VZCZCXRO0307
OO RUEHIK
DE RUEHTA #2131/01 3420908
ZNR UUUUU ZZH
O 080908Z DEC 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6961
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 2225
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1589
RUEHKO/AMEMBASSY TOKYO 2290
RUEHUL/AMEMBASSY SEOUL 1224
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1784
RUEKJCS/SECDEF WASHDC 1634
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2608
RUEHNO/USMISSION USNATO 2906
RUEHAST/AMCONSUL ALMATY 2073

UNCLAS SECTION 01 OF 07 ASTANA 002131 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
PLEASE PASS USTDA, OPIC, EXIM, USTR 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON ETRD EFIN EINV KIPR KZ
SUBJECT:  KAZAKHSTAN:  2009 NATIONAL TRADE ESTIMATE 
 
REF:  STATE 10598 
 
ASTANA 00002131  001.3 OF 007 
 
 
¶1.  The following information responds to reftel request. 
 
TRADE SUMMARY 
 
The U.S. goods trade deficit with Kazakhstan was $618 million in 
2008, an increase of $119 million from $499 million in 2007.  U.S. 
goods exports in 2008 were $986 million, up 30.9 percent from the 
previous year.  Corresponding U.S. imports from Kazakhstan were $1.6 
billion, up 28.1 percent.  Kazakhstan is currently the 76th largest 
export market for U.S. goods. 
 
The stock of U.S. foreign direct investment (FDI) in Kazakhstan was 
$4.9 billion in 2007(latest data available), up from $4.6 billion in 
¶2006. 
 
Kazakhstan has been negotiating membership in the WTO since January 
29, 1996.  As part of the process, Kazakhstan is still negotiating 
bilateral market access agreements with a number of WTO Members, 
including the United States, the EU, and Australia.  In 2007, 
Kazakhstan signed market access agreements with Malaysia, Brazil, 
and Israel.  Currently, 21 out of 40 Members of the WTO Working 
Party for Kazakhstan have signed bilateral market access agreements, 
the most recent of which were Canada and Australia.  While progress 
was made in 2008, in implementing WTO-consistent legislation, more 
work remains in a number of areas, including reform of customs 
practices, sanitary and phytosanitary (SPS) regulation, technical 
barriers to trade (TBT), government procurement, and taxation. 
 
The United States-Kazakhstan Bilateral Trade Agreement, which came 
into force in 1993, grants conditional normal trade relations 
treatment.  A bilateral investment treaty came into force in January 
¶1994. 
 
IMPORT POLICIES 
 
Kazakhstan is a member of the Eurasian Economic Community (EAEC), 
along with Russia, Kyrgyzstan, Belarus, Tajikistan, and Uzbekistan. 
Armenia, Moldova, and Ukraine currently have observer status.  Five 
of the EAEC members (all but Uzbekistan) have formed a free trade 
area.  In 2006, Kazakhstan, Russia, and Belarus announced the 
formation of a trilateral customs union.  Significant progress was 
made in 2008 on formulating the underlying legal basis for the 
customs union.  The progress included the Russian Duma's 
ratification of a free trade agreement, and agreements on the 
establishment of both regulatory and dispute resolution agencies in 
October 2008.  Russia, Belarus, and Kazakhstan intensified 
consultations and negotiations in early 2009, and officially signed 
legal agreements for its creation on November 27 in Minsk. 
According to the agreements, a common external trade tariff will be 
enacted as of January 1, 2010.  Kazakhstan's entrance into the 
Customs Union will increase its import tariffs, which already 
increased from 6.6 percent in 2008 to almost 13 percent in 2009 
according to the Custom Committee of the Republic of Kazakhstan. 
 
According to current Customs Union agreements, Kazakhstan will 
retain some flexibility in determining the common external import 
tariff regime.  For example, according to officials from the 
Ministry of Industry and Trade, Kazakhstan will have no tariff on 
over 900 specific commodity items, including modern aircraft, 
certain types of engines, and raw materials needed in the food 
processing industry, such as tropical fruits.  Over 400 specific 
commodity items will be subject to a transitional period varying 
from one-and-half to five years.  These items include 
pharmaceuticals, medical equipment, processed aluminum products, raw 
materials for the petrochemical industry, paper products, rail 
wagons, combines, and tractors.   In some specific cases, Customs 
Union member states also can apply protective import tariffs on 
 
ASTANA 00002131  002.3 OF 007 
 
 
selected goods without the consent of the other members, but only 
for six months per year and for a maximum of five years.  The member 
states have agreed to grandfather all previously existing protective 
and anti-dumping measures at the time of accession into the Customs 
Union.  The Customs Union implementation timeline anticipates 
implementation of the new common Customs Code and abolishment of the 
Russian-Belarus customs border on July 1, 2010.  The 
Kazakhstani-Russian customs border is scheduled for abolishment on 
July 1, 2011. 
 
The Law on Investments, enacted in January 2003, provides customs 
duty exemptions for imported equipment and spare parts, but only if 
Kazakhstani-produced stocks are unavailable or not up to 
international standards.  Despite the creation of the Customs Union, 
Kazakhstan is expected to continue to offer preferential treatment 
to investors outside of the extractive sector in an effort to 
promote economic diversification. 
 
U.S. exporters to Kazakhstan have consistently identified the 
requirement to obtain a "transaction passport" (providing 
information on, inter alia, the importer, contract details, local 
bank of importer/exporter, and a foreign partner) to clear goods 
through customs as a significant barrier to trade.  The transaction 
passports are designed to stem capital outflows and money laundering 
by requiring importers to show documents that verify the pricing of 
import/export transactions.  In July 2006, the National Bank of 
Kazakhstan (NBK) enacted new regulations that simplified -- but 
retained -- the transaction passport requirement.  Principal changes 
included elimination of the trade distorting maximum financing term 
of 180 days for imported goods and transfer of the authority to 
issue transaction passports from customs to the NBK and commercial 
banks.  According to Kazakhstani regulations, the transaction 
passports contain concise information on trade partners and include 
a unique transaction code; specific payment information such as 
currency, means, and deadlines for payment; and complete contact 
information for contracting parties.  Kazakhstan amended the Law on 
Currency Control in August 2009, thereby changing the ceiling on 
transactions from $10,000 to $50,000.  Despite some internal 
Kazakhstani opposition to the transaction-passport system, the 
National Bank of Kazakhstan insists on its necessity to control 
capital movement and prevent capital flight. 
 
In 2009, Kazakhstan established and later lifted, thanks largely to 
effective communication between the U.S. Department of Agriculture's 
(USDA) Animal and Plant Health Inspection Service (APHIS) and the 
Kazakhstani Ministry of Agriculture, several trade bans.  For 
example, the appearance of H1N1 led to a ban on the import of all 
pork and pork products from Texas, California, and Kansas on June 5, 
2009, which was lifted on October 19, 2009.  Similarly, to address 
the perceived threat of Hemorrhagic disease, Kazakhstan banned all 
rabbits and rabbit products on December 10, 2008, which it lifted on 
October 19, 2009.  During the same period, as a result of the 
perceived threat of Bovine Sponge Encephalitis (BSE), a ban on beef 
and beef products was established in December 2008 and removed in 
October 2009. 
 
Although Kazakhstani officials are diligently addressing the 
problematic structure of Kazakhstan's customs control agencies, 
customs administration and procedural implementation remain a 
principal barrier to trade.  Kazakhstan's planned entrance into the 
Customs Union has not negatively impacted its own attempts to 
streamline the customs process.  Since August 2008, the Kazakhstani 
Customs Control Committee has been participating in a Parliamentary 
working group, convened at the direct request of the Prime Minister, 
to develop a new overhauled Customs Code, bring Kazakhstan's 
legislation into compliance with WTO standards, and remove several 
identified barriers to trade.  Amendments currently being considered 
by President Nazarbayev are designed specifically to meet standards 
required for WTO accession and include declaration rights for 
 
ASTANA 00002131  003.3 OF 007 
 
 
foreign citizens (bypassing the current legal requirement for the 
participation of domestic brokers), ex officio rights for customs 
agents, and standardized guidelines for the valuation of goods. 
Kazakhstani customs authorities expect approval of these amendments 
by the end of December with their entry into force the beginning of 
¶2010. 
 
STANDARDS, TESTING, LABELING, AND CERTIFICATION 
 
In 2007, Kazakhstan adopted a number of laws in furtherance of its 
efforts to develop a national system of standardization and 
certification, such as laws on Safety of Chemical Products, Safety 
of Food Products, Safety of Toys, and Safety of Equipment and 
Machinery, as well as a series of amendments to the Law on Technical 
Regulation. 
 
In 2008, this package of laws was augmented by the Law on 
Accreditation, which regulates the accreditation of entities that 
conduct conformity assessment. 
 
The Kazakhstani Law on Technical Regulation distinguishes the 
state's responsibilities from those of the private sector.  The 
government is responsible for establishment of product safety 
standards, but delegates quality control responsibilities to 
authorized private institutions.  A wide range of goods are subject 
to mandatory certification requirements, which apply to both 
domestically-produced and imported goods.  A related regulation 
lists the specific categories of products subject to certification, 
including machines, cars, agricultural and telecommunication 
equipment, construction materials, fuel, clothes, toys, food, and 
drugs. 
 
The Law on Technical Regulation requires that contracts for the 
delivery of imported goods include a special clause which confirms 
the goods comply with Kazakhstani standards.  Delivery contracts 
must also be accompanied by documents that describe the products and 
list the country of origin, the producer, the expiration date, any 
storage requirements, and instructions for the use of the product in 
both the Kazakh and Russian languages.  In addition, the law states 
that foreign certificates, testing protocols, and compliance 
indicators must be in accordance with international treaties. 
Kazakhstani authorities normally recognize foreign certificates, but 
the verification process can take 10-25 days depending on the 
industry. 
 
The National Accreditation Center of Kazakhstan intends to become a 
full member of the International Laboratory Accreditation 
Cooperation in 2010 and the International Accreditation Forum in 
¶2012.  It is currently developing legislation to accomplish this 
goal.  This step would automatically make the Kazakhstani National 
Accreditation Center a signatory to a number of international 
treaties on metrology and standards. 
 
President Nazarbayev's National Program for Accelerated Industrial 
and Innovative Development announced in May 2009 and the 
Russia-Belarus-Kazakhstan (RBK) Customs Union might affect technical 
regulatory policies in Kazakhstan, by incorporating new industrial 
standards based on international best practices and a harmonized 
system of technical regulation designed largely to comply with WTO 
standards. 
 
GOVERNMENT PROCUREMENT 
 
Some potential U.S. suppliers have raised concerns about the 
transparency and efficiency of Kazakhstan's government tender 
process.  Corruption and lack of transparency remain major 
challenges for both local and foreign companies. 
 
In July 2007, Kazakhstan enacted the Law on Government Procurement, 
 
ASTANA 00002131  004.3 OF 007 
 
 
which was designed to increase the transparency of the procurement 
process and provide relevant state agencies with greater operational 
flexibility.  Concurrent amendments to the Administrative Code 
stipulated administrative penalties for violations of the Law on 
Government Procurement.  In November 2008, Parliament approved 
amendments to this Law on Government Procurement, which became 
effective in December 2008.  The amendments are primarily designed 
to further reduce corruption and introduce an e-procurement system. 
As mandated by President Nazarbayev, the changes to the Law on 
Government Procurement should also enhance the participation of 
domestic suppliers in government procurement, and whenever possible, 
give preference to them. 
 
During the first half of 2009, Kazakhstan adopted regulations and 
amendments to several laws designed to increase the proportion of 
local content in government procurement procedures. The exact 
proportion of the required purchase of local goods and services is 
calculated according to a specific formula, which was approved by 
Kazakhstan's Foreign Investor Council.  It will be applied to 
domestic and foreign operators in Kazakhstan, including government 
agencies, state-owned enterprises, national holding companies such 
as Samruk-Kazyna, and subsoil users.  According to new tender 
requirements, proposals that include significant proportions of 
locally-produced goods and services will receive preferential 
treatment.  Conversely, tender commissions without them will be 
charged administrative fees and may face administrative prosecution. 
 The Kazakhstani government is elaborating its official concept for 
the development of Kazakhstani content.  A mandate of substantial 
increases by 2014 in the local-content share of Kazakhstani-produced 
goods (up to 50 percent) and Kazakhstani-produced services (up to 90 
percent) is expected. 
 
Kazakhstan's largest national companies, governed under the umbrella 
of the Samruk-Kazyna national holding company, including Kazakhstan 
TemirZholy (national railway), KazMunayGas (national oil and gas 
company), KEGOC (electricity transmission company), and other 
companies with their subsidiaries are subject to the local-content 
requirements, but are thus far exempted from the Law on Government 
Procurement. 
 
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
The Kazakhstan government's effort to diversify the economy away 
from the energy sector and spur the growth of a domestic high 
technology industry, combined with the WTO accession process, has 
led to a strong emphasis on IPR protection.  Kazakhstan is currently 
considering a number of changes to its IPR legislation that will 
strengthen IPR protection and provide tools for improved IPR 
enforcement. 
 
In 2009, Kazakhstan adopted several amendments to IPR legislation, 
including the legal recognition of vendors who possess associated 
rights for the distribution of print and digital media.  This 
amendment allows licensed vendors to seek damages from unauthorized 
dealers selling pirated merchandise that is otherwise properly 
licensed internationally for resale.  Kazakhstan also amended its 
patent law to re-define a patent holder, including detailed 
descriptions of the relationship between an employer and an employee 
with respect to an employee's invention. 
 
Although domestically-produced pirated films and music are available 
in Almaty and Astana.  Thanks largely to decreasing costs of making 
copies, the vast majority of pirated goods in these regions appear 
to be imported, predominantly from Russia and China.  Armed with 
statutes enacted in November 2005 that authorize stiffer penalties 
for infringers, the authorities have conducted numerous raids 
against distributors of pirated products.  The government's efforts 
have greatly helped to expand the Kazakhstani market for licensed, 
non-infringing products.  Still, much remains to be done, 
 
ASTANA 00002131  005.3 OF 007 
 
 
particularly in ensuring that Customs controls are applied more 
effectively against imported infringing goods.  Legislation to 
strengthen intellectual property protection and enforcement is under 
Presidential review, including a proposal to grant customs 
officials' badly-needed ex officio power to seize infringing goods 
at the border.  Amendments to trademark legislation are being 
developed. 
 
Further progress is also needed in the realm of civil enforcement, 
which is serving as an increasingly prevalent method of IPR 
enforcement.  Although civil courts have been used effectively to 
stem IPR infringement, judges often lack expertise in the area of 
IPR, which is a significant obstacle to further improvement in 
Kazakhstan's IPR climate. 
 
SERVICES BARRIERS 
 
Foreign ownership of individual mass media companies, including news 
agencies, is limited to 20 percent in accordance with Kazakhstan's 
law "On National Security," Article 22, Paragraph 5, Number 4. 
Foreign banks and insurance companies are limited to operating in 
Kazakhstan through joint ventures with Kazakhstani companies.  For 
certain professional services, including auditing, architectural, 
urban planning, engineering, integrated engineering, and veterinary 
services, commercial presence is allowed only in the form of a 
juridical person.  For telecommunication services, foreign ownership 
may not exceed 49 percent, also in accordance with Kazakhstan's 
above-referenced law "On National Security. " 
 
INVESTMENT BARRIERS 
 
Kazakhstan's 2003 Law on Investments provides the legal basis for 
foreign investment in Kazakhstan.  In general, U.S. investors have 
concerns about the law's narrow definition of investment disputes, 
its lack of clear provisions for access to international 
arbitration, and certain aspects of investment contract stability 
guarantees. 
 
The vast majority of foreign investment in Kazakhstan is directed to 
the oil and gas sector.  The Government remains eager to do business 
with international companies, but increasingly has emphasized the 
importance of "local content" in purchases of goods and services for 
petroleum operations.  For example, a new draft Law on Subsoil and 
Subsoil Use, expected to be adopted in early 2010, contains explicit 
requirements regarding the local purchase of goods and services and 
the hiring of Kazakhstani nationals for all investments in offshore 
oil and gas exploration and production.  This law could cause 
difficulties for international investors, because the methodology to 
calculate local content is not well defined, and Kazakhstani goods 
and services do not always fully comply with international 
standards.  If enforced to the letter, the law could adversely 
affect the cost and schedule of contracts.  The draft subsoil law 
also requires that KazMunayGas, the national oil company, have a 
minimum 51 percent share in all new exploration and production 
contracts, and it establishes a procedure through which the national 
oil company may obtain field rights outside of a tender process. 
Taken together, these clauses appear to establish KazMunayGas as a 
necessary partner for international oil companies investing in 
Kazakhstan. 
 
The proposed legislation would also require separate contracts for 
exploration and production operations, put shorter time limits on 
exploration contracts, enhance the government's authority to 
terminate contracts not in compliance with the law, and require tax 
stability clauses in individual contracts to be approved by 
parliament.  In addition, under the terms of the legislation, no 
future contracts would be structured as production sharing 
agreements (PSAs), which allow companies to recoup capital 
expenditures before making royalty payments to the government. 
 
ASTANA 00002131  006.3 OF 007 
 
 
 
Although exploration and production contracts would be separated, a 
company awarded exploration rights would nevertheless be given 
priority rights to negotiate a production contract with the 
government following an oil or gas discovery.  However, if the terms 
of the production contract were not agreed to within a set time 
period, production rights would be opened to other bidders through a 
public tender. 
 
The draft law also includes a preemption clause that guarantees the 
State the right of first refusal when a party seeks to sell any part 
of its stake in a mineral resource extraction project.  The State 
claims this preeminent right even in cases where the controlling 
agreement assigns preemptive rights elsewhere (e.g., to other 
investors in a consortium).  The proposed draft also fully 
incorporates an October 2007 amendment to the current subsoil law 
which allows the government to force amendments to existing subsoil 
contracts of "strategic significance" -- or even terminate such 
contracts -- where the economic interests of Kazakhstan are so 
threatened as to create a "national security risk."    On August 1, 
2009, the government passed Decree No.1213 on "Approving the List of 
Subsoil Fields having Strategic Significance."  The list includes 
over 100 oil and gas fields, including Tengiz, Kashagan, and 
Karachaganak.  This Decree fuels concerns over the stability of 
contracts.  It authorizes the government to amend or change 
contracts if it determines that the actions of a subsoil user could 
lead to a substantial change in Kazakhstan's economic interests or 
threaten Kazakhstan's national security.  The Decree provides no 
further guidance on how the government will define a change in 
economic interests or a threat to national security. 
 
Kazakhstan's law allows citizens of Kazakhstan and foreigners to own 
land under commercial and noncommercial buildings, including 
dwellings and associated land.  Such land may also be leased for up 
to 49 years.  The land code, enacted in June 2003, for the first 
time allows private ownership by Kazakhstan's citizens of 
agricultural land, in addition to industrial, commercial, and 
residential land.  An amendment enacted in July 2007 extends the 
right to own agricultural land to Kazakhstani owned businesses as 
well.  Foreigners may still only lease agricultural land for up to 
10 years. 
 
Foreign investors continue to have difficulty obtaining work permits 
for employees who are not Kazakhstani nationals.  Many companies 
report that permits for key managers and technicians are routinely 
rejected or granted for unreasonably short periods or are 
conditioned upon demands for additional local hires.  Companies also 
report that hiring regulations are confusing and interpreted 
inconsistently by local officials and the Ministry of Labor and 
Social Protection. 
 
In December 2007, Kazakhstan adopted new regulations on foreign 
labor.  While the Ministry of Labor and Social Protection claims the 
new regulations simplify the issuance of work permits to foreigners, 
they impose additional requirements to support the domestic labor 
market that many investors find onerous. 
 
In light of these difficulties for investors, the government has 
been increasing slightly the number of work permits available.  In 
2006, the number of permits was limited to 0.55 percent of the 
economically active population (estimated at about 8 million 
people).  The percentage figure was increased to 0.8 percent in 2007 
(approximately 640,000 permits).  For 2008, it was increased to 1.6 
percent; and for managers and professionals it increased from 0.3 to 
0.6 percent.  For skilled workers, the quota rose from 0.37 percent 
to 0.93 percent. 
 
OTHER BARRIERS 
 
 
ASTANA 00002131  007.3 OF 007 
 
 
There are other structural barriers to investment in Kazakhstan, 
including a weak system of business law, a lack of an effective 
judicial system for breach of contract resolution, and an unwieldy 
government bureaucracy.  Many companies serving the Kazakhstani 
market report significant logistical difficulties. 
 
In addition, there is a burdensome tax monitoring system for all 
companies operating in Kazakhstan. Many companies report the need to 
maintain excessively large staffs in Kazakhstan to deal with the 
cumbersome tax system and frequent inspections.  The actions of tax 
and various regulatory authorities, as well as actions to enforce 
environmental regulations, can be unpredictable.  The government 
has, on occasion, initiated criminal cases against local employees 
of foreign firms.  Kazakhstani authorities often require, as part of 
a foreign firm's contract with the government, that the firm 
contribute to social programs for local communities. 
 
Widespread corruption at all levels of government is also seen as a 
barrier to trade and investment in Kazakhstan.  It reportedly 
affects nearly all aspects of doing business in Kazakhstan, 
including customs clearance, registration, employment of locals and 
foreigners, payment of taxes, and the judicial system. 
 
SPRATLEN