Kazakhstan Chamber of Commerce in the USA


KazMunaiGaz to Borrow $2 Billion, Considers IPO 0

Posted on April 13, 2010 by KazCham

By Nariman Gizitdinov

April 9 (Bloomberg) — KazMunaiGaz National Co., a Kazakh state-owned energy company, is seeking to borrow as much as $2 billion this year and is considering a share sale within three years as it bids to join the world’s leading oil producers.

KazMunaiGaz plans to invest $4.3 billion this year in production, refining and pipelines, and refinance existing debt, Ardak Kassymbek, general manager for corporate strategy and asset management, said today in a phone interview from Astana.

The capital markets offer a “favorable situation” as KazMunaiGaz’s outstanding bonds trade at “very low rates,” Kassymbek said.

KazMunaiGaz, which accounts for about a quarter of Kazakhstan’s oil output, plans to become one of the world’s 30 biggest oil producers by 2015. The company aims to produce 25 million metric tons of oil by that time from 18.7 million tons last year. The central Asian nation holds 3.2 percent of the world’s oil reserves, according to BP Plc.

The borrowing would help cover $1.2 billion of spending planned this year for Kashagan, the country’s biggest oil field, Kassymbek said. Kazakhstan plans to boost oil output to 100 million tons by 2015 after bring the field online. KazMunaiGaz is equal partners in Kashagan with Eni SpA, Exxon Mobil Corp., Royal Dutch Shell Plc and Total SA, each holding 16.8 percent.

In the next five years, KazMunaiGaz plans to invest as much as $4 billion a year, including from $1.5 billion to $2.5 billion a year for the Kashagan development, Kassymbek said.     KazMunaiGaz also plans to invest $300 million at its Atyrau refinery and $200 million to upgrade Rompetrol, Kassymbek said.

Share Sale

Kazakhstan’s National Wellbeing Fund Samruk-Kazyna, which owns KazMunaiGaz for the state, has considered selling shares in the oil producer in the next two or three years, Kassymbek said.

“An IPO would be an optimal solution for the company to raise additional capital,” although requiring significant work, Kassymbek said.

KazMunaiGaz’s debt may increase to $15.2 billion this year from $14.5 billion last year, Kassymbek said. Earnings before interest, taxes, depreciation and amortization is set to advance about 44 percent to $6.2 billion this year, lowering the debt- to-Ebitda ratio to 2.5, he said.     “We plan to stick to a 2.5 ratio in the future,” Kassymbek said.

The yield on KazMunaiGaz’s $1.5 billion bonds due in 2015 rose 1 basis point to 4.855 percent, after having risen 3 basis points earlier in the day. A basis point is 0.01 percentage point.

To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

Last Updated: April 9, 2010 11:07 EDT

SOURCE: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZ3_oHhlOlg8

KazCham representatives on MINEX and KazRefinEx 0

Posted on April 03, 2010 by Sergey Sek

Sergey Sek, Business Development of KazCham attended Minex Central Asia 2010 in Astana, Republic of Kazakhstan on 16-18 March and KazRefinEx 5th Annual International Symposium and Exhibition on Refining and Petrochemistry on 25 – 26 March.

MINEX can be described as a post-crisis mining and exploration event for Central Asian Mining Industry. The forum’s main objective was to highlight current state and midterm perspectives for mining and exploration in Kazakhstan and Central Asian states recovering from the effects of the global economic crisis. According to the feedback received from the forum participants Minex Central Asia has become a significant international business, know-how and investment platform for Kazakhstan and Central Asia.

The three day agenda of the pre-forum master classes and the main forum featured over 60 speaker presentations of the leading mining companies, the Ministry of Industry and New Technologies of Kazakhstan, the National Welfare Fund “Samruk Kazyna”, The state geological and subsoil use Committee of Kazakhstan, international investment banks, Stock Exchanges, Mining and Financial consulting firms, etc. Despite turbulent weather conditions the forum brought together over 400 delegates from 150 companies and foreign missions from Kazakhstan, Kyrgyzstan, Uzbekistan, Mongolia, Japan, China, Russia, Ukraine, United Kingdom, USA, Canada, Australia, Germany, France, Switzerland, Belgium, India and the Netherland.

KazRefinEx gathered key branch experts from Kazakhstan, Europe and Central Asia in Almaty, to give the audience an opportunity to receive information about the prospects of deep processing of hydrocarbon raw materials and implementing specific breakthrough investment projects in the petrochemical industry at the level of the world economy for the coming year, as they say, “first hand”.

Today, the Kazakhstan oil and gas industry faces several key challenges in Kazakhstan, including the provision of deep processing of hydrocarbon raw materials, development of petrochemical industries. Currently, the Fund Samruk-Kazyna considered 31 projects in various spheres of the economy of the republic. The total cost of these projects amounts to more than $ 23 billion, of which the sphere of oil refining and petrochemicals will be about 11 billion U.S. dollars, including the reconstruction projects is upgrading three refineries of the country.

New uses for sulphur solve ecological problems 1

Posted on April 02, 2010 by KazCham

OVER RECENT YEARS, more than eight million tonnes of yellow sulphur has stacked up around Tengiz and  other North Caspian oil and gas sites. However, with  new technologies being developed and implemented, sulphur is in demand and the stacks are shrinking.

Rising high above the flat steppe, the ‘sulphur  mountains’ are the inevitable by-product of  processing plants that strip sulphur and other impurities from the corrosive, high-pressure oil  brought to the surface from 5km below the surfaces.

At Balkhash, on the shores of the eponymous crescent-shaped lake, nearly 2,000km east, clouds of  poisonous sulphur dioxide and other gases used to be released into the atmosphere from copper smelting  operations at the country’s biggest non-ferrous  mining complex. But yesterday’s ecological embarrassments, which  cost oil companies such as Chevron and Exxon and  copper miner Kazakhmys tens of millions of dollars a  year in fines from environmental protection agencies  and local authorities, have been turned into money- spinning sidelines. New technologies are in place that are processing sulphur and finding new uses for the inert, and once virtually worthless, yellow powder.

New uses include adding sulphur to bitumen and  other road-making materials to improve the climate  resistance of road surfaces. Pioneered by Shell in  Canada, which has a similar climate, the sulphur- based additives offer a promising new market close to  home as Kazakhstan prepares to invest heavily in new  highways, including a motorway from China to Europe.

But the really important new market to emerge is  the uranium mining industry, which increasingly uses  sulphuric acid as a solvent in the in situ leach mining  technology pioneered by Kazatomprom, soon to  become the world’s largest producer of the radioactive  mineral that powers nuclear power stations.

Sulphur prices have risen sharply as a result of  these new markets and growing demand from  traditional users of sulphur as a raw material  for agricultural fertilisers. The storage and  transportability of sulphur has also been improved by pelletising the compacted powder in ways that make  it much easier to handle.

Tengiz, in which Chevron is the major shareholder  and operator, is currently selling more sulphur than it  is producing, despite a sharp rise in output from a $5  billion investment, which has doubled oil production  to 25 million tonnes a year from the giant onshore  field. Rising demand for the yellow stuff is steadily  slicing away the sulphur mountains, whose constant  growth was a major headache a few years ago.

In the meantime, a $130 million investment  in a new sulphuric acid plant at the giant Kazakhmys copper smelter, beside Lake Balkhash,  has transformed toxic fumes from smelting into  1.2 million tonnes of marketable sulphuric acid a  year, using technology designed by the Chemetics  subsidiary of Canada’s Aker Kvaerner.

Kazakhmys, quoted on the London Stock Exchange  since 2005, was hard hit by the sharp fall in global  copper and other metal prices last year, before  recovering on Chinese buying. But it has been partially  able to offset the decline in copper and zinc revenues  thanks to higher global prices for the gold refined as a  by-product of smelting polymetallic copper ores – and  a modest new source of income from sulphuric acid.

While the sulphur price in some markets has risen ten-fold, around $500 per tonne in recent years, the  local price is barely a tenth of that, reflecting the  isolation of most uranium and other mines and the  prohibitive costs of transporting competing product  from other suppliers. Kazakhmys sells 99 per cent  of its sulphur output to third parties, most of it to  Kazatomprom, which has several uranium mines in  the Balkhash area using the in situ leaching method.

The ecological benefits, however, are massive. As recently as 2006, Kazakhmys, which is committed to  achieving international safety and environmental  standards, struggled to cut its emissions through  conventional abatement technology. This helped cut emissions by 9 per cent in 2007, but it still emitted a  massive 706,000 tonnes into the atmosphere before  the new plant permitted a six-fold reduction in  noxious discharges.

Kazatomprom, meanwhile, mixes the sulphuric  acid with hydrogen peroxide to produce a powerful  solvent, which it injects into uranium bearing  deposits deep underground. The new technology,  developed in-house, cuts out the need for traditional  surface or deep mines – both of which have a much  heavier environmental impact than leaching. Taken together, the big reduction in toxic gas emissions  by Kazakhmys and more environmentally friendly  uranium mining from Kazatomprom represent two  big advances in tackling Kazakhstan’s Soviet legacy of environmental neglect.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages:74-75.

New focus on small and medium-sized enterprises 0

Posted on March 18, 2010 by KazCham

SAMRUK, THE POWERFUL state holding company  which controls the ‘commanding heights’ of the  Kazakh economy, from pipelines and power lines  to railways, telecoms and oil companies, also  sponsors KazNex, an export promotion agency set  up specifically at President Nazarbayev’s request to  encourage small and medium-sized enterprises (SMEs) to raise quality and compete in export markets.

The government is keen to encourage small  companies to help diversify the economy and reduce  reliance on the extractive industries. SMEs currently  account for well under 20 per cent of GDP and  limited knowledge and penetration of export markets is one of their biggest weaknesses.

“Our vision is to become a driving force for  building support for exports. We already export  raw materials, and we want to develop exports  with higher value added,” says the KazNex agency’s  dynamic deputy chairwoman, Saule Akhmetova.  “We started with a study of best practice in other  countries, especially South Korea, Singapore,  Australia and Malaysia where growth was export led,” Akhmetova says.

“The problem in Kazakhstan is very low  awareness of the importance of exports on the  part of government, society and business. As more  international companies, including multinational  corporations such as Procter & Gamble, enter the  market, local businesses have to raise their game and focus on quality and marketing to compete effectively on both domestic and export markets,” she adds.

One company that addressed this issue was  Bekker & Co, a Kazakh-German joint venture in the  food processing sector. Bekker’s general director,  Ivan Kravchenko, says that from the moment  of independence in 1991 he realised that local businesses would not be able to compete with foreign imports. He went to the head of the German food  company, Bekker GmbH, who agreed to create a joints venture, which almost two decades later employs 770 people with an annual turnover of ?35 million.  Every 24 hours, Bekker produces nine tonnes  of sausages and 1.5 tonnes of bread and bakery  products, as well as traditional foods such as Russian pelmeni and Kazakh manti (dumplings) – always with h the emphasis on high-quality ingredients and  hand preparation.

“We employ lots of people for our relatively small  output. Most is prepared by hand, which we think is a major contributor to quality – we want our products  to be the same quality as home-cooked foods,”  says Kravchenko.

“Quality begins with raw materials in the food  industry. If you buy poor meat, no amount of effort  will improve it. Therefore we work with the best  suppliers. We buy our meat in Kazakhstan but other  products are imported,” he adds.

Almaty and the surrounding area is the main  market, but Kravchenko says the company wants to  export to the EU. “We have a large territory and a  relatively small population so we can feed ourselves  and have enough left over to sell abroad without  heavy use of chemical fertilisers. If we produce  ecologically clean products, we can sell them anywhere,” he says.

Ms Akhmetova of KazNex believes there is very  good potential for companies in the food processing,  textiles, chemicals, pharmaceuticals and paper  products sectors to boost exports but admits that  the crisis has slowed things down. “Companies  have limited access to funds, and some have even  suspended their activities temporarily,” she says.

One successful exporter is Textiline, which  produces a line of sportswear for Swiss clothing  manufacturer Assos at its state-of-the-art factory  in Talgar near Almaty. The company is one of a  new breed of Kazakh businesses where focus on  quality makes it possible to compete effectively with -international firms both at home and abroad.

Producing workwear for blue chip customers  such as TengizChevroil, KazMunaiGaz and KazZinc  accounts for around 65 per cent of its business, but Textiline also provides children’s clothes for the  domestic market and niche projects such as  making costumes and fabrics for the epic Kazakh  film, Nomad. According to sales and marketing director Inna  Apenko, investing in technology and staff training  was the only way Textiline could compete with low  cost exports from China – a perennial problem for  Kazakh businesses. High labour and operating costs  mean it costs five times more to produce a simple  t-shirt in Kazakhstan than in China or Turkey. “A  cheap labour force is a big competitive advantage for clothes manufacturers, but unfortunately, we don’t  have this. Unlike Vietnam or Indonesia, we also have  a shortage of specialists in this field so we had to set  up special courses,” Apenko explains.

“Our advantage over China is in technology  and intellectual property,” she adds. “When Assos  selected Textiline, the company said it needed to  be confident of quality production, and we could  guarantee this. We employ a team of specialists in  design, engineering and technology, whereas in  Chinese companies this work is typically carried out  in Europe.” Today, Textiline is the largest clothes  manufacturer in Kazakhstan, with six factories,  employing 1,200 people.

In recognition of the difficulties of raising  funds for investment, or even working capital,  the government has set up a new fund, called  Damu, which works with banks to finance smaller  companies. It has 117 billion tenge to lend at a preferential 12.5 per cent interest rate and a further  3 billion tenge specifically to help small companies  take part in state tenders or produce goods for export. The EBRD has also been an active provider of finance  to Kazakh banks for on-lending to SME customers,  and ATF Bank President Alexander Picker says that  the UniCredit-owned bank is using its international  experience to develop small business lending in  Kazakhstan, partly thanks to EBRD fundings

Bekker and Textiline have both had to adapt to  the economic slowdown, like most other Kazakh  companies. “Before the crisis, demand exceeded  supply, so we don’t plan to reduce output or cut  staff. But we have paid more attention to marketing  recently,” says Kravchenko.  Ms Apenko agrees on the importance of  enthusiatically promoting the company’s products.  “We plan to work actively towards exporting our  products,” she says. “But our major customers have  reduced orders by around 30 per cent, so we intend  to use this spare capacity to launch new consumer products for the domestic market.”

A study by KazNex found that funding was  actually not the main issue facing SMEs. “Our  research showed that the top problem was not  a lack of money but the need for better access  to information, better marketing skills and an understanding of international trade procedures. The most important thing is to change people’s mindset,” Akhmetova concludes.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 88-90.

Tax and investment priorities 0

Posted on March 15, 2010 by KazCham

THE LATEST BI-ANNUAL session of the high-level Foreign Investors’ Council in the northern farming centre of Kostanai in June was called ostensibly to focus on the investment potential of the agriculture sector. But how Kazakhstan will continue to attract foreign investment generally in the context of the new tax structure introduced at the start of the year was at the forefront of the minds of many senior executives and government officials who took part.

The global economic outlook and the government’s current focus  on ‘shovel-ready’, local content agricultural and infrastructure  programmers is light-years away from the world of 24-hour a day  whirling tower cranes and sky-high commodity prices, which  provided the optimistic background to earlier drafts  of the new 2009 tax code that came into effect at the  start of the new year.

Drafters took their cue from President Nazarbayev’s annual address of February 2008 when he called for a new tax code that “must be aligned with the objectives of the new phase in Kazakhstan’s development, a code designed to promote modernization and diversification of the economy”.  In setting out the basic principles of the new code, the president added that the most important element h was to be “a reduction of the total tax burden on non-commodity sectors of the economy, particularly small and medium-sized businesses.” To underline this, he added: “The expected shortfall in government h revenue should be offset by greater economic returns from the extractive sector.”

A year later, in his address to the nation in March 2009, at a time when the authorities were grappling with the banking crisis and re-adjusting to the global collapse in prices of the country’s commodity exports, President Nazarbayev re-affirmed h the strategic direction “charted in the National Development Strategy until 2030” which is “economic growth based on the developed market economy with a high level of foreign investment”.

With the onset of spring came the first tentative signs of recovery from the depths of the crisis that followed the collapse of Lehman Brothers in September 2008. Oil and other commodity prices  started to rise, mainly on Chinese buying, and the  shares of Kazakhstan’s internationally-traded mining  and resource stocks recovered much of their previous – losses on the London and Kazakh stock exchanges.  Kazakhstan, the first country to be hit by the US sub-prime mortgage crisis in August 2007, suddenly started to look like one of the best placed to get back to sustained growth.

Shaken, but not stirred, the economy’s survival is partly the prize for years of careful state budgeting.  This allowed the accumulation of more than $40 billion of reserves in the National Bank of Kazakhstan and the Oil Fund while oil prices were high and reduced the need for public borrowing when market conditions suddenly turned hostile. Running down the previously acquired surplus allowed fiscal expansion and a $21 billion bank and enterprise rescue package to be financed domestically in large part, although a $10 billion oil-asset for-finance deal with China in April certainly helped to steady nerves.

The weak point in the economy was that the public-sector surplus was more than offset by heavy foreign borrowing by the private sector, which issued substantial foreign equity and accumulated debt before the markets turned sour. So while Kazakhstan’s trade has remained in surplus, the current account turned sharply negative as banks and corporate borrowers confronted unexpectedly large foreign debt obligations, which have either had to be refinanced at substantially higher rates or partly rescheduled.

Even with the deployment of accumulated oil revenues, an external funding gap of more than 11 per cent of GDP still needs to be covered by foreign direct investment (FDI) in 2009, despite the fact that the slowdown in economic growth will cut the import bill. The big question is, will that investment come under the new tax regime?

A new tax system

The new tax code came into force at the start of January 2009. It was prepared in near-record time during 2008 and some haste can be perceived in its content. As the global economy continued to deteriorate in early 2009, the Kazakh leadership called for a ‘moratorium’ on further tax code changes until after 1 July. This showed understanding that tax h policy adjustments alone would not provide a ‘quick fix’, however critical tax policy remained for meeting longer term macro-economic challenges.

In keeping with the generally-progressive policy that Kazakhstan has sustained in tax policy reform, the new code represents some, albeit incomplete, forward thinking. It incorporates provisions to help improve clarity and certainty in the tax system as to the rights and obligations of taxpayers and of the state’s fiscal and other relevant agencies.

Among its key policy objectives are reduction of the tax burden on the non-extractive sectors and individuals; and a substantial increase in that of subsurface users and large taxpayers, more generally.  This approach seeks, in a supposedly ‘revenue- neutral’ way, to hasten the diversification of the economy into non-extractive sectors.

Concurrently entering into force is an amended transfer pricing law, which continues negatively to exert control over specified business transactions, whether between related or unrelated parties. In prospect during 2009 are related laws to control money-laundering and fiscal fraud, as well as an amended law on sub-surface use. New outline administrative arrangements orders and procedures are being promulgated to guide the operations of the fiscal agencies.

These new and revised instruments were essentially conceived in economic times more robust than when their entry into force took place. The government may well have acted presciently with tax cuts for the non-extractive sectors which could provide a stimulus h to business activity during the economic crisis. That remains to be seen. But what is already clear is that the new fiscal regime for the oil and minerals sectors provides no incentive to the foreign investment considered essential for achieving the 2030 strategy.  Moreover, a continuing, unfortunate aspect of the tax system for all taxpayers is the ‘gap’ between tax policy and the tax laws and their administration, which some investors believe had begun to show almost ‘Bolivars’ tendencies.

The business tax regime

One of the key elements in the new code is a reduction in the corporate income tax (CIT) rate from 30 per cent to 20 per cent, dropping further to 17.5 per cent in 2010 and 15 per cent in 2011. Deductible expenses are correlated with the activities connected with earning income and the loss carry forward period is extended from three years, or seven years for -subsurface users, to ten years. For small and medium- sized enterprises (SMEs) the obligation to calculate and pay CIT advance payments has been repealed.

CIT investment preferences are not available, however, to organizations operating in free economic zones or producing and/or selling excisable goods, or producers of agricultural products and village consumer’s co-operatives

The tax treatment of derivatives depends upon whether the instrument is a normal ‘derivative’ financial instrument, qualifies for hedging accounting, or involves delivery of a hedged item.  Hedging income or loss shall be tax accounted in accordance with the rules determined for the underlying hedged item. In other cases, income is taxable on its own and can be utilised only against income from other derivatives, subject to the ten-year -carry-forward period.

Another eye-catching element in the new code  is a reduction in VAT from 13 to 12 per cent, but  VAT now also applies to goods/services in special  economic zones, previously zero-rated, and to  geological exploration, also previously exempt. The reporting period is now quarterly and a simplified procedure of VAT refund for large ‘good faith’  taxpayers is introduced.

The property tax on immovable property assets rises to 1.5 per cent and investment preferences (including land tax preferences) have been repealed,  while the social tax continues its transition from the h existing regressive scale of 13 per cent to 5 per cent,  to a flat rate of 11 per cent.

Overview of the subsurface users’ fiscal regime

The abolition of CIT preferences is not applicable to assets used for activities within a subsurface use contract (effective from 1 January 2012). The government can permit a subsurface user to apply preferences under the subsurface use contracts  concluded between 1 January 2009 and 1 January  2012, if the extraction of minerals happened within  this period of time. Subsurface users applying investment preferences are not allowed to apply  double depreciation rates on fixed assets exploited in -Kazakhstan for the first time.

The stability of tax regimes remains valid only for production-sharing agreements signed prior to  1 January 2009, which underwent obligatory tax  ‘expertise’, and subsurface use contracts approved  by the president. For all other contracts, the current tax legislation applies. As to the signature bonus, the minimum starting bonus for exploration contracts  is $27,000; for production contracts, $29,000; for  mineral exploration contracts, $2,700; and for  mineral production contracts, $4,800.  The commercial discovery bonus tax base, at a rate  of 0.1 per cent, is determined by prices on the London Metal Exchange (LME), or as published in Piatt’s Crude Oil Marketwire. If minerals are not listed on the LME,  the base is determined by the planned production  costs indicated in the feasibility study.

A new, complex minerals production tax (MPT)  replaces Royalty, and under the new regime,  transportation costs are not deductible. MPT rates for  crude oil and gas condensate rise from five to 18 per  cent in 2009, to six to 19 per cent in 2010 and seven  to 20 per cent in 2011. For domestic sales, crude oil  and gas condensate tax rates drop by 50 per cent. The  MPT rate for exported natural gas is 10 per cent, but  for domestic sale, rates range from 0.5 per cent to 1.5  per cent. The rate for minerals that undergo initial  processing and for coal range from 0-22 per cent in  2009, rising to a maximum of 23 per cent in 2010 and  24 per cent in 2011. For coal itself, the rate is zero.

For crude oil and gas condensate, the MPT base  value is determined upon sale to a refinery within  Kazakhstan, at the actual selling price or upon  transfer for reprocessing/use for own needs, at the  production cost, determined under IFRS, increased by h 20 per cent. Export values are calculated on the basis  of average world prices, particularly for Urals Med &  Brent Dtd, published in Platts’ Crude Oil Marketwire.

For natural gas, the MPT base is the value of  extracted natural gas, determined upon domestic sale at the weighted average selling price and if used for  own needs at the production cost, determined under  IFRS, increased by 20 per cent.

Gas exports are valued at the average world price,  published in Crude Oil Marketwire.

For minerals (except common minerals) and  coal, the MPT base is the value of depleted mineral  resources and coal determined for minerals listed on  the LME, at average exchange prices and for minerals  not listed on the LME, at the weighted average  exchange prices at the time of sale or own-use.

A renovated excess profits tax (EPT) is charged on  the same sliding progressive scale from 0 per cent to  60 per cent, but the thresholds are changed.

The rent tax on oil exports applies to exported  crude oil, gas condensate and coal with rates for  exported crude and gas condensate up to 32 per  cent, linked to world market prices. The top bracket  is $200 per barrel and price thresholds are changed.  The tax base is determined as the exported volume  multiplied by the world price without deduction  of transportation expenditures. The tax rate for  exported coal is 2.1 per cent, with the tax base  determined as the exported volume multiplied  by the selling price – again without deduction of  transportation expenditures.

Outside the scope of the new tax code is an export  duty, which can be applied by government decree on  crude oil, bitumen and distillates with progressive  rates referenced to quarterly average world prices.  The rate in early May 2009 on crude oil was $139 per  tonne, with a reduced rate of $121.32 per tonne for  rent tax payers.

International taxation

The new code’s withholding tax (WHT) is levied  at 15 per cent on dividends and interest, with a  capital gains royalty of 16 per cent and a 20 per  cent charge on any income of an entity registered  in a tax haven. Insurance premiums under risk  insurance agreements are taxed at 10 per cent, while  income from international transportation services  and insurance premiums under risk reinsurance  agreements is charged at 5 per cent, and other  income at 20 per cent.

Further, the controlled foreign company rules now  apply to individuals and companies tax-resident in  Kazakhstan and in respect of tax havens where the  critical tax rate is 10 per cent or less.

The new tax code also prescribes exemption of  dividends from WHT for outbound dividends if a non- resident owns shares/participation interest for more  than three years, and if more than 50 per cent of the  value of shares/participation interest derives from  non-subsurface user’s property. It also exempts capital gains from WHT when received by a nonresident  from selling shares/participation interest, except for  shares in Kazakhstan residents holding subsurface  use rights and in foreign or Kazakhstan entities, if  more than 50 per cent of the shares’ value is derived  from subsurface user’s property. An extraordinary  collection mechanism is established for capital gains  of subsurface users

Tax administration

The new tax code introduces a tax accounting policy  requirement upon taxpayers, prescribes separate tax  accounting rules, provides for submission of a single  CIT return by a subsurface user operating under  ring-fenced contracts and stipulates submission of  financial statements under IFRS, along with a CIT  return. Administrative responsibility lies with  the taxpayers

The new tax code

While imposing tax is a sovereign right of states,  attracting FDI is a ‘bilateral’ issue determined by  a range of parameters, including tax. We believe  that in respect of the key extractive industries  sector, Kazakhstan’s new tax code largely ignores  internationally-proven criteria for attracting  investment. These include incentives to encourage  full and efficient exploitation of hydrocarbons  that are economic before tax, an equitable balance  between government and contractor interests,  and the stability needed to support long-term  investment. Attracting FDI is also helped by clarifying administration and simplifying compliance together  with a focus on profit rather than production as the  tax object.

In the new tax code the maximum rate of mineral  production tax (MPT) is 20 per cent, compared to  6 per cent for the replaced royalty at the equivalent  production level, while the maximum rate of  export rent tax is 32 per cent, still based on world  prices, although temporarily adjusted to 0 per  cent by government decree. Both of these taxes are  contingent upon the current average prices for the  fiscal period prevalent at the International (London)  Stock Exchange, but without provision for deduction  of transportation costs.

This means, therefore, that the marginal tax rate  on the upper tier of production is effectively much  higher than the simple addition of 32 per cent plus  20 per cent equals 52 per cent, since transportation  costs are one of the most significant costs of oil field  development in Kazakhstan. Thus, if it costs, for  example, $10-$20 a barrel to move oil from a Kazakh  oil field to Europe, the market value of oil produced  at that field in Kazakhstan is Brent minus $10-$20.

With the addition of transport charges, oil  companies now bear the tax on revenues they never  received, but earned instead by other entities,  including Kazakh state-owned companies. The result  is that internal rates of return (IRRs) – even at oil  prices as high as $65/barrel – fail to meet the oil  companies’ investment hurdles.

ITIC believes that other positive changes to encourage responsible and complete exploitation of subsurface territories would include reinstating  the VAT exemption on the transfer of subsurface  licenses and or rights and the elimination of  ring-fencing. Most importantly, the code should include transportation and other ‘netback’ costs in computation of both the MPT and excess profits tax.

Further tax reform needed to sustain competitiveness and help meet President Nazarbeyev’s goal of joining the “world’s 50 most competitive nations” should commend itself to the Astana  authorities and legislators as they address the issue  after 1 July. Reform of the subsurface users’ tax  regime, in particular, is needed to attract further,  mutually-equitable investment into the extractive  sectors. The current new code, drawn up during record high commodity prices with the explicit intent of  increasing the government’s take, makes the economic attractiveness of new investments questionable. *

This is an edited version of a more detailed analysis by Daniel Witt, president of the International  Tax and Investment Center in Washington, and  Douglas Townsend, senior adviser to ITIC and former Australian ambassador to Kazakhstan. ITIC has been  working on tax and investment reforms in the former Soviet republics since 1993. A more detailed version is available on www.iticnet.org under ‘publications’.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 92-95.

Road to recovery 0

Posted on March 08, 2010 by KazCham

WHEN THE TWO most dynamic sectors of a relatively  small open economy nose-dive at the same time  the impact on overall economic activity can be very  depressing. That is what happened to the $100 billion Kazakh economy nearly two years ago when over- borrowed Kazakh banks became the first victim of  the global credit asphyxia which followed the US sub- prime mortgage crisis in August 2007.

Economic growth, which had been running at  around 8/9 per cent on an annualised basis over the  first eight months of the year, about average for the  last seven years, dropped like a stone. Cranes stopped swinging on construction sites and a ripple effect  spread right through the supply chain and into the  shops as tens of thousands of building workers were  suddenly laid off. Pressure on the rest of the economy rose as banks, suddenly cut off from foreign capital,  scrambled to recall loans to bank customers, or roll  them over at higher rates, as they struggled to repay  their own maturing foreign loans.

For the Kazakh economy as a whole, recourse to  cheap foreign borrowing by its entrepreneurial,  privately-owned banks in the boom years was a way  of monetising the expected future flow of funds from huge offshore oil and gas fields, such as Kashagan,  whose development is proving more expensive – and  taking longer – than originally expected. Cheap bank -loans for mortgages, large cars and consumer items  generally were a way for hitherto lowly-indebted  Kazakh consumers to access the higher standard of  living that seemed to be assured by the apparently unstoppable rise in the global price of Kazakhstan’s  main exports – oil, gas, minerals and grain.

But the second stage of the global economic  slowdown, which followed the collapse of Lehman  Brothers in September 2008, sparked off a precipitous fall in the traded prices of natural resources of  all kinds. What had begun 15 months earlier  as a construction crisis triggered off by a credit  crunch became a generalised slowdown as miners,  steelmakers and smelters mothballed marginal mines and/or cut output. Only the oil and gas producers  and the uranium miners continued ramping up  production, but even they were hit by lower prices  as oil dropped to just over $30 a barrel and copper to  below $3,000 a ton before starting to recover in the  second quarter of 2009.

The government reacted angrily to the first phase  of the crisis. Bankers said President Nazarbayev  castigated them as “greedy traitors” and, with the  benefit of hindsight, it soon became clear that  the banks had indeed financed far more palatial  mansions and luxury apartments than the number of oligarchs and aspiring middle class able to buy them- but too few flats that working people could afford  in the fast-growing cities. The short-lived craze for  buying top of the range SUVs and Porsches on credit  also looked over the top – especially as the Almaty  Metro project dropped even further behind schedule  and road construction generally failed to keep up  with the growth in traffic and air pollutions

But the real crunch in what is now an almost two  year long crisis came in February 2009, always a  bleak month in the heart of the Steppe winter, when  the government issued a blizzard of instructions –  and put the resources of the National Fund to work  shoring up bank balance sheets. The Fund, flush  with $24 billion set aside from oil revenues in the  fat years for just such a rainy day, transferred $10  billion to Samruk/Kazyna, the state holding company  and de facto sovereign wealth fund. Further billions  were shovelled into financing nearly completed  construction projects, converting luxury flats  into more affordable properties for civil servants,  especially in Astana, and replacing banks as financiers to some credit-starved construction companies.

But the clearest sign of a new determination to  tackle an economy heading for zero growth – or  worse – came with the appointment of Grigori  Marchenko as chairman of the National Bank. One  of his early acts, in February, was to decree an 18  per cent devaluation of the Tenge, with a 3 per cent  fluctuation margin either side of the new Tenge  parity of KZT150 to the US dollar. It was KZT120  before devaluation. This helped the export orientated minerals sector – but aggravated the foreign debt  burden of the banking system.

The most controversial move was virtual  nationalisation of the country’s biggest and hitherto  fastest-growing bank, BTA, as Samruk defenestrated  the bank’s former president, Mukhtar Ablyazov, and  injected $1.7 billion in return for a controlling 76 per cent stake. At the same time Samruk poured another h $3 billion into the two remaining ‘big three’ banks – Kazkommertzbank and Halyk Bank, in return for  a quarter of their equity, and warned creditors of  Alliance Bank that re-financing the smaller of the top six banks would only happen if they first agreed debt-n restructuring terms.

Samruk’s role in the bank re-capitalisation  underlined the accumulation of wealth and power  into its hands over the last three years or so. Set up  ostensibly to improve the standard of management  in state owned companies, critics see its hydra-like  control over the ‘commanding height’ of the Kazakh  economy – railways, telecoms, power distribution,  airlines and the state oil and gas corporation KMG – as a reincarnation of Soviet-style control over the  economy, a sort of Gosplan designed by McKinsey.

Inside the arched Astana headquarters of Samruk, h and the ‘Golden Horn’ building housing formerly  autonomous Kazyna, now merely the financial arm of the merged Samruk/Kazyna, planners and strategists  have swapped the obtuse language of Soviet  bureaucracy, which older staff grew up with, for the  equally impenetrable jargon of US-style management consultancy speak. Samruk, say some of its fiercest  internal critics, has become like the UK’s BBC – a system of outdoor relief for the children of the elite,  setter at analysing problems than deciding and  executing decisions.

One of the big questions over the future of the  economy is whether the rise of Samruk/Kazyna,  headed by Kairat Kelimbetov, points to ever greater  state control over the economy, and a more crypto- soviet future, or whether the accumulation of  economic and financial power in its hands –  Kazatomprom was the latest big corporation to come  under its control – marks a temporary expedient  until a new generation of political leaders emerges  md controls can be relaxed.

Whatever the outcome, which is of great interest to foreign investors, the macro-economic developments  of the last two or three years already point to the  possibility that a much stronger and better balanced  economy will emerge from this crisis.

The big developments now taking place include  major modernisation of the road, rail, port and  Dther transport infrastructure to create a shorter,  modern transit route between China and Europe and  an to Iran. At the same time Kazakhstan’s export  pipeline arrangements are being transformed with  new 3,000km-long oil and gas export pipelines from  the Caspian Sea to Western China, expansion of the  ZPC and other pipelines through Russia – and a new  southern energy transit route across the Caspian Sea  to Azerbaijan and Georgia. China is rapidly raising its  profile and weight in the economy alongside Russia,  Europe and the US. Next year Kazakhstan will become the world’s biggest producer of uranium. All these  themes, and more, are treated, in greater depth,  inside this edition.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 23-24.

The Samruk-Kazyna refinary projects 0

Posted on March 07, 2010 by KazCham

“Currently, «the Samruk-Kazyna» National Welfare Fund is reviewing 31 projects in various fields of Kazakhstan’s national economy. The total value of the projects exceeds 23 billion US dollars. Out of that amount approximately 11 billion US dollars account for petroleum refining and petrochemical industries, including refurbishment and upgrading projects for three oil refineries in Kazakhstan.

You probably know that a programme of these refineries’ enhancement has been developed in the framework of advanced hydrocarbon processing, which will improve the extent of future hydrocarbon conversion and improve the quality of the produced petrochemicals up to European standards and meet the country’s demands for high-octane gasoline and aircraft fuel.

Ongoing is the implementation of the development project to create the First Integrated Gas Chemical Facility that will produce baseline petrochemical products like polyethylene and polypropylene. We are also implementing a bitumen producing facility in Aktau at the plastic-making works. We are about to start operations to implement a project of aromatic compounds production at Atyrau Refinery. Some other production opportunities (including methanol facilities) are also being reviewed”.

From a welcome note of the managing director of Samruk Kazyna National Welfare Fund, B. Akchulakov


Light at the end of the tunnel 0

Posted on March 06, 2010 by KazCham

Kazakhstan is heading for economic recovery nearly two years after the country’s heavily indebted banks became the first foreign victims of the global financial crisis, which began in the US. Economic growth fell from near double digits to around zero by the end of 2008 as commodity prices nosedived. The collapse in global prices for oil, copper and other export commodities reifoced the effects of the original banking crisis, which had sent shock waves through the construction and related industries as banks recalled loans and scrambled to repay maturing foreign debt.

Nearly two years after the onset of the banking crisis, the fate of two of the largest six banks – BTA and Alliance Bank – still hangs in the balance. Creditors face heavy losses from tough restructuring terms designed to keep the banks alive without saddling the state with heavy bailout costs. This is bad news for investors in Kazakh bank debt. But, paradoxical as it may seem, the hard line now being taken by the National Bank with the foreign banks and institutions which lent so freely to Kazakh banks in the boom times reflects a growing sense that the Kazakh economy has already come through the worst.

When the Kazakh tenge was devalued 18 per cent against the US dollar in February, foreign exchange markets factored in further weakening, which newly re-appointed National Bank President Grigori Marchenko insisted would not happen. Since then, oil prices have virtually doubled to more than $60 a barrel, copper prices have risen 60 per cent to more than $5,000 a tonne, and whatever the shape of the expected global recovery, Kazakhstan, with its rich resource base ,strategic position between China, Europe and the Middle East and rising investment in basic infrastructure will be one of the principle gainers. The next movement in the tenge is more likely to be up than down.

Commodity prices are not the only factor affecting confidence. A spate of top-level personnel shuffles and the arrest of senior officials in Kazatomprom, the state-owned nuclear mining and engineering corporation, on theft and corruption charges which many see as controversial, have unsettled both domestic and foreign investors.

President Nazarbayev, who presided over Kazakhstan’s seamless 1991 transition from Soviet Republic to sovereign state, is 68 years old, still active and vigorous. The next presidential elections are not scheduled to take place until 2012. But the last decade of rapid economic growth and the emergence of a new middle class is reflected in the maneuvering of the rising generation preparing to take greater power and responsibility in the years ahead.

The economic crisis of the last two years has inevitably impacted on this on-going transition process. The tensions are reflected in part by the recent concentration of economic power in the hands of Samruk/Kazyna, which doubles as a de facto sovereign wealth fund and industrial holding company. Samruk, which is headed by Kairat Kelimbetov, former head of the Presidential  Administration, was originally set up to inject modern, market-oriented management methods into the state sector of the economy.

It controls the ‘commanding heights’ of the economic system – Temir Zholy, the state railways; Kegoc, the national power grid; KazMunaiGaz, the state oil and gas corporation; KazkhTelecom, the main telecoms provider; and Air Astana, the national airline. This year it added to this ‘traditional’ portfolio by becoming the main shareholder in BTA Bank, a major shareholder in both Halyk and Kazkommertz Bank, and also took over the former direct state holding in Kazatomprom.

This concentration of ownership reflects the President’s choice of Samruk as the main instrument for carrying out the rigorous anti-crisis policy unveiled in February. Faced with a drying up of foreign bank finance, the government decided to deploy the billions of dollars prudently stashed away in the Norwegian-style National (Oil) Fund and central bank reserves during the boom years. Oil revenues were scrupulously separated from the budget and invested conservatively abroad under the watchful eye of the central bank and the Ministry of Finance.

Some $10 billion of these ‘rainy day funds’ of around $47 billion were transferred to Samruk in February in order to recapitalize the main banks and channel fund into selected support for the construction industry, finance for small and medium enterprises and agriculture.

At the same time, however, President Nazarbayev came back from a recent state visit to China with a $10 billion package of financial assistance, including a $5 billion investment by the Chinese state oil company in a joint venture with KazMunaiGaz. This financial boost from China was followed shortly afterward by a $5 billion investment and financing package from South Korean banks and enterprises. This shift in emphasis towards closer ties with Asia is a part of a global re-positioning in economic power away from the traditional sources of capital and technology in Europe and the US towards China and other dynamic financial surplus countries in Asia.

Two years ago, just before the boom collapsed, South Korea’s Kookmin Bank paid a total of $1 billion for contral of BankCenterCredit (BCC), while Italy’s Unicredit paid $2.3 billion for ATF Bank. Both new foreign owners have since injected further capital into their Kazakh acquisitions,  which both  see as potentially profitable investments in Kazakhstan’s long-term future. International investment banks have also been quietly building positions in the country with JP Morgan, Deutsche Bank and UBS prominent amongst recent arrivals keen to potion themselves for Kazakhstan’s expected emergence as a regional financial hub by the middle of the next decade – a prospect also attracting banks from Russia, Asia and the Middle East.

This quiet positioning of long-term investors contrasts with all the superficial signs of an economy in temporary crisis – idle cranes on early-stage construction sites, a steep fall in formerly boated property prices, a collapse in car sales, rising unemployment, falling inflation – which have imposed real pain on many families and individuals. The statistics indicate negative growth in the first quarter of 2009 and only optimists think 2009 will produce 1-2 per cent GDP growth overall – and that hinges on a global recovery in demand for the commodities, which make up more than 80 per cent of the country’s exports.

But 2010 and beyond should be a different story. Next year Kazakhstan’s international profile will rise as it becomes the first post-Soviet state to chair the Organization for Security and Co-Operation in Europe, which was set up to promote democratic development and economic and political co-operation between countries formerly divided by the Cold War. At the same time, China, Kazakhstan’s populous, resource- and energy-hungry but capital-rich neighbor, should be back on its long-term path of rapid economic development, and taking advantage of new pipelines and road and rail links connecting China and Kazakhstan and other Central Asian resources.

This reflects the key fact that throughout this tough recession the big international oil companies have continued to invest billions of dollars in world-size oil and gas fields in the west of the country, such as Karachaganak, Tengiz and Kashagan, while China has pushed ahead with a 3,000 km gas pipeline to carry Turkmen and Uzbek gas through southern kazakhstan to western China. At the end of 2012 the offshore Kashagan oil field is scheduled to come on stream and oil production and revenues will virtually double as production builds up to 1.5 million barrels a day from the new field.

Kazakh gas will also flow east to China when the new export line reaches full capacity of 30 billion cubic meters over the next few years, while construction companies are also building new oil and gas pipelines south and west to Europe via Azerbaijan, Georgia and Turkey. At the same time, Kazakhstan is poised to become the world’s largest miner and exporter of uranium for nuclear power stations as Kazatomprom powers ahead with operative investments with foreign companies in nes mines and processing plants.

With finance from China as well as the World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others, Kazakhstan is also gearing up to build a new motorway linking China and Europe. Heavy investment  in new rail links, powerful diesel locomotives from a GE locomotive plant in Astana and new oil and gas export facilities at the ports of Aktau and Kuryk are transforming the basic economic infrastructure and preparing for decades of future growth. The last two years have been tough, but the have not been wasted.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Pages: 18-20

MINEX’10 Central Asia 0

Posted on February 27, 2010 by Sergey Sek

Minex Central Asia Forum will be held on 16-18 March 2010 at the Radisson SAS hotel in Astana, Republic of Kazakhstan. Minex Central Asia Forum and Expo will become a key annual Mining event for Kazakhstan and Central Asian Region. The general objective of this forum is to illustrate and promote emerging investment opportunities in the Mining Sector of Kazakhstan and Central Asian republics. The forum also aims to provide companies with information about key business / technical / investment and financial factors which will assist them in managing their exploration and mining businesses in Central Asia.

Over 60 prominent speakers from largest mining companies, ministries, investment banks and mining consultants from Kazakhstan, Russia, Uzbekistan, Kyrgyzstan, Mongolia, China, Australia, United Kingdom and Canada will be presenting at the Minex Central Asian Mining & Exploration forum.

For more information about the forum’s agenda and information on how to participate in the forum please visit: www.minexasia.com

Chamber of Commerce and Industry of the Republic of Kazakhstan in the USA 9

Posted on January 05, 2010 by Sergey Sek

We are proud to announce the opening of an official representative office of the Chamber of Commerce and Industry of the Republic of Kazakhstan in the USA (“KazCham”).

Chambers of commerce have traditionally been the associations of enterprises engaged in trade, manufacturing and services. The predecessors of the medieval guild houses were merchants and artisans. The overall objective of the chambers around the world – protecting the interests of business and promoting their development.

Kazakhstan Chamber of Commerce and Industry (“Chamber”) was established in 1959 by decree of the Council of Ministers of the Kazakh Soviet Republic.

The Chamber represents interests of the Kazakhstani business community and provides a set of essential business services. The Chamber serves as the social and economic partner for small and medium-sized businesses in the dialogue with government, big business, as well as partners in foreign trade activities. The Chamber has signed over 70 cooperation agreements with foreign countries: Italy, UAE, Russian Federation, India, Turkey, Jordan, Syria, South Africa, Egypt, etc.

Each year, the Chamber, which has 16 regional chambers, provides 70 thousand services. Included are a number of expert and inspection services, consultations on foreign trade activities, assessment services for the customs value of goods, confirmation of documents on foreign trade transactions, the consideration of disputes arising between the partners.

When conducting business forums in Kazakhstan and abroad, visiting foreign markets as part of trade missions is a proven and cost-effective way to grow your business. A business visit, professionally planned and managed by Chamber specialists, allows one to achieve results much more efficiently than a few self-organized trips.

The practice shows that the majority of business contacts, organized and implemented by the Chamber, are effective.

Membership in the Chamber is voluntary.

After decades of hard work, the Chamber gained tremendous experience and serves for the benefits of your business.

In 2009 the Chamber of Commerce of the Republic of Kazakhstan celebrates its 50th anniversary.

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