Kazakhstan Chamber of Commerce in the USA

KazCham



III Astana Economic Forum 0

Posted on April 28, 2010 by Sergey Sek

The III Astana Economic Forum will be held in July 1-2,  2010 in Astana city and dedicated to the issues of ensuring sustainable economic growth in the post-crisis period.

The third economic forum will bring together over 2000 representatives from political and business area from more than 50 countries of the world this year, and also the leading scientists, representatives of the public and mass media to discuss the key subjects of the global economy development.

The two-day event program is dedicated to the issues of innovation, business, industry, international trade, export and import, customs union, energy, ecology, international financial and currency systems, Islamic financing and youth development. Within the frames of the Forum the exhibition of scientific works and innovative projects, competitions for the best research works and two events with the participation of the international organizations concerning the issues of the role of information and communication technologies and development of “green” economy will take place.

Contact information: 
Tel.: + 7 7172 70 18 32 
Fax: +7 7172 70 18 35 
E-mail: forum@aef.kz 
Skype ID: aef2010

Interview with Grigory Marchenko, the head of the National Bank 0

Posted on April 06, 2010 by KazCham

The crisis came down to nothing or we just got used to live in its terms, taking it as an inescapable reality? The economy is stuck at the notorious bifurcation point and what to expect now: an increase or a new wave of setback? These issues are still hotly debated in society. Discarding the emotions and looking at the situation on the basis of the indicators of bygone years, the head of the National Bank, Grigory Marchenko, offers his view.

– To remind you the key results of the economic growth of Kazakhstan according to official sources in 2009: economic growth was 1,1%, industrial growth – 1,7%. While the predictions at the start of the last year were very pessimistic. Today, experts agree that a positive result was achieved by taking proper anticrisis measures in many ways. The effectiveness of the Government, the National Bank and AFS, summing up the very difficult year, were voiced by the Head of the State in his speech: “The world financial and economic crisis affected the pace of economic growth but did not stop our development. Past economic potential provided us with stability in difficult crisis battles for three years. We have defended the country’s financial system and rescued banks. We were in a “breakout group” of countries with positive growth rates. Gross international reserves and assets of the National Fund already exceeded $ 50 billion and has increased over the past ten years for more than 25 times. It is important to note that we spent part of the funds last year, but yet today the fund is bigger than in December of last year.” Today’s priority is to prepare the economy for the post-crisis development. So, are we done with the page addressed to the crisis and its emotional perception?

– There are lee emotions now and you can safely talk about it, because accusations,  made and not made, in fact, have accumulated a lot, said the head of the National Bank. – The fact that they are mostly emotions, economically unfounded or financially illiterate, is obvious. In particular, the question: why did we have the devaluation? Even today there is still some views that it could not have been done. But this is  misleading.

– Gregoriy Aleksandrovich, to be honest, some measures, particularly February devaluation, seemed very hard, painful, ill-founded a year ago.

– Shall we recall what happened before? Prices for raw materials, which is our main export item and an essential part of the economy, fell two or three times. In autumn 2008 the country’s neighbors  devalued the currency: Russia – 50%, Ukraine – almost 60%. In January 2009, our industrial production fell by 18% in a month. This reduction was for those industries that competed with cheap imports of Russia or Ukrainian (more than two-thirds of them). All that we had already passed in 1998-1999! We also had no internal reasons for the devaluation. But there was a default in Russia. There was an abrupt devaluation, and all of Russian, Ukrainian, Belarusian goods fell sharply in price in dollar terms and poured into our market. They were much cheaper than domestic goods, which costs could not compete with them. As a result, our enterprises had problems: first, they began to go to work in one shift, then began to send people to unpaid leave …
Many financiers saw the devaluation as the only exit in January and February 1999. Although, personally, I was not its advocate. At that time I was a member of the working group, and we were opposing devaluation, believing that we could solve those problems by methods of tax and customs policy of the state. It did not happen. And the National Bank introduced a freely floating exchange rate in April 1999.
In January 2009, there were similar factors and other circumstances. For example, during one month the net purchase of US dollars was amounted to two billion dollars in exchange offices! For our system is an absolute record.
In addition, during the same month the flow of deposits in tenge currency to foreign currency was 3,8 billion dollars. Thus, everybody understood what was happening and began a massive withdrawal into dollars. These factors clearly indicated that the devaluation was absolutely inevitable. The question was only how to do it. But that was what exactly I had to do in a week after taking the office; I did not come up with a scheme. By this decision, I repeat, we summed up the real situation.

– Was there an alternative to implement schemes, for example, the gradual devaluation, as in neighboring Russia?

– The decline in industrial production, the massive buying of dollars and flow of tenge deposits into foreign currency clearly said that the devaluation had to be done before and that we were already late. From the standpoint of economic theory it should have been carried out in October, when commodity prices fell. That happened, for example, in Australia, Canada, Norway. These countries, like Kazakhstan, are commodity exporters. There, the exchange rate in just a few weeks fell to 26% in Australia, at 28% in Canada and 40% in Norway. There was also a second option: to devalue along with Russia in mid-November. Neither the first, nor the second option had been made. Therefore, the only way out was to conduct a one-stage devaluation in February 2009.

– It is believed, that as a result  investors, individuals, who kept their savings in tenge, became the most aggrieved party…

– According to the National Bank, Kazakhstan depositor shifted to the foreign currency deposits 20% savings in four months (November 2008 – February 2009), and in Russia, despite the gradual devaluation – 18%. That is, our people had shifted more money: all who wanted to protect savings which was done before the devaluation. In that case we had no leaks of deposits. And it was in Russia: 300 billion left the banking system, but later returned. I also recall that during the last decade the National Bank has always insisted that you should not keep all your savings in one basket. It is necessary to divide the savings in the proportion of 50 to 50. And then the currency fluctuations between them are not scary. Investors who adhere to this rule were not affected by the devaluation.
If we compare the scheme of the devaluation, let’s judge their performance. In Kazakhstan GDP grew, albeit a little bit; in Russia it fell for 7,9%. Inflation in the neighboring countries was 8,8% in 2009. In Kazakhstan – 6,2%. This one and a half times lower compared to 2008 (9.5%). Although, I remind you that some of the most pessimistic “experts” promised us inflation at 25%. The forecasts of the same “experts” on the second round of devaluation were not justified as well. They frighten people that the dollar would cost 180 tenge. It’s possible even now to hear such predictions, but if the “experts” regularly mistaken before, then why do people believe them now?
I think the important lesson of the last year is that the National Bank, publicly designating its policy, was adhered to it: we did all that we promised. The National Bank marked the corridor, and it passed. And the corridor was even narrower in reality. We promised that there would be more inflation but it did not let that happen. We said that there would be a small growth in GDP, and it was so. However, even more than we planned. We have done everything correctly, and all our predictions were confirmed.
I think the situation with international reserves (gold reserves) of Kazakhstan is fully restored: the total gold and foreign assets (GFA) of the country stand at 52.7 billion dollars now. But it’s more than before the crisis, despite the fact that we spent 10 billion dollars from the national fund for the anti-crisis measures.

– It is common knowledge that you are not a fan of analysts and experts. However, the National Bank uses forecasting and planning. What is, in your opinion, permissible prediction error?

– We have no, unfortunately, serious analysts or an authoritative analytical community. However, many foreign analysts do not differ in their validity and accuracy of forecasts as well. For example, they predicted the deficit of current account balance at minus-six – eight per cent of GDP in 2008 for us, but it was actually plus five percent! Error in 12 billion dollars! However, the same experts come again and give forecasts for Kazakhstan in 2010. But if the experts do not understand the economy, do not understand its significant difference from the economies of Europe or Russia, they should not give forecasts, or give them, but cautiously, with these caveats in mind.
I, personally, and the National Bank, would gladly welcome a serious analytical community, but there are just a few good analysts. I can name one of them – Jonathan Schiffer, the vice president of Moody’s, who is responsible for Kazakhstan since 1996. Before he was a professor at the Columbia University and worked on the Soviet economy. There are just a few people who understand the nature, essence, the origins of the national economy, its specificity and the mentality of the population. Everything matters in the analysis, even, for example, the notion of “sedentary” or “nomads”. And who, for example, knows in Europe what is a nomadic lifestyle and the customs and traditions that it generates?

– For example, the Roma …

– But they do not work as analysts! But if to talk seriously, the National Bank is constantly analyzing the situation and makes predictions. It prepares and not guesses. But even in serious prognosis some errors are allowed. So, we gave the forecast for GDP growth of 0,3%, but it turned out – 1,1%. The volume of GDP at current prices, according to operative data of the Statistics Agency, reached 15.9 trillion in 2009. Let me remind you, some analysts predicted the fall of the main indicators, but in practice it was an increase. That is, first, the trend was identified incorrectly. This is a principle mistake. Secondly, there is an error of calculation – not even for a few percents, but in times. Therefore, the National Bank indicates the corridor in forecasts. And if the process goes in limits of this corridor, the exact approach is correct.

– Grigory Aleksandrovich, I remember well your interviews with our newspaper three-four years ago, when you warned about the mortgage bubble and would predict that it would burst. It happened. Many mortgage based businesses were in a difficult situation. What to do now?

– They are all adults, and if they assume such risks in the market economy, they should be responsible. And I do not see other ways but to negotiate with your bank, explain what the essence of problems is and how the debt can be restructured. There are people who really were in a difficult situation because of the crisis circumstances among the borrowers. But many of them wanted to do business on the growth of prices in the real estate market. That is another story – this is a market risk rather than social risk. In addition, we estimate that one third of borrowers could not service their loans, even if there was no crisis and there would be no devaluation. And there are many lessons to be learned for everybody, because some borrowers used dishonest tricks in efforts to confirm their ability to pay. For example, they provide banks with non-existent income statements.

– To sum up: how does the National Bank evaluate the outcome of the devaluation, does it achieve its goals?

– The results clearly show that our decision was necessary and correct. One-stage devaluation immediately reduced the pressure on the national currency and devaluation expectations, increased the competitiveness of Kazakhstani goods by reducing their costs, improved the balance of payments, and maintained gold reserves of the National Bank and the country. In addition, despite the devaluation, the total amount of residents’ deposits in the banking system for the year increased by 19.7% to $ 6,473 billion tenge. Moreover, individual deposits grew by 28.5%, exceeding 1.8 trillion tenge.

– Your term “asymmetric apron” gave an incentive for new forecasts. In particular, it was about a more pronounced correlation of tenge exchange rate with the rate of the ruble, which includes the establishment of the Customs Union. Are these assumptions reasonable?

– In principle, the establishment of the Customs Union should not have any pressure on tenge exchange rate in relation to Russia’s ruble as well as it does not require an adjustment in the monetary policy of the National Bank. However, one of the potential risks involved with the creation of the Customs Union is a risk of rising inflation. However, if implemented, the National Bank has the necessary tools to minimize it.

– The head of the state demanded banks to cut off from overtly or covertly affiliated entities,  to ensure that they are engaged exclusively in banking activities and that their activity should be very transparent. What measures are supposed to take?

– First, it is necessary to tighten control over the ongoing intra-group transactions and prudential supervision of banking conglomerates. Secondly, it’s necessary to improve measures on transparency of the ownership structure of financial institutions and affiliated organizations. Today, there is a working group, based on the AFS, is being established to develop a bill which will ensure the transparency of banks and their exclusive affiliation with other entities. It will also include representatives of the National Bank of Kazakhstan.

– Evaluating the outcomes of anti-crisis program in 2009, do you consider it necessary to continue the state support for the banking sector?

– The main achievement of bygone years that the banking system of Kazakhstan is relatively successfully coped with the negative impact of the second wave of the crisis. Problems of individual large banks do not have the problems of the whole system, and they successfully complete the restructuring process. In general, a package of anti-crisis measures helped to overcome some of the most dangerous consequences of the crisis. In particular, to overcome the shortage of credit on the most important sectors of the economy and avoid a collapse as a result of underfunding.
If we talk about stabilizing activities in the current year, I think, success will depend on the concerted action of the Government, AFS and the National   Bank. We have already identified the main directions of work. First, to support exchange rate stability of tenge and the level of liquidity of the money market.
This is the main task of the National Bank. Secondly, it is necessary to accelerate the healing process of bank balances and to clean their low-quality assets.
Thirdly, there is a need to develop a set of measures that will stimulate the credit activity of banks in the post-crisis phase. Fourthly, it is necessary to make the transition to a countercyclical management and improved risk management systems in financial institutions. Finally, fifthly, there is a need to develop a set of measures to reduce the level of economic imbalances and systemic risks.
I think that, it is not worth to cease the direct support of the banking sector completely in 2010 because the current state of the banking sector is largely dependent on state support, which allows overcoming the shortage of funding banks. However, there should be a gradual reduction in state aid and stimulus to the process of finding new sources of funding.

The interview is taken by Alevtina DON

SOURCE: http://www.zakon.kz/165594-grigorijj-marchenko-my-sdelali-vse.html

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.

Banking overview 0

Posted on March 06, 2010 by KazCham

KAZAKH BANKS ACCUMULATED $45 billion of foreign  debt in a few years of heavy borrowing to fuel their dynamic growth. As a result they became the first  victims of the global financial crisis sparked off  by the US sub-prime crisis in July 2007. Nearly two  years later, the crisis is still being worked through.  BTA, the country’s largest bank, has been virtually  nationalised; another two of the ‘big six banks’  have been partially recapitalised with state money, while two have been helped out by their new  foreign bank owners; and the sixth, Alliance Bank,  is still struggling to find a future either through nationalisation or a foreign takeovers.

BTA, the largest pre-crisis bank, has been virtually  nationalised, and Samruk, its effective new owner  after a $1.7 billion partial re-capitalisation in February, is seeking both to re-schedule its $11 billion foreign  debt and attract a new foreign owner. Russia’s  Sberbank is one interested party, but others may  come forward. The future of Alliance Bank, the fourth  largest, was still in doubt at time of writing, but  Central Bank president Grigori Marchenko hinted that  it could be allowed to fail if creditors cannot agree a  debt restructuring deal acceptable to Samruk/Kazyna,  the state holding company charged with re-capitalising and restructuring the banking system.

Halyk Bank and KazkommertzBank (KKB), the  surviving duo of the former ‘big three’ leading  Kazakh-owned banks, ceded 25 per cent of their  shares to Samruk in return for capital injections  in February, when the state intervened to restore  confidence in the battered financial system. They expect to return to full private ownership within the  next few years. The government insists that de facto nationalisation of some banks and state-financed  re-capitalisation of others is a short- to medium-term  emergency operation to cope with the effects of a  global crisis – and not an attempt permanently to  expand the state’s role in financial markets.

In the three years leading up to the crisis, Kazakh  banks grew at a phenomenal rate – virtually doubling h their assets and liabilities every year – before being  halted in their tracks in August 2007. As they struggled to recall loans or refinance at higher rates, the ensuing credit squeeze throttled the construction h industry and lending for consumer goods and mortgages, and non-performing loans, rose.

The creation of a well-regulated domestic banking system, together with pension funds, a stock market and a government-run National Fund to absorb and conservatively invest ‘surplus’ oil money for a rainy  day, was one of the biggest successes of the first years  of independence. It was therefore reassuring when  Grigori Marchenko, one of the main architects of  banking reform and probably the country’s most  experienced banker, was recalled by President Nazarbayev in January to head the National Bank,  as the wider economy reeled from the collapse of  commodity prices, which followed the demise of  Lehman Brothers.

Record high commodity prices cushioned the  impact of the first stage of the Kazakh banking crisis  and made it possible for banks to repay all their  maturing loans over the first 15 months or so of the  crisis. But the collapse in the value of the country’s  main exports ushered in a new and more acute phase  of the crisis. The partial recovery of oil, copper and  other key commodity prices in the second quarter of  2009 provided the first chink of light at the end of  what has already been a nearly two-year tunnel.

Marchenko, an acerbic free-thinker with experience of both international financial institutions (such  as the World Bank) and the private sector, where  he worked at Deutsche Bank, masterminded  Kazakhstan’s successful navigation of the post-1998  Russian rouble crisis when he was last president of  the Central Bank.

For four years before his re-appointment,  Marchenko ran Halyk Bank, the privatised former  state savings bank. In 2006 Halyk raised $748 million  from a London IPO in 2006, which brought in foreign h institutional investors while retaining control by  the bank’s well-connected main shareholders, Timur  Kulibayev and his wife.

While Halyk’s main competitors – KKB, which  had similarly raised $845 million from an IPO in  2006, and BTA – opted for foreign-funded growth at  breakneck speed, Marchenko ran a more conservative ship. He repeatedly warned of the dangers of reckless borrowing. He warned that Halyk’s own internal  research indicated that the banking sector had become “an accident waiting to happen” months  before the crisis erupted.

Those banks with foreign equity from IPOs and/or  foreign shareholders have fared best in the current  crisis. But when foreign lending dried up and  commodity prices collapsed in 2007-8, globalisation  became a double-edged weapon as Kazakhstan got  lumped together indiscriminately with much less  well-endowed and well-run economies. Fortunately  for Kazakhstan, but less so for the foreign banks who paid top dollar before the crisis broke, Italy’s  Unicredito paid $2.3 billion for ATF Bank and South  Korea’s Kookmin Bank paid $1 billion for a majority  stake in BankCentreCredit (BCC) a few months before the crisis broke. Anvar Saidenov, National Bank  president at the time, was delighted to welcome the  deep-pocketed newcomers, noting that “Kookmin  alone had more assets than the entire Kazakh  banking system put together.”

Significantly the only ‘top three’ bank not ready to launch an IPO three years ago was BTA Bank, which  has been the main casualty of the banking crisis,  together with the much smaller Alliance Bank. The  latter’s headlong leap into consumer and mortgage  finance made it vulnerable and it was unable to lock  in a foreign buyer in time.

In the months leading up to the 2007 crisis, dozens of foreign banks were looking for Kazakh  acquisitions, although many of them, such as  Austria’s Raiffeisen, were deterred by the high  multiples demanded. Now the boot is on the other  foot, as BTA spearheads the search for new foreign  investors and smaller banks seek either foreign partners or mergers as the government raises minimal capital  and other requirements.

The crunch came in early February this year when  Marchenko, who had privately advocated devaluing  the Kazakh tenge in the autumn of 2008 in line  with the Russian rouble, announced an 18 per cent  devaluation from around tenge 120 to the US dollar,  to a 3 per cent margin around a new tenge 150 central  rate. Devaluation added to the foreign currency repayment burden of all banks – but especially to BTA,  the biggest borrower of all, with over $11 billion in foreign liabilities. In March, BTA’s new chairman, Anvar  Saidenov, announced that UBS and Goldman Sachs had  been appointed as financial advisers to help the bank  re-schedule its debts and find a new owner.

Tough rescheduling negotiations lie ahead for Kazakh banks. But Marchenko told the Eurasia Media Forum  in Almaty in April that Kazakhstan’s foreign debt had  already been reduced from $56 billion, or around 50  per cent of GDP, in summer 2007 to $35 billion by  the beginning of April 2009. “The banks will still be  servicing their debts after the second quarter and by  June it will be clear that the foreign borrowings issue  will be resolved,” he added.

A leaner, wiser and temporarily smaller and more  locally-focused banking system is emerging. The  government wants banks to concentrate more on  financing small and medium enterprises (SMEs) and  institutions like the EBRD and the Asian Development  Bank are supporting this. The EBRD, for example,  recently provided two loans totalling $100 million to  support SME lending by ATF Bank. Its parent bank,  Unicredit, also stepped in to shoulder repayment of $500 million-worth of ATF’s maturing foreign loans.

Increasingly, Kazakhstan is looking to the Middle  East and Asia for finance, trade and banking links.  President Nazarbayev signed a $10 billion oil and  infrastructure investment and financing deal with  China during his state visit in April, for example,  and a month later a major South Korean delegation  came to Kazakhstan to sign finance and investment  commitments totalling $5 billion.

Meanwhile, the rise in oil prices above $60 a barrel  and a lift in commodity prices generally in April/May  helped restore liquidity to some of the banks’ main  customers and the banking system itself. It has been a  heart-stopping ride since summer 2007 – but, as markets gradually recover and new sources of finance open up,  Kazakh banks should also benefit.

Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 80 – 81.

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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