FDI Policies

Kazakhstan is in the process of establishing a legal environment that is conducive to investment. Some of the key legislation affecting investment relates to foreign investments (Foreign Investment Law of 1994), taxes (Tax Code of 1995), customs procedures (Customs Code of 1995), insurance (Decree of President having the Force of Law On Insurance of 1995), competition policy (Law on Development of Competition and Restriction of Monopolistic Activity of 1991), land rights (President Decree having the Force of Law “On Land” of 1995), other currency and banking laws and regulations, and intellectual property legislation.

The Foreign Investment Law provides for guarantees for national treatment and non-discrimination among foreign investors. Since Kazakhstan has a policy of free and open admission to foreign investments, it does not subject foreign investment to any prior authorization requirements. The law does not provide any investment incentives in the form of tax holidays or others either in general or with regard to a specific sector. The Government plans to continue improving the legal and regulatory environment for foreign investment and to improve the conditions for stimulating the operations of credit, financial, investment, and insurance institutions servicing the small and medium-size

The Machinery Industry in Kazakhstan: Economic Conditions and Policies

Box 5.1

Kazakhstan’s Credit Rating

In November 1996, the international rating agencies Standard & Poor, Moodys and IBCA issued credit ratings for the Republic of Kazakhstan. All three agencies assigned a BB Minus rating for long -term foreign currency and a B rating for short--term foreign currency. For tenge-denominated debt, Standard & Poor assigned a BB Plus long-term and B short-term local currency ratings.

Overall, the ratings are believed to be favorable, since they are in line with those given for Russia, Argentina and Romania; they are above countries such as Turkey and Pakistan. More importantly, the fact that a rating has taken place represents an important step in Kazakhstan’s continued economic development and can be considered a catalyst for greater investment into the country’s capital markets.

According to press releases from the international rating agencies that were issued in November 1996, and which were reported by the Kazakhstan Post-Privatization Fund (1997), the following factors affected the ratings:

Positive Factors Affecting the Ratings:

 A tight fiscal policy.

 A large reduction in inflation.

 Stabilization of outputs.

 A generally low government debt burden.

 An external debt service that is below most other countries with BB category foreign currency ratings.

 An improving external liquidity position.

 A low current account deficit.

 Potentially large production of oil and gas and minerals.

 Agreement on a planned pipeline to the Black Sea to increase oil exports.

 Strong government control over the domestic financial system.

Negative Factors Affecting the Ratings:

 A relatively young political system.

 The government’s lack of experience in economic management.

 A continued weakness in the government’s revenue performance.

 The risk of slippage in enterprise and banking reforms.

 The need for greater private sector savings and more activity on the financial markets.

 The need to secure trade and transit arrangements with neighboring countries as a result of Kazakhstan’s landlocked position.

Source: Kazakhstan Post-Privatization Fund (1997).

Box 5.2

Laws and Regulations on Foreign Investments

 Law on Investment Activity in Kazakhstan (10 June 1991)

 Law on Membership of the Republic of Kazakhstan in the International Monetary Fund, International Bank for Reconstruction and Development, International Finance Corporation, International Development Association, Multilateral Agency of Investments Guarantee and International Center on Investment Disputes Settling (26 June 1992)

 Law on a Returnable System of Financing for Investments (12 April 1993)

 Law on Foreign Investments (27 December 1994)

 Decree 2035 of the President on Measures for Increasing the Efficiency of State Administration and Regulation of Processes for the Attraction of Foreign Capital to the Republic of Kazakhstan’s Economy (19 January 1995)

 Government Resolution 139 on Measures for Attracting Foreign Credits to the Republic of Kazakhstan (8 February 1995)

 Law on State Support for Direct Investment (February 1997) Source: Ministry of Energy, Industry and Trade.

In February 1997 the Law on State Support for Direct Investment was enacted to stimulate domestic and foreign investment in the following priority sectors of the economy:

 Infrastructure (including electrical infrastructure and telecommunications);

 Light manufacturing;

 High-yield varieties of crops and livestock, fertilizers and pesticides;

 Social sector investments (including investments in the health, education, sports, and tourism); and

 Investments associated with the transfer of the capital to Akmola.

As inducements to stimulate additional investments in these sectors, various forms of tax and customs exemptions, together with contributions of real property by the Government, may be individually negotiated with the State Committee on Investments.

Performance requirements generally refer to the investor’s requirement to pay back wages, remodel factories and plants, and provide an agreed level of output. Rules on local content, hiring of nationals, and local source of financing vary from contract to contract.

While investors are usually not required to purchase from local sources, such terms can be written into contracts (for example, the Petroleum Law requires that petroleum contractors give preferences to the purchase of local equipment, goods and services).

There is no requirement in Kazakhstan that nationals own shares in foreign investments.

In the banking sector, foreign investors have participated only through joint ventures with local entities, but this is no longer necessary. Likewise, there is no general requirement that the level of foreign equity be reduced over time. Technology transfers frequently occur and sometimes are written into contracts, but do not appear to be a necessary aspect of foreign investment.

The Machinery Industry in Kazakhstan: Economic Conditions and Policies

Land ownership is provided by Kazakhstan's constitution. Land and other natural resources can be owned or leased by physical persons according to conditions established by law. These conditions are: (i) permanent ownership is restricted to state enterprises;

(ii) life inheritable tenure is granted for family farms, household plots, gardens, and dachas; and (iii) other land and natural resources may be leased up to 99 years.

Agricultural land is not permitted to be privately owned. Foreign citizens and foreign legal entities are only able to lease land for up to 99 years.

Protection of property rights is recognized under the Civil Code and the 1995 Land Law.

Adequate enforcement of these interests, however, is seriously compromised by the absence of central registries for non-fixed and land cadastres for fixed property. The use of mortgages on real property has just begun, with a Law on Mortgages adopted in 1996.

There is a traditional system of recording interests in land, buildings and mortgages.

However, legal and banking expertise in this area is quite limited and enforcement procedures are uncertain.

Patent and trademarks laws guarantee the right of inventors to the ‘name’ of their product, but financial rights of patent holders do not appear to be protected. In addition, Kazakhstan lacks patent protection for certain types of products and processes, such as layout designs and plant varieties, and according to USAID (1996), existing protection provided for trade secrets is rudimentary. Registration of trademarks also began in July 1992. Trademark violation is a crime, but enforcement appears to be rare and arbitrary.

There are marked disparities in fees charged to domestic patent and trademark applicants, as compared with foreign applicants. The ‘Law on Copyrights and Related Rights’ was approved in June 1996. USAID (1996) believes that the absence of special border measures in the Customs Code, together with outdated provisions in the current Criminal, Procedural, and Administrative Codes, diminishes the effectiveness of applying appropriate sanctions to violators.