08ASTANA146, 2007 INVESTMENT CLIMATE STATEMENT – KAZAKHSTAN

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Reference ID Created Released Classification Origin
08ASTANA146 2008-01-29 09:12 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO3692
RR RUEHAST
DE RUEHTA #0146/01 0290912
ZNR UUUUU ZZH
R 290912Z JAN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1581
RUEHAST/USOFFICE ALMATY 0166

UNCLAS SECTION 01 OF 16 ASTANA 000146 
 
SIPDIS 
 
SCA/CEN - O'MARA 
EB/IFD/OIA 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ETRD EFIN ECON EINV PREL OPIC KTDB USTR
SUBJECT: 2007 INVESTMENT CLIMATE STATEMENT - KAZAKHSTAN 
 
REF:   A. 07 State 158802 
 
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 2007, foreign investors had invested a 
total of about $58.3 billion in Kazakhstan, primarily in the oil and 
gas sector, during the country's fifteen 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. 
Despite continuously increasing investment into Kazakhstan's energy 
sector, concerns remain about a 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 an enduring perception that 
Kazakhstan is becoming less open to investment. 
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. However, inconsistent implementation of 
these laws and reforms at all levels of government remains the key 
obstacle to business in Kazakhstan. 
Since 1997, there has been a growing trend to favor domestic 
investors over foreigners in most state contracts. Furthermore, 
amendments passed in 1999 to the Oil and Gas Law require mining and 
oil companies to use local goods and services. According to these 
"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. Since 
2002, a designated government body must approve all tender 
documents, participate in tender committees, and approve all tender 
committee decisions, in order to ensure compliance. The 2005 
"Production Sharing Agreements (PSA)" law, which applies primarily 
to Kazakhstan's offshore oil development projects, binds companies 
to similar local context provisions. 
In December 2006, amendments to the Subsurface Law further tightened 
the government's application of local content requirements, 
requiring companies to meet local content benchmarks annually, 
rather than on average over the lifetime of a project. More 
recently, an amendment signed in October 2007 allows the government 
to annul contracts in the extractive sector if they are deemed to be 
harmful to Kazakhstan's economic security or national interests. 
President Nazarbayev, however, said publicly that the amendment 
would not be used retroactively, but rather only with respect to new 
contracts. (Note: The amendment was not invoked during recent 
negotiations to restructure the Kashagan field consortium.) 
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..." 
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, and provides, 
inter alia, guarantees of national treatment and non-discrimination 
for 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 2003 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 fo
r access to international arbitration. U.S. 
investors should note that the U.S.-Kazakhstan Bilateral Investment 
Treaty, as well as the New York Convention, protects U.S. investor 
access to international arbitration. Additionally, the RK 
 
ASTANA 00000146  002 OF 016 
 
 
Constitution, as well as the 2003 law "On Investments," specifies 
that ratified international agreements have precedence over domestic 
law. The May 2005 Law on International Agreements appeared to 
contradict this legal hierarchy, setting precedence of domestic law 
of the RK over its international agreements  However, Kazakhstan 
amended this law in February 2007, eliminating this contradiction.. 
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. 
Amendments since made to the 2003 law, which came into force in May 
2005, eliminate five-year corporate income tax exemptions and 
replace them with a modified set of ten-year exemptions. Customs 
duties exemptions are limited to equipment that is destined for use 
in production processes exclusively in Kazakhstan. 
In 2001, Kazakhstan adopted 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. 
Kazakhstani law holds that no sectors of the economy are fully 
closed to investors, although there are sectoral limitations, 
specifically a 20% ceiling on foreign ownership of media outlets and 
49% restriction on foreign ownership in the telecommunications 
sector.  However, a December 2005 law lifted the restrictions on the 
participation of foreign capital in the banking sector. A ban on 
foreign bank and insurance company branches remains in force. 
Finally, the 2005 Production Sharing Agreement law mandates that the 
state oil company be a minimum 50% participant in new offshore 
projects. In practice, investors may find that a joint venture with 
a well-connected local partner is advantageous in navigating the 
legal and political complexities of operating in Kazakhstan 
Insurance supervision and licensing powers are exercised by the 
Financial Supervision Agency. February 2006 amendments to the Law on 
Insurance have eliminated participation restrictions for foreign 
legal entities in insurance and re-insurance organizations in 
Kazakhstan. 
Restrictions also exist on foreign ownership of land in Kazakhstan. 
See below (A.6 "Right to Private Ownership and Establishment"). 
The government plays a large role in overseeing foreign investment. 
Government officials, sometimes at the highest levels, screen major 
foreign investment proposals. 
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 Production Sharing Agreements (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 override 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. The same amendments 
allow the government to block the sale of oil and gas assets in the 
interest of "national security." Additional amendments to the 
Subsurface Law signed in December 2006 also assign the government 
the right to exclude companies from participating in oil and gas 
investment program tenders if it is similarly considered in the 
interests of "national security." 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. 
Starting January 1, 2007, the value-added tax (VAT) will be set at 
14%, and the personal income tax rate increasing to 20%. 
Furthermore, employees' earnings are subject to a regressive "social 
 
ASTANA 00000146  003 OF 016 
 
 
tax," ranging from 7% to 20% for Kazakhstani employees and 5% to 11% 
for "foreign specialists." The corporate tax rate is flat at 30%. In 
addition to all taxes levied on Kazakhstani entities, non-residents 
must pay 15% of net income or 20% of commercial revenues. However, a 
non-resident might have a right to recuperate this money, if a 
relevant bilateral tax treaty exists and covers the respective tax 
provision. The Tax Code contains a description of this procedure. 
Certainly, this requirement creates unnecessary complications and 
impedes business activity. 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 une
ven, and in some cases blatantly unfair. This has been 
particularly true in cases where a company is involved in another, 
unrelated dispute with the authorities. Foreign investors have 
complained of a lack of evenhandedness in the authorities' 
application of other laws or regulations as well. In some cases, the 
investors have interpreted regulatory pressure as an effort to 
extract bribes. 
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. 
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. 
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 
2005, 0.32%.; in 2006 0.55%, and in 2007 0.8%. 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 
float freely at market rates, thus abolishing the previous managed 
exchange rate system. 
No distinction is 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 
 
ASTANA 00000146  004 OF 016 
 
 
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 Number 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. However, the transfer of cash amounts exceeding $3,000 must 
be declared; 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 of property, including 
real estate transactions; and 
--the repayment of loans extended by residents to non-residents for 
a period of more than 180 days. (Obtaining licenses is sometimes 
very 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. There is a real 
question whether the law is effective for its stated purpose - to 
ensure that the proceeds from export sales are returned to 
Kazakhstan, and to prevent money laundering and fraudulent 
over-invoicing of imports. 
In July 2006, Kazakhstan adopted an amendment to its Customs Code, 
requiring submission of  export declaration forms of country of 
origin for bringing goods into Kazakhstan.  This resulted in an 
unintentional virtual shutdown for imports from many countries, 
particularly from the United States.  The July amendment was 
repealed in November, ending the problem. 
The U.S. Embassy is not aware of any concerns with regard to 
remittance policies or availability of foreign exchange for 
remittance of profits. 
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 became available to &#x000A
;its owners at the end of the amnesty period. Kazakhstanis 
repatriated $480 million under this amnesty, of which almost 90% was 
brought to banks in the form of cash.   Another amnesty, which 
concluded on August 1, 2007, resulted in legalization of nearly $7 
billion in property. 
Based on rules adopted in late 2005 relating to the control of 
currency turnover and capital flows, the National Bank regularly 
monitors currency operations of selected non-residents. This 
procedure primarily affects the following sectors: the oil and gas 
industry, construction, mining, as well as companies providing 
architectural, engineering and industrial design services. According 
to the National Bank, this monitoring will furnish the National Bank 
with better statistical data on the balance of payments and external 
debt. 
 
Expropriation and Compensation 
------------------------------ 
The Investment Law of 2003 represents a step back from the clarity 
of the 1994 law with regard to expropriation and compensation. 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 May 2006, after 
lengthy delays and negotiations, the government paid the amount 
 
ASTANA 00000146  005 OF 016 
 
 
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. 
 
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.   A recurring theme remains the unpredictability of 
actions taken by tax authorities and other regulating agencies. 
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. 
Problems also arise in enforcing judgments. Given a relative lack of 
judicial independence, there is ample opportunity for interference 
in judicial cases. 
General commercial law principles are established in Kazakhstan's 
Civil Code. 
The 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. An early test 
case yielded decidedly mixed 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 Supreme Court of Kazakhstan in the U.S. company's favor. In 
January 2006, however, the Astana City Court relied on an 
international convention loophole to decline the LCIA's award of 
legal costs to the U.S. firm on the grounds that doing so would be 
detrimental to "public order" in Kazakhstan. In May 2006, that 
decision was overturned, and the legal costs were awarded. 
Kazakhstan has been a member of the International Center for the 
Settlement of Investment Disputes (ICSID) since December 2001. 
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, the 
London Court of International Arbitration, 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. 
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. The Committee on Work with 
Insolvent Debtors, operating under the umbrella of the Ministry of 
Finance, is Kazakhstan's official bankruptcy agency. 
The Law "On Bankruptcy" approved in 1997 was amended in May
 2007. 
 
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It contains a detailed list of creditors' rights and prescribes a 
mechanism for their enforcement. Monetary judgments are normally 
made in domestic currency. 
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 and Incentives 
--------------------------------------- 
The Investment Committee under the Ministry of Industry and Trade 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. 
With the exception of investments in oil production or mining, rules 
on local content and local sources of financing vary from contract 
to contract.  Typically, an investor's obligations might include an 
obligation to train local specialists and contribute to the social 
development of the respective regions. 
Technology transfers frequently occur and sometimes are written into 
contracts, but are not explicitly required for foreign investment. 
The Investment Law of 2003 provides tax preferences, customs duties 
exemptions, and in-kind grants as incentives for investment in 
government-determined priority sectors. To obtain the preferences, 
the investor enters into a contract with the Investment Committee. 
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. The early 2006 
amendments to the Investment Law eased compliance and audit 
requirements for firms wishing to qualify for the preferences. The 
law provides the same preferences for domestic and foreign 
investors.  Preferences are, however, determined on a case-by-case 
basis.  The Ministry of Industry and Trade reported that in 2007 it 
signed 76 contracts for a total of about $1.65 billion, in which 
such preferences were extended.  Roughly a quarter of these 
investments had foreign involvement. 
The preferences system echoes the government's policy of 
diversifying the economy away from the extractive sector and largely 
focuses on selected clusters. The overall list contains 245 types of 
activities grouped into 36 categories. The system applies to new 
enterprises as well as to existing enterprises making new 
investments; the duration of the tax preferences increases with the 
size of such investments. 
In 2006-2007, the government created fourlarge state-owned holding 
companies; Samruk, Kazyna,, KazAgro, and Samgau.  The Samruk State 
Holding Company, modeled on Singapore's Temasek, manages the state's 
shares in a growing number of large enterprises. The Kazyna 
Sustainable Development Fund oversees the government's development 
institutions aiming to stimulate the country's non-extractive sector 
and diversify the economy.  KazAgro manages the state's agricultural 
holdings.  Samgau, the newest holding, is charged with stimulating 
the development of domestic know-how in the high-tech sector. 
In 2007, the government also announced formation of Social 
Entrepreneurial Corporations (SECs).  Charged with managing regional 
government's holdings, SECs are meant to serve as a link between 
business and regional governments. 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 a national basis. The Kazakhstani government has recently taken a 
strong interest in dedicating state resources to the support of 
research and development. How such projects will be administered in 
practice remains to be seen. 
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. Kazakhstan has made significant progress in implementing a 
legal framework necessary for accession and signed bilateral 
protocols on market access for goods and services with several of 
its major trading partners.   The Kazakhstani government is hoping 
to complete WTO accession negotiations by the end of 2008. 
Kazakhstan is also a member of the Eurasian Economic Community 
(EEC), along with Russia, Kyrgyzstan, Belarus, Tajikistan, and 
Uzbekistan. Armenia, Moldova and Ukraine currently have observer 
status. In 2006, Kazakhstan, Russia, and Belarus announced the 
formation of a trilateral customs union. There are plans to 
eventually expand it to include other EEC countries. The union aims 
to bring about coordinated customs procedures and a high degree of 
uniformity in its members' external tariffs. The government's 
working assumption appears to be that the country will enter the WTO 
before the customs union will enter into force. 
 
ASTANA 00000146  007 OF 016 
 
 
Kazakhstan permits the importation of goods from EEC partners and 
certain developing or less-developed countries either free of duty, 
or at a reduced rate. 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. 
 
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. However, state-owned enterprises 
do sometimes enjoy better access to markets, credits, and licenses 
than private entities. 
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 and national security 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.; 
-- p
ublic areas (urban or rural settlements); 
-- main railways and public roads; 
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 either a Kazakhstani-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 has 
grown dramatically in the past several years.  A credit bureau 
system does exist, but is in very early stages of development. 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 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.  The 2005 amendments played a significant role in USTR's 
2006 decision to remove Kazakhstan from the Special 301 Watch list. 
While Kazakhstan has demonstrated a commitment to improving its IPR 
regime, substantial weaknesses, particularly in the area of civil 
dispute resolution, still remain. 
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. The 
National Institute of Intellectual Property performs formal 
examination of patent applications. 
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 Institute of Intellectual 
Property and the Committee for Intellectual Property Rights. 
Kazakhstan is a member of the Moscow-based Eurasian Patent Bureau 
and the Munich-based European Patent Bureau. 
Trademark violation is a crime. Enforcement has historically been 
questionable, but U.S. companies are generally confident that their 
trademarks are protected in Kazakhstan. Still, imported counterfeit 
goods can commonly be found at local markets. 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 should 
 
ASTANA 00000146  008 OF 016 
 
 
be filed with the National Patent Office and approved by the 
Committee for Intellectual Property Rights. Trademarks and service 
marks are afforded protection for a period of 10 years from the date 
of filing. 
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 late 2006, the government stated its plans to provide customs 
officials with ex officio authority to seize counterfeit products at 
the border.  However, appropriate legislation has not been passed. 
Complicating the issue is the government's concern that granting ex 
officio powers may exacerbate corruption at customs checkpoints. 
Amendments to the Administrative, Criminal and Civil Procedural 
Codes have been adopted to bolster IPR enforcement capabilities. IPR 
enforcement measures, while still somewhat sporadic, are 
increasingly robust. Prosecutions, under both the Criminal and 
Administrative Codes, have led to a steady legitimization of the 
domestic trade in copyrighted material. Progress in IPR protection 
through civil courts is less pronounced as the judicial system 
develops the expertise necessary to resolve the more complex civil 
disputes. 
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. 
 
Transparency of 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 of 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 Investment 
Committee 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. 
Opportunities for public comment on proposed laws and regulations 
are sporadic and generally limited. 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 Investment 
Law 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, oblast authorities may create additional 
bureaucratic encumbrances, especially in the licensing and issuance 
of permits.. 
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 prob
lems 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.  The law was further amended in 1998, 2005, and January 
2007.  The 2007 amendments simplified procedural requirements for 
issuing licenses, reduced the number of licensed activities from 426 
to 100 and introduced a mechanism to help prevent the extension of 
this list by other legal acts.  However, licensing remains a 
problematic area for business, particularly for small- and medium- 
sized enterprises. 
 
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. In 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. 
 
ASTANA 00000146  009 OF 016 
 
 
The National Bank has demonstrated a willingness to pursue monetary 
tightening in response to inflationary pressures. In 2006, it raised 
the refinancing rate twice as well as toughened reserve requirements 
for second-tier banks. 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 maintain inflation 
in the single-digit range. 
As of the middle of December 2007, the net gold and hard currency 
reserves of the National Bank stood at $18.1 billion; the total gold 
and hard currency reserves of Kazakhstan, including the National 
Bank reserves and reserves accumulated in the National Fund, reached 
$39 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. Since then, private 
deposits have grown thirty nine-fold, from less than $300 million in 
November 1999, to $11.87 billion in November 2007. 
Most domestic borrowers receive credit from Kazakhstani banks. 
However, foreign investors find the margins taken by local banks and 
the collateral 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. The Kazakhstani Stock Exchange is struggling to 
gain momentum and, as such, not yet a realistic source of funds (see 
below). Since 1998, Kazakhstani banks have 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. The National Bank and 
 the Financial Supervision Agency (FSA) supervise the banking system 
and have overseen a steady consolidation and strengthening of it. 
The global liquidity crunch, which hit in late summer 2007, 
presented a substantial challenge to the Kazakhstani banking system, 
which had come to rely heavily on external borrowing over the 
preceding five-year period.  Kazakhstani banks had been directing 
much of the borrowed funds into the country's construction and real 
estate sectors, particularly in the form both of construction 
financing and for mortgages for new housing in Astana and Almaty. 
The sudden global liquidity dry-up abruptly left some leading 
Kazakhstani banks unable to continue their aggressive external 
borrowing, forcing them to curtail their domestic lending activity. 
While policymakers widely saw this development as a healthy 
correction in view of the preceding liquidity glut, the National 
Bank of Kazakhstan and the government introduced measures in late 
2007 to provide liquidity to the banking system and inject capital 
in the cooling construction sector. 
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; so far, there have been no defaults. 
Rates for borrowers have declined on average from approximately 16% 
in September 1999 to approximately 9% in 2006. 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. The market for fixed-income securities 
has grown from $74,000 in September 1999 to over $14.7 billion in 
October 2007. 
In 2007, the yield rate on middle-term government notes was 6.35%. 
Longer-term government notes (with maturities up to 10 years) were 
offered at 7.0%. 
The Kazakhstani Stock Exchange (KSE) has been in operation since 
1997. As of December 2007, there were 69 listed companies with 31 
"A-listed" stock issues; 38 companies with "B-listed" stock issues; 
and 5 non-listed issuers. There are also 62 "A-listed" and 26 
"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. 
As of October 1, 2007, total capitalization of the KSE was $71.95 
billion, or 70.7% of GDP Though there has been a slight decline of 
capitalization over the second half of 2007, a continued annual 
growth in both the absolute value of total capitalization and 
capitalization relative to GDP has occurred for the last three 
years. 
Trading on the KSE is overwhelmingly dominated by block trades, 
liquidity is low, and the spreads are extremely wide. In 2006, 
several large Kazakhstani companies issued initial public offerings 
on the London Stock Exchange (LSE). In compliance with a 2006 law 
requiring any foreign IPO by a Kazakhstani company to be accompanied 
by a domestic issuance, these companies also offered shares on the 
KSE. However, despite these offerings and the Kazakhstani pension 
funds' (see below) tentative moves to invest in KSE-traded shares, 
the exchange remains in a very early stage of development. Due 
largely to Kazakhstani companies' recalcitrance to dilute ownership 
and provide extensive disclosure, the Kazakhstani debt market is 
substantially more developed. The plans for the "Almaty Financial 
Center" (see below) aim to spearhead the development of Kazakhstan's 
 
ASTANA 00000146  010 OF 016 
 
 &#x
000A;financial markets.  In 2007, the Almaty Financial Center officially 
announced that it would merge its efforts to create an effective 
equity market with the KSE, thereby signaling that there will be 
only one stock exchange in Kazakhstan in the foreseeable future.) 
The Financial Supervision Agency (FSA), Kazakhstan's main financial 
regulator, has broad authority over the banking and insurance 
sectors, as well as the stock market.  The FSA is financed from the 
National Bank's budget and subordinated to the President of 
Kazakhstan. 
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 November 2006, the 14 funds (13 
private and one state-owned) operating in Kazakhstan held 
approximately $9.6 billion in assets. Asset management companies 
invest the contributions on behalf of the pension funds. While the 
government provides specific restrictions on how the pension funds 
may invest, these restrictions were relaxed in 2006, allowing some 
involvement in Kazakhstani equities. Still, the pension assets must 
be invested primarily 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. 
The mutual investment fund industry remains small but is growing 
rapidly.  As of October, 1 2007, total assets of the mutual 
investment funds amounted to $1.16 billion, representing a 302% 
increase when compared to October 2006 figures. Despite a reduction 
from 37.1% in October 2006 to 15.77% in October 2007, Kazakhstani 
corporate securities remain a significant share of the consolidated 
mutual fund investment portfolio. 
The 1998 Law on Joint Stock Companies provides the basis for the 
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; and 
-- the 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 Financial Supervision Agency 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. 
In March 2007, the Government accepted amendments to legislation 
regarding the protection of minority stockholders' interests.  The 
enactment of this law was prompted by numerous violations of 
minority stockholders' interests. In addition, this step was driven 
by the Government's intention to promote the development of stock 
exchange. 
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, 
 
ASTANA 00000146  011 OF 016 
 
 
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 
views as vulnerable to penetration by extremist groups. 
Kazakhstan's 2007 parliamentary elections took place without 
significant violence or unrest. President Nazarbayev's Nur Otan 
party won every seat in the lower house of parliament with an 
overwhelming majority of the votes. In its assessment, the OSCE 
noted that the election did not meet a number of OSCE commitments 
and international standards for democratic elections. Although 
opposition groups denounced the election as fraudulent, there were 
no significant demonstrations against the announced results. The 
next parliamentary election is scheduled to take place in 2012. 
The February 2006 murders of a prominent opposition politician and 
his two associates were perceived by opposition parties as 
politically motivated. The former chief of staff of the Senate was 
convicted in August 2006 of having ordered the murders; prosecutors 
charged that he was motivated by personal animosity. 
 
Corruption 
---------- 
Although the Kazakhstani Criminal Code contains special penalties 
for accepting and giving bribes, corruption is prevalent throughout 
Kazakhstan. The Ministry of Interior, the Financial Police, the 
Disciplinary State Service Commission, and the Committee for 
National Security (KNB) are responsible for combating corruption. 
The government has taken some measures to address corruption and 
increased its attention to the problem through educational and 
pub
lic awareness efforts.  President Nazarbayev publicly deplored 
corruption and encouraged media to report about it.  Some lower and 
middle-ranking officials and minor political figures have been 
penalized on corruption charges. 
Transparency International has a national chapter in Kazakhstan. The 
government has signed on to the Extractive Industries Transparency 
Initiative (EITI). 
U.S. firms have cited corruption as a significant obstacle to 
investment. Law enforcement agencies have on occasion t pressured 
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 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 second defendant, James Giffen, was indicted in 2003 and is 
awaiting trial in the United States. 
 
Bilateral Investment Agreements 
------------------------------- 
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 Treaty on the Avoidance of Double Taxation between the 
United States and Kazakhstan came into force. However, an ongoing 
dispute with a U.S. investor raises concerns with the government's 
tax treaty compliance. Since independence, Kazakhstan has ratified 
treaties on the avoidance of double taxation with 41 countries. 
Kazakhstan has bilateral investment agreements in force with forty 
countries, including the United States, Great Britain, Germany, 
France, Austria, Russia, Korea, Iran, China, and Turkey. 
 
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 
----- 
The 1999 Labor Law and the Constitution guarantee basic workers' 
rights, including the right to organize and the right to strike. 
 
ASTANA 00000146  012 OF 016 
 
 
Teachers, miners and workers at a variety of enterprises have 
conducted occasional strikes for generally short periods during the 
past several years. In September 2006 the death of 41 miners in an 
explosion at Mittal Steel Termirtau's "Lenin" coal mine triggered an 
unprecedented wave of strikes. Mittal's striking coal miners were 
joined by steel workers which shut down operations at each of the 
eight coal mines owned by the company for a week. The strike ended 
after Mittal agreed to substantial raises. Subsequently, two U.S. 
companies operating coal mines in Kazakhstan raised wages 25-30% in 
order to avert threatened strikes. 
The 1996 Law on Labor Disputes and Strikes lays out the procedure 
for resolving disputes. However, the law also restricts strikes by 
requiring, inter alia, 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. 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. 
In May 2007, Kazakhstan passed a new Labor Code, encompassing all 
the preceding legislation under a single umbrella.  Key provisions 
of all the previous labor laws were retained.  The Labor Code 
extended minimum mandatory vacation time from 18 to 24 days, 
provided an outline of labor unions' and labor representatives' 
rights, and toughened rules governing the dissolution of labor 
contracts. 
The 1993 Law on Professional Labor Unions provides a legal guarantee 
against limitations of labor. It also grants socio-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 termination of employment on the basis of such 
membership. Kazakhstan also joined the International Labor 
Organization (ILO) in 1993. As of January 2007, Kazakhstan has 
ratified 16 ILO conventions, including those pertaining to minimum 
employment age, forced labor, discrimination in employment, equal 
remuneration, and collective bargaining. 
Kazakhstan's economy has grown steadily in the last five years. 
Preliminary 2007 GDP growth is estimated at 8.7%.  (The highest 
year-on-year rate was 13.5% in 2001.) Although incomes and consumer 
spending have risen across the board, in the 3rd quarter 2007 the 
minimum subsistence wage is still only $83.. per month;   with 13.8% 
of the population receiving income below that level. Starting on 
January 1, 2008, the minimum pension  will be $65.45 per month. By 
government estimates, in the 3rd quarter of 2007 unemployment was 
7%. 
Kazakhstan has an educated and technically competent workforce. 
However, the demand for specialized skilled labor created by the 
simultaneous development of several major oil fields in western 
Kazakhstan has exceeded locally available supply. Foreign investors 
increasingly cite a lack of skilled workers and technical 
professionals. Management expertise and marketing skills are also in 
short supply. Many large investors rely on foreign workers, 
particularly from Turkey, to fill the vacuum. In turn, the GOK 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. In late 2006, the government 
discussed measures limiting the inflow of foreign workers, 
particularly unskilled, and pressuring large foreign investors to 
hire and train Kazakhstanis. Since 2001, the quota system has 
required employers to search for local workers prior to the issuance 
of work permits for foreigners (see section A.1.). 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. 
Employers' reliance on foreign labor in the face of persistent 
poverty in rural Kazakhstan became a political issue in 2006 and 
2007. The debate revolved around the underlying causes of some 
violent incidents between Kazakhstani and foreign workers. The 
tension was epitomized by a major October 2006 brawl that involved 
over 400 workers. Policymakers often point
 to disparities in wages 
and working conditions between Kazakhstani and foreign workers. 
Employers retort that the domestic lack of skilled labor frequently 
necessitates management of Kazakhstani laborers by foreigners. 
 
Foreign - Trade Zones/Free Ports 
-------------------------------- 
A system of tax preferences exists for enterprises engaging in 
prescribed economic activities in the so-called "special economic 
zones." As of December 2007, four such zones had been established: 
the "New Administrative Center" in Astana, the Seaport of Aktau, the 
Alatau Information Technology Park (near Almaty), and the Ontustik 
Cotton Center in south Kazakhstan.). In addition, a separate 
preferential tax system exists for enterprises manufacturing high 
value-added goods, regardless of location. 
In the second half of 2006, the government took steps toward 
 
ASTANA 00000146  013 OF 016 
 
 
establishing the Almaty Financial Center, a legal and institutional 
framework aimed at making Almaty the financial capital of Central 
Asia. The plans, which are still in very early stages of 
implementation, include tax privileges for major participants in the 
financial marketplace: investors, broker-dealers, and issuing 
corporations. The legal framework for the Almaty Financial Center 
includes a specialized court with jurisdiction over civil disputes 
between the Financial Center's participants 
 
Foreign Direct Investment (FDI) Statistics 
------------------------------------------ 
Annual Gross Foreign Direct Investment Flows by Country of Origin 
(Millions of Dollars; nominal) 
1993-20052006  2007(1st half) Total 
USA 11,841.2  1,694.7  802.2 14,338.1 
UK 4,378.7  852.5  255.2  5,486.4 
South Korea 1,880.9  248.6  116.6  2,246.1 
Italy 2,468.3 376.1  212.6  3,057 
Canada 1,481.2  437.1  273  2,191.3 
Switzerland 2,021.5  234.6  367.9  2,624 
Netherlands 4,940.1  2,877.3  1,170.6  8,988 
China 1,680.5  359.5  171.6  2,211.6 
Turkey 906.9   92.9  141.9  1,141.7 
Russia 1211.1  490.9  219.0  1,921 
Japan 1005.1  342.6  169.7  1,517.4 
Others 6,970  2,559.9  3,033.6  12,563.5 
TOTAL 40785.5  10,566.7  6,933.9   58,286.1 
Source: National Bank of Kazakhstan 
 
Annual Gross Foreign Direct Investment Flows by Sector (Millions of 
dollars; nominal) 
1993-2005  2006  2007 (1st half)  Total 
 
AGRICULTURE, 15.7  37.3  1.3  54.3 
HUNTING AND 
FORESTRY 
 
MINING AND  22,286.2  2,323.1  2,126.4   26,735.7 
QUARRYING 
 
mining of coal 39.8  0.0  0.0  39.8 
and lignite, 
extraction 
of peat 
 
extraction of  20,406.3  2,003.4  1886.3  24,296 
crude 
petroleum 
and natural 
gas 
 
mining of 146.5  162.4  83.7  392.6 
uranium and 
thorium ores 
 
mining of 884.6  149.1  156.2  1,189.9 
metal ores 
 
other mining 
and quarrying 50.9  8.3  0.1  55.5  114.8 
 
MANUFACTURING  5,066.4  644.4  326.1  6,036.9 
 
including but 
not limited 
manufacture of 
food products, 644.7  51.9  19.8  716.4 
beverage and 
tobacco products 
 
manufacture of 
coke, refined 
petroleum 
products 508.2 -15.8 -192.8 299.6 
and nuclear 
fuel 
 
manufacture of 139.8  17.9  7.9  165.6 
chemicals 
and chemical 
products 
 
manufacture of 32.9   7.9  12.3  53.1 
rubber and 
plastics 
products 
 
manufacture of 85.9  26.2  13  125.1 
 
ASTANA 00000146  014 OF 016 
 
 
other 
non-metallic 
mineral products 
 
manufacture 3,068.7   423.9  385.8  3,878.4 
of basic metals: 
manufactures 405.7  1.4  1.6  408.7 
of ferrous 
metals 
 
manufacture of 2,649.3  419  381  3,449.3 
basic precious 
and non-ferrous 
metals 
 
manufacture of 13.9  3.4  3.3  20.6 
fabricated 
metal products 
except 
machinery 
and equipment 
 
manufacture 21.4  4.2  0.1  25.7 
of machinery 
and equipment 
 
manufacture 431.1  39.7  20.4  491.2 
of electric 
and computing 
machinery 
 
manufacture of 11.8  72.4  53.9  138.1 
transport 
equipment 
 
manufacture, 5.0  0.7  1.6  7.3 
n.e.c 
 
ELECTRICITY, 699.2  26.6  5.3  731.1 
GAS AND WATER 
SUPPLY 
 
CONSTRUCTION 416.1  378.4  243.8  1,038.3 
 
WHOLESALE AND 1,122.8 760.9  618.7  2,502.4 
RETAIL TRADE, 
REPAIR OF 
MOTOR VEHICLES, 
MOTORCYCLES 
AND PERSONAL AND 
HOUSEHOLD GOODS 
 
HOTELS AND 115.3  10.2  43.5  169 
RESTAURANTS 
 
TRANSPORT690.6  301.3  48.5  1,040.4 
STORAGE AND 
COMMUNICATION 
land transport 378.8  23.6  20.6  423 
 
including 
transport 
via pipelines 360.3  19.4  20.6  400.3 
 
water -12.2  4.1  0.6  -7.5 
transport 
 
air transport 24.9  3.2  1.1  29.2 
 
supporting 152.3  187.4  29.5  369.2 
transport 
activities 
 
post and 146.8  83  -3.2  226.6 
telecommunication 
 
including 145  81.1  -4.0  222.1 
telecommunication 
 
FINANCIAL 494.2  375  201.6  1070.8 
ACTIVITY 
 
REAL ESTATE, 9,223.3   5,610.1  3,271  18104.4 
RENTING 
AND BUSINESS 
ACTIVITIES 
 
Including 
 
ASTANA 00000146  015 OF 016 
 
 
but not limited 
real estate 
activities 105.1 29.1 30.6 164.8 
 
legal, 
accounting, book- 
keeping and 
auditing                   143.2 -22.5 49.6  170.3 
activities, 
tax consultancy, 
market research, 
business and 
management 
consultancy 
geological  8,739.5 5,487.5 3,167.6 17,394.6 
exploration and 
prospecting 
activities 
 
EDUCATION, 295.3  99.5  47.5  442.3 
HEALTH AND 
SOCIAL WORK 
 
ACTIVITIES, 360.8  0.0  0.0  360.8 
N.E.C. 
 
TOTAL      40, 785.5  10,566.7 6,933.9   58 286.1 
Source: National Bank of Kazakhstan 
 
FDI as a Percentage of GDP 
2005   2006  2007(1st half) 
11.58% 13.05% 15.5% 
Source: National Bank of Kazakhstan 
 
Kazakhstani Direct Investment Outflows 
Millions of US dollars, nominal 
Country of 
Destination 2004-2005 2006 2007(1st half) Total 
Austria   0.4     0.3       0.1    0.8 
Azerbaijan 0.0    3.2       3.4     6.6 
Armenia 2.8     0.7       0.0   3.5 
Afghanistan 0.1  -0.1  0.0   0.0 
Byelorussia 3.4  1.5  0.1   5.1 
Bulgaria   0.0  0.0  0.7   0.7 
Dominican Republic 0.0 10.0 0.0   10.0 
France   0.0  0.0  3.0  3.0 
Great Britain 15.5  -3.7  82.1   93.9 
Virgin Islands 43.225.4  78.9   147.5 
Germany 217.3  0.2  10.4  227.9 
Georgia 1.9  66.0  9.2   77.1 
Hong Kong 0.0  0.0  60.0   60.0 
Israel  0.0  0.4  0.0   0.4 
India  0.0 0.1  0.1   0.2 
Iran  0.0  0.0  0.3   0.3 
Italy  0.1  0.0  0.0   0.1 
Canada  5.8  37.3  0.0   43.1 
Cayman Islands 0.0 0.5  0.0  0.5 
Cyprus 0.0  0.8  88.8   89.6 
China  6.0  7.1  34.5   47.6 
Kyrgyzstan 57.4  102.8  55.4   215.6 
Latvia  1.9  0.0  0.3   2.2 
Lithuania 0.0
 -5.0  0.0   -5.0 
Luxemburg 0.0  9.5  1.7   11.2 
Malaysia  0.0  0.8  0.7  1.5 
Marshall Islands 0.0 0.0  96.0  96.0 
Isle of Man   6.6  0.0  0.0  6.6 
Mongolia 0.1  0.0  0.0   0.1 
Netherlands 17.5  639.4 17.6  674.5 
Nigeria 0.0  0.0  0.1   0.1 
Arab Emirates 0.0 1.4  37.7   39.1 
Russian Federation 127.2  183.3  198.1  508.6 
Seychelles 28.3  0.0  0.0   28.3 
Singapore 0.0  2.4  61.7   64.1 
South Korea 0.0  0.0  1.1     1.1 
Spain 0.0  0.0  1.0      1.0 
USA 8.1   3.2  0.4   11.7 
Tajikistan 0.1  12.3  10.7    23.1 
Thailand 0.0  0.0  0.2      0.2 
Turkey 41.2 3.9  318.3  363.4 
Uzbekistan 8.0  86.0  14.3   108.3 
Ukraine 10.1  2.0  8.7   20.8 
Check Republic -4.00.2  2.0   -1.8 
Switzerland 127.1 77.1  157.5   361.7 
Estonia 0.0  0.0  0.0   0.0 
Other 
Countries 6.5  4.0  0.7   11.2 
TOTAL  732.6  1,273.0  1,356   3,361.6 
Source: National Bank of Kazakhstan 
 
ASTANA 00000146  016 OF 016 
 
 
 
Investments as of 2007 
---------------------- 
The oil and gas sector accounts for approximately 71.5% of the $58.3 
billion that has been invested in Kazakhstan, with U.S. firms 
consistently ranking as the largest foreign investors. U.S. firms 
with noteworthy investment in Kazakhstan's petroleum sector include: 
Chevron, ExxonMobil, and ConocoPhillips. Other major foreign 
investors in this sector include: LucArco, Agip, Shell, Inpex, Eni, 
Total, British Gas, Lukoil, Mitsubishi and the Chinese National 
Petroleum Corporation (CNPC). 
Other major US investments include: AES (over $200 million in power 
generation), Access Industries (coal mining), Philip Morris (over 
$320 million in tobacco processing), and General Electric 
Transportation (locomotive modernization facility). Non-petroleum 
foreign investors include Mittal and BAE Systems. 
 
ORDWAY

Wikileaks

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