Kazakhstan is the ninth largest country in the world, with huge economic potential, but how easy is it to do 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. Recent years have seen a series of economic reforms and privatizations, and the IMF’s April 2016 World Economic Outlook report forecasts Kazakhstan’s GDP growth to rise to 4.9% by 2021. On 30 November 2015, Kazakhstan became the 162nd member of the World Trade Organization (WTO), the culmination of a 20-year long negotiation of its accession terms. 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. The Law on Permissions and Notices of 16 May 2014 lists the construction activities affected. Licenses 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
Kazakhstan has adopted a new labor code, which came into force on 1 January 2016. This updated code makes a number of new provisions governing the relationship between employers and employees. Among the noteworthy changes to the previous regime, the new labor code: (i) allows for non-competition agreements between employers and employees; (ii) allows a probationary period of up to six months for the head of a legal entity, the chief accountant or the head of a branch/representative office (whereas, under the previous labor code, the probationary period for any employee could be no more than three months); and (iii) in an effort to combat prolonged absenteeism, permits an employee’s absence from work for more than one month (without having given any reason to the employer) to be a ground for termination.
Local content is a crucial consideration for any organization wishing to do business in Kazakhstan. A local content regulation requires contractors and suppliers to purchase goods and services from local Kazakh entities, thus giving employment preference to local labor and meeting 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 licenses and permits required by contractors and suppliers. In addition to this, on 3 December 2011, the Law on Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan Relating to Environmental Issues was adopted in Kazakhstan. This was introduced with the aim of implementing the Kyoto Protocol in Kazakhstan and the aforementioned law has affected the interests of entities operating in the areas of, inter alia, subsoil use, the chemical industry, agriculture and transport.
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 criminalizes active and passive bribery, attempted corruption, extortion, money laundering, abuse of office, as well as bribe facilitation by third parties. In addition, an anti-corruption decree issued in April 2009 provides whistle-blowers with greater protection, punishes state officials who fail to report cases of corruption and tries to prevent conflicts of interest.
Investment and Dispute Resolution
Kazakhstan’s Law on Investments, adopted in January 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 also has bilateral investment treaties in force with more than 35 countries, including the People’s Republic of China.
Like other former Soviet Republics, Kazakhstan is still developing a transparent and effective business environment, and those in authority recognize 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.
Co-authored by Zhanna Temirbayeva from Hill International (UK) Ltd.