“Strategically, politically and economically (Eurasia) has become a region to watch—and for many American companies, a place in which to do business.”

                                                                                Secretary of Commerce Carlos Gutierrez

Economic Highlights:

• Kazakhstan’s economy grew by an estimated 10.6% in 2006, a continuation of the annual 9-10% growth levels experienced since 2000.  Though GDP grew by 9.7% during the first 3Qs of 2007, it is expected that the global liquidity crises and its impact on the domestic services and construction sectors will severely impact growth in 2007, and as a result, forecasted GDP growth in 2007 was reduced to 8.7%.
• Rising GDP per capita reached $3,790 in 2006 (Atlas methodology), or $8,800 in terms of purchasing power parity.  This ranks Kazakhstan firmly as the number two country in the former Soviet Union in terms of per capita economic prosperity, and places them ahead of key export markets like China, Brazil, and India.
• Annual foreign direct investment in the Kazakh economy grew 60% in 2006 to $10.6 billion according to the National Bank.  Out of South East Europe and the Commonwealth of Independent States (CIS), only Russia and Romania attract more investment, and only Hungary has a higher per capita FDI.  UNCTAD reports FDI inflows of only $6.1 billion in 2006, which is more than three times the $2 billion the organization reports Kazakhstan received in 2005.
• U.S. exports to Kazakhstan reached nearly $646 million in 2006, a 20% increase from the previous year and more than double exports from 2004.  Exports from Jan-Oct 2007 totaled $633 million, a 17% increase from the same period in 2006.  However, Kazakhstan only ranks as the 75^th largest export market for U.S. goods.  Bilaterally, our countries conducted $1.6 billion in trade in 2006, ranking Kazakhstan as our 79^th largest trade partner.
• The most recent report from the Heritage Foundation’s Index of Economic Freedom rated the country as “moderately free” and ranked it 75 out of 157 countries, well above neighboring Russia and China and just below the global average.  The Foundation’s report scored Kazakhstan highly in fiscal freedom, freedom from government, and labor freedom.   However, the report also noted “significant shortcomings. Investment freedom, property rights, and freedom from corruption are weak.  Foreign investment in virtually all sectors is restricted by exclusive barriers and bureaucratic incompetence.  Government policy actively favors domestic businesses, and the weak rule of law allows for significant corruption and insecure property rights."

Like other former Soviet Republics, Kazakhstan is still going through the long process of developing a transparent and effective business culture that is attractive to foreign investment.  Though the government of Kazakhstan (GOK) publicly supports economic reform, changes are slow and commerce is plagued by a bureaucracy that is unable to initiate needed change.  Foreign investors, as well as local firms, complain about burdensome regulations that often reflect a way of doing business that is reminiscent of the Soviet Union.  Challenges remain in addressing problems related to the country’s competitiveness and economic diversification, its over-reliance on the oil sector, continued corruption, need for increased rule of law, and concentration of political power.

Over the past decade, Kazakhstan has made some progress in transforming its economy to create a more transparent, less regulated and more market-driven business environment.  Nonetheless, this progress continues to be progressively undermined by continued developments that have caused increased concern for U.S. investors and their government alike. Firms that have experience in Russia, the Ukraine and other post-Soviet economies will be familiar with some of these challenges:

• Continuing concerns over interpretation of laws by the central government, which often is at variance with that of local officials, especially in the implementation of Kazakhstan’s system of taxation and collection of revenues.  U.S. investors report taxation as one of their top concerns, reporting frequent harassments by local and national ‘financial police’ and other taxation authorities through generally intrusive inspections.  Quite often, settlement of these cases with the tax authorities has led to criminal charges by local governmental officials as a pressure tactic.
• As the Heritage Foundation reports, “the government constantly challenges contractual rights and legislates to favor domestic investors over foreign ones, all of which significantly deters foreign investment.”  The investment climate took a turn for the worse in 2007 with the passage of an amendment to the "Law on Subsoil and Subsoil Use," which may have substantial negative consequences for the oil and as and mining sectors in Kazakhstan.  According to the amendment, the GOK has the right to require changes to contracts or to unilaterally refuse to perform its contractual obligations based on the country's economic interest.
• Despite attempts to improve the business environment and join the World Economic Forum’s “Global Competitiveness” Top 50, Kazakhstan continues to fall in the rankings.  Their 2006 ranking of 56th in world (with a score of 4.19) fell to 61^st in 2007 (with a score of 4.14).  The report highlighted problematic areas of corruption, tax regulations/rates, and inadequate supply of infrastructure.
• Kazakhstan performed poorly on the World Bank’s Ease of Doing Business Report for 2008, again ranking 71^st out of 178 countries.  Except for dropping nine places in “Starting a Business,” Kazakhstan saw little change to most of the report’s indicators and was ranked last in “Trading Across Borders” and 173 in “Dealing with Licenses”.
• Corruption, which increases the cost and difficulty of doing business for foreign and local firms alike, especially as it relates to customs.  Corruption remains widespread, and the judiciary is often perceived as an arm of the executive branch rather than as an enforcer of contracts and guardian of property rights.  Kazakhstan ranks 150^th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007.  They were ranked 107^th in 2005.
• A customs regime that is hampered by the incomplete implementation of customs codes, regulations and instructions, excessive and unclear documentation requirements and the necessity to provide ‘facilitation payments’.  Though Kazakhstan boasts the most improved customs administration in Central Asia, it is far from effective.  As an example, in August 2007, an unannounced change to the customs code requiring the submission of the shippers export declaration resulted in hundreds of millions of dollars in goods being held at the border due to improper documentation.  The GOK took nearly three months to reverse the order, which left importers paying high warehousing fees and exporters unable to meet contractual obligations.
• Competition is increasing, as Russia and China vie for access to the country’s energy resources and growing buying power.  The EU is also a major player and as a group is Kazakhstan’s single largest investor.  Turkey is another formidable competitor, using its strong presence in the construction and retail sector to better position itself.
• The ability to create a modern trade route through Central Asia is hampered by the reluctance of Central Asian countries to work together to increase cross-border traffic.  This impacts Kazakhstan’s plans to position itself as a transit area for goods between Asia and Europe, and the GOK is increasingly pursuing its own plans of developing road and rail links between China and Russia.

Demand in this developing market goes beyond the few best prospect sectors covered in our annual Country Commercial Guide.  Kazakhstan's strategic aspiration is to become a modern, diversified economy with a high value-added and high-tech component, well integrated in to the global economy, and they are cognizant of the need for foreign expertise to accomplish this.  Like other former Soviet republics, Kazakhstan’s infrastructure is a nightmare, especially roads, transportation, and telecommunications.  With continued high commodity prices, Kazakhstan has the means to repair the nation’s infrastructure.  Likewise, areas such as health and environment need an infusion of investment to reach European standards.

Despite the recent impact that global liquidity has had on the construction sector, the GOK is aware that this is a key industry driving economic growth, and they are taking steps to inject sizable funds into this industry.  Though it is expected to slow in 2008, the construction boom will continue, creating opportunities for U.S. engineering and design firms and demand for building and construction equipment and materials.  The August 2007 banking crisis should only have a short-term impact on Kazakhstan’s growing middle class, which is demonstrating an increased appetite for automotives and consumer goods.  Though per capita GDP is far below developed countries, anecdotal evidence suggests that Kazakhstanis are seeking out higher end goods.

A complete copy of the Country Commercial Guide for Kazakhstan, as well as commercial guides to other countries, is available (free for U.S. companies if registered) on http://www.export.gov