Kazakhstan - Foreign investment



Even before its formal independence, the government adopted the Foreign Investment Law of 1991 that allowed investment by foreign companies in any economic activity except the manufacture of military goods. The law contained provisions for duty-free imports as well as tax breaks for firms with foreign investment, especially those involved in producing consumer goods, agricultural goods, and electronic and medical equipment. Further, the law also laid out provisions for the operation of Special Economic Zones (SEZs) where imports of intermediate products and exports of finished goods would be allowed without customs duties.

The regime was subsequently revised in a new Foreign Investment Law in 1994 (amended in 1997) to provide stronger guarantees against changes in Kazakhstan's legislation, greater clarity on investment requirements and on the credit facilities available to foreign investors, some additional customs exemptions, and a guarantee of the right to recourse to international arbitration to settle disputes.

From August to November 1996, the government pursued a vigorous privatization program. In 1997, a new law enabled investors to qualify for up to 100% tax relief for five years, and for up to 50% tax relief for the second five years. Priority areas were infrastructure, manufactures, housing, construction in Astana (designated the new capital as of December 1997), and agriculture. Following the recession in 1998, in 1999 the government began to change its stance on foreign investment from favorable treatment to national treatment. In January 2001, the government passed laws to control the transfer of capital out of the country. Foreign investors expressed concern over the increased authority given customs officials to regulate export and import transactions.

In 2001 the government moved to enact a new investment law to replace the 1994 and 1997 regulations. Because of strong opposition from foreign investors, the president did not sign the new law until January 2003. The new code, unlike the previous law, offers fewer protections to foreign investors and limits exemptions from customs fees to one year, with extensions limited to no more than five years. Particularly contentious was the removal of the right to international arbitration to settle disputes. (When the law took effect, there were at least two major disputes pending involving ChevronTexaco, Kazakhstan's largest single investor and the largest single tax payer. In November 2002, as a direct protest against the government's intention to change the investment regime, the foreign companies involved in the Tengchevoil (TCO) consortium (including ChevronTexaco with a 50% share and ExxonMobil with a 25% share) put on hold the second stage of $3 billion expansion plan for the Tengiv oil field.

In 1996, foreign direct investment (FDI) was estimated at $1.22 billion, and at $1.3 billion in 1997. FDI flows fell slightly to $1.2 billion in 1998, or from 9.4% of GDP to 5.7% of GDP. In 1999, FDI flow rose to almost $1.8 billion, and then soared to $2.75 billion in 2000, or from 11.4% of GDP to 15% of GDP. From 1993 to 2001, total gross inflow of FDI amounted to about $17 billion. Over a third (34% or $5.2 billion) of the FDI flow has come from the United States, with United Kingdom (including the British Virgin Islands) the second-largest source at $2.3 billion or more than 15%. Other major sources of FDI are South Korea, China, Italy, Turkey, Japan, and Germany.

Since 1995, FDI in the development of the country's immense oil and gas deposits has averaged more the $1 billion, and was close to $2 billion in 2001. As of October 2001, there were 3,606 joint ventures and 2,030 foreign companies operating in Kazakhstan according its Ministry of Economy and Trade. Important non-oil sector projects include the expansion of gold production in partnership with foreign concerns promoted as a means of quickly boosting the inflow of foreign exchange. In 1993, the Philip Morris Co. signed an agreement with the Almaty Tobacco Company to invest $350 million; since 1994, Philip Morris has been producing cigarettes for the domestic market. RJR Nabisco has also invested more than $100 million in a joint venture.

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