Asif Noor
The inflow of Foreign Direct Investment has a steady rise for Kazakhstan since independence due to the outstanding legislative measures and reforms in the economic sector. The recent foreign direct investment hitting $17 billion in 2020 is 13 times higher from all-time low $1.3 billion in 1993. All in all, since independence, over $ 330 billion of direct foreign investments from more than 120 countries have made it to Kazakhstan. Half of the investments are in the countries of the European Union, another 15% – in the United States of America, about 5% are investments from Great Britain and China. It reflects that Kazakhstan is a potential destination for investments. This has also been approved by the UNCTAD that 60% of foreign investment in Central Asia went to Kazakhstan by 2018. It is pertinent to mention that 16,800 companies, 18.1% increase with foreign capital, had been operating in the country by the end of October 2019 standing at 55 points in global competitive ratings.
Kazakhstan has not received all these investments and growth in a few years; rather it is a story of struggle since independence. Due to hard work and sheer commitment of the leaders of Kazakhstan, the country has played a constructive role in its regional and global economic contribution. Naturally, it all started under different circumstances. In the early 90s, in the most difficult times of economic instability and loss of ties, it was foreign investments that became the main means of survival for enterprises in Kazakhstan. In these circumstances, foreign direct investment and trust of investors became the major hope for Kazakhstan. Kazakhstan is a potential market with immense natural resources and a distributive geography connecting it to regional and global markets.
The credit for nation building by generating business activity goes to the first President of Kazakhstan Nursultan Nazarbayev who kick started the investment friendly policies and environment in the country since 1990s. The President’s visionary leadership has led to first major investor, the President of Chevron Corporation, Kenneth Derr who concluded the first major investment agreement in Kazakhstan. At that time Kazakhstan was not having efficient financial and technological mechanisms but this investment boosted the confidence of other global investors to forge partnerships with Kazakhstan especially in the oil and gas sectors. Currently, all energy giants such as Exxon Mobil, Shell, Eni, Chevron, Texaco, Total, British Petroleum, Lukoil and China National Petroleum Corporation are operating in Kazakhstan.
The Production Sharing Agreements played a pivotal role in attracting the global investments which later developed the reputation of Kazakhstan in the earlier phase of independence. The period from 1998 to 2007 is considered as the second phase of investment rise in Kazakhstan. During this period, Kazakhstan employed the experience gained from doing business with foreign investors into domestic legislation. This led to the creation of a transparent and business friendly infrastructure at the national level in Kazakhstan to attract further investments hence smoothly run the existing state and government operations.
Later into the years, Kazakhstan invited investments into least developed or low performing sectors including manufacturing, agriculture, social infrastructure, and tourism and youth development while it consistently sought improvement in already developing sectors. Certain laws have been helpful in this regard which covered state support of direct investment, taxes and mandatory payments to the budget, securities market, foreign borrowing and management of external debt. These regulations helped Kazakhstan to develop a legal structure to regulate the investments.
These measures and important national policies helped Kazakhstan to measure the three elements of economic growth such as stability, predictability and consistency. The Council of Foreign Investors played a pivotal role to facilitate the dialogue and provide ease of doing business to the investors. It is important to note that the first real breakthrough in attracting foreign capital into the economic landscape of Kazakhstan was in 2001 when the volume of the annual gross inflow of foreign direct investment began to improve sharply and peaked at $29 billion in 2012.
It has been recognized globally that Kazakhstan is moving towards the right direction. The country was the first in the CIS countries to be recognized by the European Union and the US as country with growing market economy. Along with this, Kazakhstan was the first country in the region to receive in 2002 investment grade country rating for liabilities in foreign currency (Moody’s Investor Services) and later in 2003 for liabilities in national currency (Standard & Poor’s).
This visionary process and adoption of the effective legislation continued hence made the financial climate of the country to improve especially due to the international experience. In 2003, a new investment law was adopted. This law was focused on the equality and rights of the domestic and foreign investors and mechanism for better dispute resolution. This was managed by the ““Program for attracting direct investments for the period 2003-2005″. Such legal instruments were not only introduced at the national level but at the multilateral and bilateral levels as well in order to promote investment and at the same time guarantee and support investors. This initiatives helped Kazakhstan to be the leader amongst the CIS countries for attracting huge volume of regional and international level investment.
After 2007, the third phase began the journey of managing foreign direct investment in Kazakhstan. It was a hard task to convince the companies to support the Kazakh economy and not scale down their operations because of the recession in 2008. Kazakhstan initiated the State Program of Forced Industrial and Innovative Development of Kazakhstan which instilled a new vigor to foreign direct investments and their effects on Kazakh economy. The chronology of financial reforms reflects that there had not been radical changes but sustained measures to improve the economy as demonstrated in the following sectors such as extraction of natural resources such as metal ores, oil and metallurgy. The investment potential in these sectors during 1999 was limited to 77.7% which declined up to 48% by 2020. Meanwhile, the other sectors witnessed more investments such as manufacturing industry, infrastructure development, transport and mining.
Nevertheless, the current surge in investments marks the fourth phase in Kazakhstan beginning in 2017. This follows a comprehensive strategy to facilitate and attract foreign direct investment. To quote an example, Kazakhstan joined the OECD Declaration on International Investment and Multinational Enterprises and won the status of an associate member of OECD Investment Committee.
The government adopted a new strategy namely National Investment Strategy 2018-2022 with the partnership of World Bank. It can be taken as a marketing proposal for the investors to invest in Kazakhstan in potential sectors of growth manifesting its will and developing its capacity to handle massive investments. This document stresses upon attracting the investments in non-resource sectors which is an export oriented sector and a tool to bring dollars in the country. It reflects that the whole economy is divided into two groups i.e. the industries with active potential such as food industry, metallurgy, chemistry, petro chemistry and potential industries such as information, communication and finance. The active industries serve the short term goals while the promising industries are long goals.
Kazakhstan is improving the measurement tools of the economy such as sustainability and predictability to increase the transparency and accountability in the policies of investment. The government decided to include the private sector to develop the legal instruments of regulatory statutes in English language and to provide investors better understanding of compliance to make their business operation smooth.
“Kazakh Invest” was the new operational instrument that has offered a full range of services to investors as a one-shop stop solution from search for an idea to the post investment period. Within the framework of the strategy, an information and monitoring system of investment projects has been introduced. This system records all agreements, road maps, and tasks of all participants in the process. In addition the Investment Projects Map is integrated into the same system. This in turn is divided into two group-promising projects for investors and ongoing projects.
This structure helped foreign companies to smoothly navigate the economy of Kazakhstan. Through this initiative, the investors can see the reliability of the investment policy and prospects for cooperation. This was a soft structure that has been built in Kazakhstan for investors. “Kazakh Invest” is also responsible for explaining Kazakhstani legislation, procedures and decision making algorithms. As a result of this initiative, in one business, any investor can open a company in Kazakhstan and in 3 days register real estate.
The global trends of foreign direct investment reflects strong competition and the countries considered safe for investment are expected to have capital safety, rule of law, ease of doing business and comfortable corporate environment. Since Kazakhstan has been introducing a series of reforms and business friendly regulatory measures, it is considered as the one state among top countries with indicators of protection of minority investors, transparency of contracts. In addition, Kazakhstan stands at 25th position in a World Bank’s Ease of Doing Business among 190 countries.