesic maps, excursion 
and tourist business, and legal services (except advocacy). 
There are some transparency problems connected with the 
customs regime in Kazakhstan. These include the following: 
 
--Granting customs exemptions stipulated in the Law on 
Foreign Investment continues to be problematic, because the 
Customs Committee has failed to issue any regulations or 
instructions for its implementation. Instead, Customs 
decides claims in an ad hoc manner, which has resulted in 
inconsistent and unclear application of the law. 
 
--Kazakhstan has adopted the international tariff 
nomenclature as the basis of its Tariff Schedule and has 
prepared a tariff schedule, but it has not been published 
in full. As a result, regional customs offices continue to 
use the old tariff schedules. According to businesses, this 
leads to unnecessary delays in processing and increased 
costs for importers. 
 
In December 2004 the formerly independent Customs Agency 
was subordinated to the Ministry of Finance, where it was 
re-established as the Customs Control Committee. 
 
Efficient Capital Markets and Portfolio Investment 
--------------------------------------------- ----- 
 
Kazakhstan's efforts to create a sound financial system and 
a stable macroeconomic framework have been notable among 
former Soviet republics.  Much progress has been made in 
creating and implementing an adequate legal framework.  By 
comparison with other parts of the economy, reform of the 
financial system has been deeper and more effective.  The 
financial system has started to mediate financial resource 
flows and direct them to the most promising parts of the 
economy.  Official policy is clearly supportive of credit 
allocation on market terms and the further development of 
legal, regulatory and accounting systems that are 
consistent with international norms. 
 
Most domestic borrowers receive credit from Kazakhstani 
banks.  However, foreign investors find the margins taken 
by local banks and the security required for credit to be 
very onerous. It is usually cheaper and simpler for them to 
use retained earnings or borrow from their home country. 
Kazakhstan's stock exchange is tiny and, as such, not yet a 
realistic source of funds (see below). Kazakhstani banks 
have, since 1998, placed Eurobonds on international markets 
and obtained syndicated loans, the proceeds of which have 
been used to support domestic lending. Leading Kazakhstani 
banks have been able to obtain reasonably good ratings from 
international credit assessment agencies. All Kazakhstani 
banks are to meet Basel I risk-weighted capital standards 
by 2007. The National Bank supervises the banking system 
and has overseen a steady consolidation and strengthening 
of the system. In 2005 the National Bank raised the reserve 
requirements for second-tier banks, in part to control the 
growth of monetary aggregates but also to apply discipline 
during the current "credit boom". The National Bank further 
changed the method banks use to calculate reserves by 
requiring them to count foreign liabilities as well as 
domestic. 
 
With the implementation of deposit insurance in 1999, 
private deposits in the banking system grew from less than 
$300 million in November 1999 to $3.93 billion at the end 
of September 2005. 
 
Since 1999, a market for debt securities has been rapidly 
developing in Kazakhstan. Several dozen bank and non-bank 
corporations - large and small - have issued bills, notes 
and bonds with maturities ranging from three months to 
seven years. Earlier issues have matured and been redeemed 
and, so far, there have been no defaults. Rates for 
borrowers have declined on average from approximately 16% 
in September 1999 to approximately 10% in 2005. Maturities 
have increased from 1.5 years to up to 10 years during the 
same period.  Kazakhstan's pension system reform has 
boosted the bond market by creating a pool of capital; in 
September 2005 private pension funds managed over $4.4 
billion. The government intends to privatize the one 
remaining state pension fund. In November 2005, this fund, 
the Ministry of Finance and EBRD signed the protocol of 
intention on the sale of 10% of the fund's stake to EBRD. 
The market for fixed-income securities has grown from 
$74,000 in September 1999 to over $2.3 billion in September 
¶2005. 
 
In September 2005, the rate on short-term government notes 
was 2.94%. Longer-term government notes (with maturities up 
to 10 years) were offered at 6.08%. 
 
The Kazakhstan Stock Exchange (KASE) has been in operation 
since 1997. As of November 2005, there were 93 listed 
companies with 31 "A-listed" stock issues; 28 companies 
with "B-listed" stock issues; and eight non-listed issuers. 
There are also 44 "A-listed" and six "B-listed" corporate 
bond issues. Inadequate financial records prevent many 
other companies from being put on the exchange. Moreover, 
company managers fear diluting control of their enterprises 
by selling more shares. 
 
The National Securities Commission has been operating since 
1996 in compliance with the norms of the International 
Organization of Securities Commissioners. In 2001, the 
Commission was made a department of the National Bank, and 
renamed the "Securities Market Regulation Department. In 
2003, functions of this Department were given to a newly- 
created Financial Supervision Agency (FSA). The FSA has 
broad authority over the banking insurance sectors, as well 
as the stock market. The FSA is financed from the National 
Bank's budget and subordinated to the President of the RK. 
 
Resident Kazakhstani companies must compete for capital 
with the attractive (and tax deductible) returns offered by 
government debt, although these interest rates have been 
steadily decreasing. 
 
In 1998, the government introduced an accumulation pension 
system that requires all employed persons to contribute 10% 
of their salary to accumulation pension funds. As of 
September 2005, the 14 private (and one state) funds 
operating in Kazakhstan held approximately $4.4 billion in 
assets. Asset management companies invest the contributions 
on behalf of the pension funds. The pension assets must be 
invested only in specific categories of instruments, such 
as government bonds and A-listed securities. The largest 
concentration of investments is in dollar-denominated 
Kazakhstani Eurobonds. Custodian banks hold pension assets. 
The government plans to sell some shares of state 
enterprises on the national stock market, partly to provide 
a more profitable alternative vehicle for the investment of 
pension fund assets. 
 
There appear to be no "cross-shareholding" or "stable 
shareholder" arrangements used to restrict foreign 
investment in private firms through mergers and 
acquisitions. Joint stock companies may not cross-hold more 
than 25% of each other's stock unless they have an 
exemption codified by law and may not exercise more than 
25% of the votes in a cross-held joint stock company. 
Kazakhstani law recognizes companies as "related" if one 
company or legal entity holds more than 20% of the shares 
of another. However, the owning company may not vote more 
than 25% of the total shares at the general meeting of 
shareholders of the related company. The general meeting 
must approve various corporate actions, such as mergers and 
acquisitions. This rule applies to all persons, domestic or 
foreign. 
 
There have been very few hostile takeovers in Kazakhstan, 
primarily because there are few publicly traded firms. 
Defensive measures are not targeted toward foreign 
investors in particular. Current legislation provides a 
legal framework for takeovers. The Civil Code requires a 
company that has purchased a 20% share in another company 
to publish information about the purchase. 
 
Kazakhstan has a well-developed infrastructure for equity 
and debt trading with a network of brokerage firms. This is 
a resource for future corporate finance. However, at 
present, the dearth of attractive stocks for trading is a 
significant obstacle to the further development of the 
securities market. This is another weakness that the 
government's plan for offering shares in state enterprises 
is meant to address. 
 
The 1998 Law on Joint Stock Companies provides the basis 
for regulation of open and closed-type joint stock 
companies. It also contains clauses to protect investors in 
often-abused circumstances, such as: 
 
-- issuance of additional shares 
 
-- maintenance of charter capital and restrictions on 
payments of dividends 
 
-- re-purchase by a company of its own shares 
 
-- debt-to-equity conversions 
 
-- fiduciary duties imposed on company officers 
 
-- proxy votes 
 
-- independent audit 
 
-- determination of asset values during the sale of company 
property. 
 
The Law on Joint Stock Companies also regulates tender 
offers for stock of open joint stock companies by requiring 
the purchaser to notify the Securities Market Regulation 
Department and the target company of their intention to 
purchase 30% or more of the target company and, after such 
purchase, to make an offer to all remaining shareholders to 
purchase their shares at the average price during the last 
six months before the purchase. 
 
There are no laws or regulations specifically authorizing 
firms to adopt articles of incorporation or associations 
that limit or prohibit foreign investments. The Law on 
Joint Stock Companies, however, allows charter limits on 
the number of shares or votes that one shareholder may 
have. 
 
Standards, including sanitary and phyto-sanitary standards, 
are promulgated solely by the Committee for Technical 
Regulation and Metrology (Gosstandard). Proposals for 
adoption, amendment, or abolishment of state standards are 
normally prepared by technical committees constituted by 
Gosstandard, and may include producers, scientific and 
engineering associations, and technical experts. Foreign 
participation in the standardization process is regulated 
by international multilateral and bilateral agreements. 
 
Political Violence 
------------------ 
 
There have been no incidents of politically-motivated 
violence against foreign investment projects. Kazakhstan 
has been stable since independence. Politically-motivated 
civil disturbances remain exceptionally rare. Kazakhstan 
has good relations with its neighbors. The government 
continues to express concern over the security of its 
borders with Kyrgyzstan and Uzbekistan, which it view as 
vulnerable to penetration by extremist groups. 
 
Kazakhstan's 2005 presidential elections took place without 
significant violence or unrest. President Nazarbayev was 
reelected with an overwhelming majority of the votes. In 
its preliminary assessment the OSCE noted that the 
presidential election did not meet a number of OSCE 
commitments and international standards for democratic 
elections. Although some opposition groups denounced the 
election as fraudulent, there have been no significant 
demonstrations against the announced results. The next 
parliamentary election is scheduled to take place in 2009. 
 
Kazakhstan's economy has grown steadily in the last four 
years. 2005 GDP growth is estimated at 9%, and the highest 
year-on-year rate was 13.5% in 2001. Although incomes and 
consumer spending have risen across the board, the minimum 
subsistence wage is still only $46.53 per month, and 18.8% 
of the population receives income below that level. 
Starting on July 1, 2006, the minimum pension payment will 
be $ 68.1 per month. By government estimates, unemployment 
has remained near 8% since 2002. 
 
Corruption 
---------- 
 
Although the Kazakhstani Criminal Code contains special 
penalties for accepting and giving bribes, corruption is 
widely perceived to be prevalent throughout Kazakhstan. The 
Ministry of Interior, the Financial Police and the 
Committee for National Security (KNB) are responsible for 
combating corruption. The latest national commission to 
fight government corruption - the Disciplinary State 
Service Commission - was established in June 2003. 
 
U.S. firms have cited corruption as a significant obstacle 
to investment. Law enforcement agencies have on occasion 
brought pressure on foreign investors perceived to be 
uncooperative with the government. The government and local 
business entities are widely aware of the legal 
restrictions placed on U.S. business abroad (i.e., the 
Foreign Corrupt Practices Act). 
 
In 2002, a former Minister, a Minister, and a former Oblast 
Akim were separately indicted on corruption charges. The 
timing of two of these cases appears to have been 
politically motivated, as they were co-leaders of a major 
new opposition political movement started only months 
before. Two were convicted and sentenced to lengthy jail 
terms, though one was pardoned and released in May 2003. 
 
The third case also resulted in a conviction, though the 
by-then former minister was given a suspended sentence. 
 
In 2003 in the United States two American citizens were 
charged with violating the Foreign Corrupt Practices Act in 
a case that received significant international media 
attention. The two allegedly channeled tens of millions of 
dollars in bribes to two senior Kazakhstani officials 
during the 1990's in order to facilitate oil deals for 
American companies. One is currently serving a jail term; 
the trial of the second, James Giffen, is scheduled to 
begin in 2006 in the Federal District court in the Southern 
District for New York. 
 
Bilateral Investment Agreements and Double Tax Treaties 
--------------------------------------------- ---------- 
 
The United States-Kazakhstan Bilateral Investment Treaty 
came into force in 1994. In 1992, the United States and 
Kazakhstan signed an Investment Incentive Agreement. In 
1996, the United States and Kazakhstan ratified the Treaty 
on Avoidance of Dual Taxation. 
 
Kazakhstan has bilateral investment agreements in force 
with over three dozen countries, including the United 
States, Great Britain, Germany, France, Russia, Korea, 
Iran, China, and Turkey. Kazakhstan also has ratified 36 
treaties on avoidance of dual taxation. 
 
OPIC and Other Investment Insurance Programs 
-------------------------------------------- 
 
The Overseas Private Investment Corporation (OPIC), an 
independent U.S. Government agency that provides project 
financing, political risk insurance, and a variety of 
investor services, has been active in Kazakhstan since 
¶1994. OPIC is seeking commercially viable projects in the 
Kazakhstani private sector. OPIC offers a full range of 
investment insurance and debt/equity stakes. 
Kazakhstan is a member of the Multilateral Investment 
Guarantee Agency (MIGA). 
 
Labor 
----- 
 
Kazakhstan has an educated and technically competent 
workforce. The demand for specialized skilled labor created 
by the simultaneous development of several major oil fields 
in western Kazakhstan has exceeded locally available 
supply. Management expertise and marketing skills are also 
in short supply. U.S. firms employ Kazakhstani specialists 
across a broad spectrum of industries, although additional 
training to qualify specialists is often necessary. 
 
The 1999 Labor Law and the Constitution guarantee basic 
workers' rights, including the right to organize and the 
right to strike. Teachers, miners and workers at a variety 
of enterprises have conducted occasional strikes for 
generally short periods during the past several years. The 
1993 Law on Professional Labor Unions provides a legal 
guarantee against limitations of labor. It also grants 
social-economic, political and personal rights and freedoms 
as a result of membership in a union and prohibits the 
denial of employment, the denial of promotion or the 
release from employment on the basis of such membership. 
Kazakhstan joined the International Labor Organization 
(ILO) in 1993. As of January 2006, Kazakhstan has ratified 
16 ILO conventions, including those pertaining to minimum 
employment age, forced labor, discrimination in employment, 
equal remuneration, and collective bargaining. 
 
The 1996 Law on Labor Disputes and Strikes lays out the 
procedure for resolving disputes. However, the law also 
restricts strikes by requiring that a peaceful attempt at a 
solution first be made, that two-thirds of the labor 
collective must approve the strike, and that the employer 
must be warned 15 days in advance in writing, among other 
restrictions. In addition, strikes for political purposes 
are forbidden. 
 
A separate 1992 Law on Collective Bargaining Agreements 
sets out the basic framework for concluding such 
agreements. There are instances of unions successfully 
negotiating collective bargaining agreements with 
management. 
 
The Government of Kazakhstan has made it a priority to 
ensure that Kazakhstani citizens are well-represented on 
foreign enterprise workforces, and is particularly keen to 
see Kazakhstanis hired into the managerial and executive 
ranks of those enterprises. Changes in 2001 to the quota 
system for foreign labor work permits has increased 
pressure on employers to hire local labor through the 
introduction of requirements to search for local workers 
prior to the issuance of work permits for foreign labor 
(see section A.1.). All U.S. companies are strongly advised 
to contact locally-based law and accounting firms, as well 
as the U.S. Commercial Service in Almaty, for the latest 
information on work permits. 
 
Foreign Trade Zones/Free Ports 
------------------------------ 
 
The government established special economic zones in the 
capital city of Astana (as of July 2001) and on the 
territory of the seaport of Aktau (as of April 2002). Under 
the law, the Astana Special Economic Zone must be abolished 
no later than five years after its foundation, while the 
Aktau Special Economic Zone must be closed by January 2007. 
In the special economic zones, foreign companies have the 
same privileges as Kazakhstani entities. A third Special 
Economic Zone has been established near the city of 
Shymkent as an incubator for the cotton textile industry. 
The Shymkent zone is an example of the Government's 
"cluster" strategy, whereby the state is attempting to 
create new industrial sectors where it has identified the 
potential for the growth of competitive firms. In addition 
to the cotton textile industry, there are plans to build 
clusters in the petrochemical, oil machinery, food 
processing, tourism, transport and metallurgical sectors. 
 
As a part of Kazakhstan's national strategy to diversify 
the economy, the government has begun to establish 
"technoparks" where investors, including foreigners, can 
take advantage of incentives to develop trade-intensive 
high-tech industries. 
 
Foreign Direct Investment (FDI) Statistics 
------------------------------------------ 
 
Annual Gross Foreign Direct Investment Flows by Country of 
Origin (Millions of Dollars; nominal) 
 
              1993-2003   2004    2005(Jan-Sept) Total 
 
USA             7738.5   2970.6    759.5    11 468.6 
UK              3516.6   924.6     179.6    4261.6 
South Korea     1750.8   72.5      40.5     1863.8 
Italy           1848.7   313.0     213.4    2375.1 
Canada          1065.2   169       224.0    1458.2 
Switzerland     1682.5   235.6     76.6     1994.7 
Netherlands     1622.7   1782.2    1070.6   4475.5 
China           1076.6   397.7     103.6    1577.9 
Turkey          742.1    92.1      68.3     902.5 
Russia          787      200.6     158.2    1145.8 
Japan           491.6    178.5     238.7    908.8 
Others          3527.3   956.6     1495.9   5979.8 
Total           25,849.6 8,293.0   4,269.7  38 412.3 
 
Source: National Bank of Kazakhstan 
 
Annual Gross Foreign Direct Investment Flows by Sector 
(Millions of dollars; nominal) 
 
             1993-2003   2004   2005(Jan-Sept)  Total 
 
AGRICULTURE,    16.5       -2.0       0.7        15.2 
HUNTING AND 
FORESTRY 
 
MINING AND      15241.8     5268.4    1237.5     21747.7 
QUARRYING 
 
mining of coal  33.6        9.7       2.4        45.7 
and lignite, 
extraction 
of peat 
 
extraction of   13546.8     5200.5    1150.0     19897.3 
crude 
petroleum 
and natural 
gas 
 
mining of       43.3        34.8      47.9       126 
uranium and 
thorium ores 
 
mining of       1570.8      13.5      42.9       1627.7 
metal ores 
 
other mining 
and quarrying   47          9.9       -5.8       51.1 
 
MANUFACTURING   4242.2      519.1     202.1      4963.4 
 
including but   607.2       36.4      45.8       689.4 
notlimited 
manufacture of 
food products, 
beverage and 
tobacco products 
 
manufacture of  438.9       20.4      34.1       493.4 
coke, refined 
petroleum 
products 
and nuclear 
fuel 
 
manufacture of  115.5       25.2      -3.8       136.9 
chemicals 
and chemical 
products 
 
manufacture of  14.2        9.1       6.7        30.0 
rubber and 
plastics 
products 
 
manufacture of  63.8        11.2      9.5        84.5 
other 
non-metallic 
mineral products 
 
manufacture     2622.3      323.8     71.5       3017.6 
of basic metals: 
 
manufactures    401.8       0.7       2.7        405.2 
of ferrous 
metals 
 
manufacture of  2212.9      319.8     67.6       2600.3 
basic precious 
and non-ferrous 
metals 
 
manufacture of  7.9         3.3       1.2        12.4 
fabricated 
metal products 
except 
machinery 
and equipment 
 
manufacture     15.7        7.5       -5.1       18.1 
of machinery 
and equipment 
 
manufacture     316         71.4      37.3       424.7 
of electric 
and computing 
machinery 
manufacture of  4.4         1.1       2.7        8.2 
transport 
equipment 
 
manufacture,    4.1         1.8       -1.1       4.8 
n.e.c 
 
ELECTRICITY,    568.1       11.4      116.7      696.2 
GAS AND WATER 
SUPPLY 
 
CONSTRUCTION    161.8       159.9     87.6       409.3 
 
WHOLESALE AND   482.3       271.8     251.4      1005.5 
RETAIL TRADE, 
REPAIR OF 
MOTOR VEHICLES, 
MOTORCYCLES 
AND PERSONAL AND 
HOUSEHOLD GOODS 
 
HOTELS AND      96.1        13.4      3.3        112.8 
RESTAURANTS 
 
TRANSPORT,      491.4       83.2      89.6       664.2 
STORAGE AND 
COMMUNICATION 
land transport  324.2       29.4      19.8       373.4 
 
including       319.8       28.8      20.0       368.6 
transport 
via pipelines 
 
water           14.2        -26.4     0.0        -12.2 
transport 
 
air transport   21.7        0.5       2.4        24.6 
 
supporting      65.1        15.7      44.5       125.3 
transport 
activities 
 
post and        66.4        63.9      22.9       153.2 
telecommunication 
 
including       65.5        63.5      22.6       151.6 
telecommunication 
 
FINANCIAL       315.3       71.0      52.8       439.1 
ACTIVITY 
 
REAL ESTATE,    3731.8      1806.1    2184.5     7722.4 
RENTING 
AND BUSINESS 
ACTIVITIES 
 
Including       82.6        11.6      4.3        98.5 
but not limited 
real estate 
activities 
 
other business 3642.7       1788.5    2167.4     7598.6 
activities: 
 
Including      64.4         51.5      1.2        117.1 
legal, 
accounting, book- 
keeping and 
auditing 
activities, 
tax consultancy, 
market research, 
business and 
management 
consultancy 
geological     3458.4       1717.6     2113.5    7289.5 
exploration and 
prospecting 
activities 
 
EDUCATION,     141.7        90.8       43.5      276 
HEALTH AND 
SOCIAL WORK 
 
ACTIVITIES,    360.8        0.0        0.0       360.8 
N.E.C. 
 
TOTAL          25,849.8     8,293.1    4269.7    38 412.6 
Source: National Bank of Kazakhstan 
 
                               2003    2004    2005 
 
FDI as a Percentage of GDP     15.2%   20.3%   12% 
 
Source: National Bank of Kazakhstan 
 
Largest Investments as of 2005: 
------------------------------ 
 
¶1. TengizChevrOil (TCO). The TCO joint venture (50% owned 
by Chevron, 25% by ExxonMobil, 20% by the Government of 
Kazakhstan, and 5% by LucArco), launched in 1993, was the 
first major international oil project in post-independence 
Kazakhstan.  Through 2004 the joint venture partners 
invested more than $7 billion in TCO. In 2005 TCO is 
expected to produce 280,000 bpd.  By 2007, TCO will 
complete a three-year expansion project, which will 
increase production to an estimated 570,000 bpd. TCO member 
companies are also major shareholders in the Caspian 
Pipeline Consortium (CPC), a $2.5 billion project which 
began transporting Tengiz crude to the Black Sea port of 
Novorossiysk in 2001. Negotiations among CPC shareholders 
to more than double CPC pipeline capacity continued through 
¶2005. 
 
¶2. AGIP Kazakhstan North Caspian Operating Company. Formed 
in 1997 to develop the super-giant offshore Kashagan field 
in the North Caspian, this consortium has undergone 
numerous partner changes. Current members include Agip-ENI, 
ExxonMobil Shell, Inpex, ConocoPhillips, Total, and 
KazMunayGaz. Estimated reserves of extractable oil stand at 
7-9 billion barrels. First Kashagan oil is likely to be 
exported via the BTC pipeline, and IGA and HGA negotiations 
are ongoing to facilitate movement of Kazakhstani oil along 
that route. Under terms of the initial PSA, Agip KCO was to 
start commercial production in 2005, but that date has been 
moved back to at least 2008. Project partners planned to 
invest $3.5 billion in Kashagan in 2005 alone. 
 
¶3. Karachaganak Consortium. Chevron, British Gas, Agip, and 
Lukoil signed a PSA in 1997 to develop the Karachaganak oil 
and gas condensate field, estimated to hold 2.3-6 billion 
barrels of oil / gas condensate and 16-46 Tcf of natural 
gas reserves. In 2003 Western partners completed a 400 mile 
pipeline to connect the field to the CPC pipeline in 
Atyrau. A "Phase Two" expansion project was completed in 
2004, in which an estimated $4.3 billion was invested to 
construct a new gas and liquids processing facilities, gas 
re-injection facilities, and a 120-megawatt power station. 
According to a 40-year agreement, the company will invest 
$10 million annually in local social projects. 
 
¶4. PetroKazakhstan (PK). Until its sale in October 2005 to 
a subsidiary of Chinese National Petroleum Corporation 
(CNPC), PK ran one of Kazakhstan's three major oil 
processing plants, the Shymkent refinery, which meets about 
50% of the domestic demand for refined products. PK also 
operated the Kumkol deposits in southern Kazakhstan. 
According to an agreement between the GOK and CNPC 
International, the GOK will purchase 50% of the Shymkent 
refinery and one-third of additional PK assets. In 2004 
PK's capital investments reached $82 million, and were 
planned at $40 for 2005. In addition to the former PK 
assets, in 1997 CNPC bought 60.2% of state-owned 
Aktobemunaygaz, and in 2003 CNPC purchased a further 25.12% 
stake for $150 million.  By 2004 the company's investments 
were over $1 billion. In addition, CNPC, together with 
national oil company KazMunayGaz, is constructing an oil 
pipeline to China. The second, $700 million stage was 
completed in December 2005. 
¶5. Nelson Resources (Canada).  In 2000 the company 
purchased a 50% interest in Kazakhoil Aktobe, in 
partnership with KazMunayGaz. In 2004 production reached 
20,000 bpd and is projected to increase three-fold by 2007. 
In 2004 Nelson invested about $140 million in the project. 
Since 2004 Nelson Resources has developed North Buzachi 
field on a parity basis with CNPC. In 2004 the company 
produced 10,000 bpd. In 2005 $125 million was invested into 
the project. In late 2005 Russian Lukoil purchased 100% of 
Nelson Resources. 
 
¶6. Nations Energy (Canada). In 1997 the company bought a 
94.64% stake in the Karazhanbasmunay state oil company for 
$45 million. The company produces about 50,000 bpd. By 2005 
the company had invested about $250 million into the 
project, targeting planned production at 80-90,000 bpd over 
the next two years. 
 
¶7. AES Kazakhstan and AES Ekibastuz. In 1996, the American 
energy company AES bought the Ekibastuz-1 power plant. In 
the fall of 1997, AES purchased two hydroelectric power 
generation plants and several other coal-fired 
power/heating plants in and around Ust-Kamenogorsk, in 
eastern Kazakhstan. In 1999, AES gained management control 
of two regional electric distribution companies (REC) in 
Kazakhstan for 15 years. Since 1996, AES has invested over 
$220 million. In 2005-2008 the company plans to invest 
$300-500 million in Kazakhstan's economy. 
 
¶8. Bogatyr Access Komir. In 1996, the American firm Access 
Industries bought the Bogatyr coal mine and 66% of the 
neighboring Stepnoy coal mine (both part of the giant 
Ekibastuz mining complex) for more than $40 million. Access 
pledged to invest $550 million toward upgrading the 
coalmines over the next five years. Access Industries 
continues its investment program at the Ekibastuz mining 
complex. Nearly 36 million tons of coal were delivered from 
the Bogatyr mine in 2004. About $18-million investments 
into production are planned in 2005. 
 
Other major investments in the past several years have 
included: 
 
Philip Morris-Kazakhstan. Philip Morris signed an agreement 
with the Almaty Tobacco Company in 1993, under which it 
pledged to invest USD 350 million through 1998. Philip 
Morris has been producing cigarettes in Kazakhstan for 
domestic consumption since 1994. In spring 2000, it 
completed its USD 200 million Greenfield cigarette 
manufacturing plant in the Almaty Oblast. The plant is 
slated to produce over 25 billion cigarettes annually. 
 
Trans World Metals. A UK-registered company, which in 1995 
purchased Kazakhstan's chromium plant and associated mine. 
Trans World paid USD 65 million for the facilities and 
pledged to invest a further USD 400 million. In 2000, after 
two years of legal battle in Kazakhstani and foreign courts 
with local company Kazakhstan Mineral Resources Corp (KMRC) 
over rights to its chromium operation and rights to other 
properties in Kazakhstan, Trans World Metals left the 
country and dropped its court cases against the KMRC for a 
reported USD 200-USD 250 million settlement. 
 
The LNM Group (UK), in 1995, purchased the Karaganda 
metallurgical plant (KARMET), which was subsequently 
renamed to Ispat-Karmet. The LNM Group paid USD 225 million 
and invested a further USD 450 million by 2000. The new 
owner significantly improved the plant's product quality 
and packaging and now exports 95% of Ispat-Karmet's output 
to over 60 countries. In late 2004 LNM's Kazakhstani steel 
operation was renamed "Mittal Steel Temirtau". 
 
ASQUINO