Kazakhstan is the ninth largest country in the world with huge economic potential, but how easy is it doing business there?
The ninth largest country in the world, Kazakhstan stretches from Eastern Europe to Asia across an area the size of Western Europe. It is rich in natural resources, with huge economic potential. A series of economic reforms and privatisations have encouraged growth. The IMF’s World Economic Outlook report forecasted GDP growth of 5.9% and 6% for 2012 and 2013 respectively, and negotiations on Kazakhstan’s accession to the World Treaty Organisation should be completed by the end of 2012.
Unsurprisingly, Kazakhstan is attracting interest from international investors. So what are key issues for those wishing to do business there?
Essential for anyone wishing to do business in Kazakhstan is an understanding and recognition of the distinctive Kazakh business culture. It is strictly hierarchical, normally with just one key decision-maker, the most senior person in the company. Personal relationships are key, and while those in more subordinate positions can represent the business during meetings, they normally do not have the authority to make decisions unless stated in writing. The same will be assumed of company representatives negotiating with Kazakh entities - don’t send someone junior to meet the CEO.
Construction activities are heavily regulated in Kazakhstan and require a number of permits and approvals. The main legislation regulating construction is the 2001 Law on Construction. Most stages of construction are subject to approval, in particular by the Agency for Construction, Housing and Utilities.
Like many business and professional activities in Kazakhstan, most construction activities are subject to mandatory licensing. A 2007 law (Decree No. 555) lists the construction activities affected. Licences are obtained from the regional local executive bodies, which have a great deal of discretion in applying the regulations.
Employment, local content and the environment
The Labour Code adopted in 2007 regulates the employment of both residents and non-residents in Kazakhstan. Employee rights established by the code generally cannot be reduced or restricted by the provisions of an employment contract.
Local content is a crucial consideration for any organisation wishing to do business in Kazakhstan. A local content regulation requires contractors and suppliers to purchase goods and services from local Kazakh entities, give employment preference to local labour and meet annual local content benchmarks.
The 2004 Law on Conservation, Reproduction and Use of Wildlife regulates environmental matters and the Ministry of Environmental Protection deals with the licences and permits required by contractors and suppliers.
Tax and administration
Although corporate and individual income tax rates in Kazakhstan are low by international standards, the tax laws have changed frequently in recent years. Tax planning must therefore be both careful and robust, addressing the needs of business restructuring and the need to cope with changes in the tax law. Kazakhstan is very bureaucratic and keeping all documentation in good order is of paramount importance.
Kazakhstan is a signatory to the United Nations Convention against Corruption and its anti-corruption laws are relatively strong. The Criminal Code criminalises active and passive bribery, attempted corruption, extortion, money laundering, abuse of office, as well as bribe facilitation by third parties.
Investment and dispute resolution
Kazakhstan’s Law on Investments, adopted in early 2003, provides for the settlement of investment disputes through litigation and international arbitration, although in practice arbitration is rarely used. It should be noted that the law defines “investment disputes” narrowly, excluding disputes between private entities. While the law contains various provisions aimed at protecting the contractual and property rights of investors in Kazakhstan, concerns have been raised that the law does not go far enough. For instance, while the law guarantees “the stability of the conditions of contracts entered into between the investors and state bodies”, this is made subject to a number of exceptions.
Kazakhstan is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its arbitration law gives precedence to international arbitration agreements. It is also signatory to bilateral investment treaties with over 40 counties, including the UK.
Like other former Soviet Republics, Kazakhstan is still developing a transparent and effective business environment and those in authority recognise the need for further economic reforms to continue to attract foreign investment. It is, however, a promising place to do business and the time and effort spent in developing personal relationships and in understanding, and being sensitive to, local customs could be rewarded with lasting business relationships.
Kwadwo Sarkodie is a partner in the Construction & Engineering Group at Mayer Brown International LLP
Zhanna Temirbayeva is a Managing Consultant at Hill International (UK) Ltd