Kazakhstan Chamber of Commerce in the USA



Posted on January 09, 2011 by KazCham

Sheridan Prasso asks Prime Minister Massimov about foreign policy, diversification and investing in Kazakhstan

THE GOVERNMENT OF Kazakhstan is ready to provide investors with one of the most liberal tax regimes in the world, essential infrastructure, and generous state support, according to Prime Minister Karim Massimov, who notes that 2009 was a breakthrough year for foreign investment despite the financial crisis. He also wants to reassure investors worried about the renegotiation of production-sharing agreements that their investments are safe in Kazakhstan.

Q: What is the situation in Kazakhstan in terms of attracting foreign investment following the global financial crisis?

Investments have declined around the world. Kazakhstan was no exception. However, in spite of these extraordinary circumstances, we performed better than our peers, especially those in the Commonwealth of Independent States (CIS). In fact, we achieved positive GDP growth in 2009 while also avoiding large-scale unemployment. At the same time, our foreign exchange reserves and savings have grown. Currently, National Fund assets and foreign exchange reserves amount to more than $50 billion. Despite the acutely difficult economic environment, 170 industrial and infrastructure projects worth $3 billion were brought into operation, creating more than 9,000 jobs.

These projects include a locomotive assembly plant in Astana, which was built in partnership with General Electric; a gas processing plant at the Kumkol gas field in South Kazakhstan; a multi-lane freeway between Astana and Schushinsk, and many others. These projects were carried out with foreign partners and international financial institutions. Overall, 2009 was a breakthrough year for investment promotion in Kazakhstan. Thanks to high-level dialogue with countries including South Korea, China, Italy, France, Turkey, and Belarus, we reached agreement on projects amounting to $25 billion.

As a result, we are embarking on the largest industrial projects in the history of Kazakhstan. These include the Balkhash thermal electric power station, a gas pipeline from Beineu to Bozoi, and the production of fuel assembly units for atomic power stations by Kazatomprom and the French company Areva. In addition, there are plans to modernize the Atyrau oil refinery, build a gas-based petrochemicals complex in Atyrau, and construct a shipyard at Kuryk. The list goes on.

Therefore, Kazakhstan has demonstrated its attractiveness as a destination for investment despite the global crisis.

Q: What are the advantages and opportunities that did not exist prior to the crisis?

Political and social stability together with strong government institutions allowed us to approach economic development, particularly investment promotion, confidently and decisively during a period of great external uncertainty.

As a result, the Government of Kazakhstan is ready to provide investors with one of the most liberal tax regimes in the world, essential infrastructure, and generous state investment support. These measures are endorsed by credible international business and competitiveness surveys, including the World Bank’s Doing Business Report and the World Economic Forum’s Competitiveness Index.

The crisis has also brought into sharp focus the primary challenge facing our economy: reducing dependence on raw materials and generating more income from diversified sources. This creates opportunities.

Our task in government is to provide conditions for foreign direct investments in value-added sectors. This means fewer incentives for the extraction of raw materials and greater incentives for the processing industries. Our objective is to move up the value chain of production. As a result, we are looking for investors who have more to offer than simply capital – for example, technology and skills transfer. The government is willing to provide these investors with tax preferences, demand for products guaranteed by state orders, and access to cheap sources of financing.

Q: Foreign investors are worried about investing because of the government’s intention to renegotiate production-sharing agreements (PSAs). What can you say to them in response, and to investors outside the oil and gas industry?

I would like to state unequivocally that there is no “government intention” to unilaterally force subsoil users to accept changes to the initial terms of the largest production-sharing agreements, and there will never be.

These agreements were signed according to the legislation that was in force at the time. However, in the 15 intervening years, the situation in global markets has changed dramatically. Oil prices have been growing for many years, reaching the unprecedented level of $150 per barrel in 2008. This allowed oil companies to generate massive excess profits. Even now, oil prices are several times higher than during the 1990s. For this reason, we believe that foreign companies will agree that some amendments to the subsoil use regime are fair and in the long-term interests of the industry.

To say that Kazakhstan is attempting to shift the largest PSAs from an “international” to a “national” tax regime would be a mistake. As a matter of fact, the opposite process is occurring. The PSA formula of the 1990s was created to meet investors’ needs exclusively. Now, Kazakhstan needs to balance its interests with those of its partners. There is no balance if the country receives the same amount of tax revenue at an oil price of $10-$20 per barrel or $60-$150 per barrel.

In all our relations with investors, including subsoil users, we always act according to the law, and we respect due process. There will be no unilateral decisions or any other actions by the government

that run contrary to the law. This is the fundamental position of Kazakhstan’s government. Private property protection is enshrined in the Constitution of the Republic of Kazakhstan and we consider it sacrosanct. Our relations with investors are built on this bedrock.

Regarding messages for investors outside the oil and gas industry, we are working hard to attract investment into the non-extractive industries. Kazakhstan is looking for partners and is ready to provide the most favorable conditions to ensure that we, together, achieve success.

Lastly, I wish to provide a final message for those operating in the oil and gas sector: do not be concerned about your investments; Kazakhstan will continue to guarantee their safety. You have absolutely nothing to worry about. You are protected both by international law and Kazakh legislation.

Q: What opportunities does the government’s Diversification Strategy create for foreign investors outside the extractive industries?

Since independence we have attracted more than $100 billion of foreign direct investment into the economy which has, in turn, spawned approximately 8,000 companies with foreign participation. We have attracted quality investment and investors: more than half the Fortune 500 currently invests in Kazakhstan.

However, today we are beginning a new phase of cooperation with foreign investors.

Over the next decade our approach to economic development will revolve around our economic diversification strategy. Foreign investment has a vital role to play in priority sectors. These include metallurgy, oil processing and refining, electricity generation, chemicals and pharmaceuticals production, agriculture and food processing, building materials production, transportation and communication infrastructure, nuclear fuel production, tourism and space.

In recent months, the government has created several programs which provide measures of state support for these priority sectors. Currently, for example, the government is considering the creation of new free economic zones. Local companies, including those with foreign participation, will be permitted to operate within these zones. As a result, they will be granted a number of preferences including exemption from customs duties, corporate tax, property tax, land rent, and other preferences.

Export-oriented companies outside of the free economic zones will also enjoy significant preferences. The greater the company’s export-orientation, the greater the preferences it will be entitled to.

Q: Developing countries (such as Malaysia) have discovered that import-substitution strategies are not a successful means of economic development. How will the government’s Diversification Strategy challenge this?

Let me somewhat disagree with your assessment of the Malaysian experience. It is well known that the country’s economy – which until a few decades ago was based on natural rubber exports – has made giant strides forward. There is no need to list all the areas in which Malaysia has succeeded by relying on import substitution – such as developing national “Silicon Valley” enterprises. If in 10 years, 60 percent of Kazakhstan’s exports are comprised of electronics, for example, it will be a comparable breakthrough for us.

We do pay a lot of attention to the experience of countries which try to overcome resource dependency by import-substitution. Here, not only do we mean the “Asian tigers,” but also Russia, which faces many challenges similar to ours.

Of course, the Government of Kazakhstan is not trying to substitute the entire range of imported goods with domestic sources of production. Clearly, in a globalized world, setting high trade barriers and restricting imports administratively does more harm than good. Therefore, we must focus on the production of goods and services where we have sources of competitive advantage. Kazakhstan possesses such advantage in a range of areas.

It is absurd for one of the largest oil exporters in the world to import almost 40 percent of oil products for the domestic market. We will eliminate this illogical and unnecessary situation by investing in the modernization and reconstruction of our oil refineries.

More than a century ago, the great chemist Mendeleev said that using oil as a fuel is akin to firing a furnace with bank notes. Our task, therefore, to avoid pitching more banknotes into the proverbial

furnace, is to ensure there is sufficient local production of oil products for the domestic market.

Another promising sector is agriculture and food processing, which has significant natural advantages in a country with abundant arable land. Livestock, for example, has great potential. With the appropriate processing infrastructure in place, Kazakh meat can not only satisfy internal demand, but also markets along our borders – particularly in Russia, Europe and China.

Our strategy of increasing local content is a temporary measure designed to support the national middle class. It is aimed at boosting local development in key sectors which have significant potential in internal and external markets. We certainly do not plan to put every Kazakh citizen in a Kazakh car, dress them in locally produced clothes, and make them watch TV produced in Kazakhstan. Instead, what we mean is the priority development of certain key sectors which have sources of sustainable competitive advantage.

Q: What are advantages and disadvantages to Kazakhstan and to foreign investors in the creation of the Customs Union with Russia and Belarus?

Today the global economic situation is changing very rapidly, and in response, new economic and political centers are emerging. Kazakhstan’s support for the Customs Union is a move in this direction -an acknowledgement that the world is changing and Kazakhstan must change with it. We expect the Customs Union to become a single economic space in the near future and, with it, EurAsEC [EurAsian Economic Community] will become a new global center.

Of course, our commitment to the Customs Union is based on our practical economic interests. Yet, large reforms will always have negative side-effects, whatever their positive contribution overall. We now equilibrate custom duties to a “single denominator,” but most sectors in Customs Union countries are not at comparable stages of development. Thus, due to the absence of automotive and aircraft industries, Kazakhstan will suffer from higher tariffs on imported cars and airplanes. We will also need to impose higher tariffs on electronic goods. Many people in Kazakhstan are worried that entering the Customs Union will reduce low-cost imports from China and lead to substantial price increases. However, without question, there are many more advantages to membership of the Customs Union than to the contrary.

Scrapping the many customs barriers that exist today will lower the cost of cargo transportation, a critical challenge in our region, which in turn will provide better access to the three countries’ infrastructure. We will have a single market with a combined population of 170 million and total GDP exceeding $2 trillion. This larger, unimpeded market will support the development of new businesses in the region in sectors where the barriers to entry were previously too high.

Several large companies have already expressed interest in establishing automotive and computer assembly facilities in Kazakhstan. The Customs Union has markedly improved the attractiveness of these sectors domestically, in light of our low corporate tax, skilled labor force, and now, large single market.

Additionally, I am certain that growing competition across the Customs Union will soon result in higher quality of local goods and lower prices. Let us not forget that local producers will now be entitled to access the technologies of our Customs Union partners. For instance, we are currently negotiating with Belarus to establish joint production in Kazakhstan of agricultural machinery, heavy trucks, and other light industry, based on their technology and know-how.

The free exchange of goods within the Customs Union will open up new markets to Kazakh producers including in the agro-industrial sector. Historically, we had difficulties exporting our agricultural products to other CIS countries. Now these problems are a thing of the past.

Q: What is the state of Kazakh-Chinese relations, particularly in the energy sector? Is Chinese involvement in Kazakh oil companies appropriate, and what price did Kazakhstan pay to obtain approximately $13 billion of investments, credits and loans from China last year?

The price to receive $13 billion of investment at the nadir of the global crisis, without sacrificing a shred of our national interest or security, was fair.

What are the agreements about? We reached an agreement with the Chinese government to manage MangistauMunaiGas together after returning half of the company’s shares to state property and giving control to the national company KazMunaiGas. Joint management does imply selling a proportion of the oil production in China at market prices.

Our other contracts deal primarily with export financing for machinery and equipment purchases from China. They also involve investments to bring new mineral deposits into production with a reciprocal agreement to supply Chinese demand for future production.

Finally, a substantial share of the investments took the form of credit by the State Development Bank of China to the Development Bank of Kazakhstan for supporting our diversification and industrialization program. This was a critical condition of the deal. It also demonstrates the willingness of the Chinese people to support our ongoing industrialization efforts.

We are open to investment from around the world. As a result, in 2010, 28 percent of an estimated 80 million tons of oil production will be produced by KazMunaiGas, 24 percent by American companies, 22 percent by Chinese companies, 17 percent by European companies, and 9 percent by Russian companies.

We consider CIS countries, as well as Western states and China, as equal and strategic partners. That is the distilled essence of our foreign policy over the last two decades. ?

Sheridan Prasso, editor of Invest in Kazakhstan, is an associate fellow at the Asia Society in New York and a contributing editor at FORTUNE magazine.


Кazakhstan – U.S. Investment Forum 2010 0

Posted on July 27, 2010 by Sergey Sek

The Embassy of Kazakhstan will be hosting the third annual Kazakhstan – U.S. Investment Forum 2010
on November 8-9 in New York.
The forum, an official Government of the Republic of Kazakhstan event in partnership with Newsdesk Media Inc, is entitled: ‘Program of Accelerated Industrial-Innovative Development of Kazakhstan’.
This year’s event will highlight the Government of the Republic of Kazakhstan’s initiatives to increase the productivity
and competitiveness of the economy in order to provide sustainable and balanced development. Following a teleconference address by H.E. Karim Massimov, the Prime Minister of Kazakhstan, the forum’s agenda will provide in-depth analysis across the designated sectors of Agriculture, Construction and Metallurgy, Oil & Gas and Petrochemicals, Machinery, Transport and Telecommunications, Energy, and the Chemical and Pharmaceutical Industry.
A high-level delegation from Kazakhstan led by H.E. Asset Issekeshev, Deputy Prime Minister and Minister of Industry and New Technologies, will participate along with H. E. Richard Hoagland, United States Ambassador to the Republic of Kazakhstan. The forum will also host the formal launch of the Republic of Kazakhstan’s Chamber of Industry and Commerce representative office in the United States.
For further information, please visit: www.kazakhinvest.com

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