2006 INVESTMENT CLIMATE STATEMENT -- KAZAKHSTAN

UNCLAS SECTION 01 OF 19 ALMATY 000282

SIPDIS

DEPARTMENT FOR EB/IFD/OIA

E.O. 190356: N/A
TAGS: PREL KTDB USTR ECONOMIC
SUBJECT: 2006 INVESTMENT CLIMATE STATEMENT -- KAZAKHSTAN

REF: 05 STATE 201904


1. The following information is provided in response to
reftel request.

Openness to Foreign Investment
--------------

Kazakhstan has made significant progress toward creating a
market economy since its independence in 1991. The European
Union in 2000 and the U.S. Department of Commerce in March
2002 recognized the success of Kazakhstan's reforms by
granting it market economy status. Kazakhstan also has
attracted significant foreign investment since
independence. By July 2005, foreign investors had invested
a total of about $36.8 billion in Kazakhstan, primarily in
the oil and gas sector, during the country's fourteen years
of independence. Following independence, the government
created a favorable regime for oil and gas investments at
the same time that it undertook other liberalizing economic
measures and began an ambitious privatization program.

This record of market-oriented reform and successful
attraction of investment has been progressively undermined
over the last five years by a growing tendency on the part
of the government to challenge contractual rights, to
legislate preferences for domestic companies, and to create
mechanisms for government intervention in foreign
companies' operations, particularly procurement decisions.
Together with vague and contradictory legal provisions that
are often arbitrarily and inconsistently enforced, these
negative tendencies feed a growing perception that
Kazakhstan is becoming less open to investment.

Since 1997, there has been a growing trend to favor
domestic investors over foreigners in most state contracts.
Amendments passed in 1999 to the Oil and Gas Law required
mining and oil companies to use local goods and services.
According to "local content" regulations, subsurface users
in Kazakhstan are obligated to purchase goods and services
from Kazakhstan entities -- provided that the local goods
meet minimum project standards -- and to give preference to
the employment of local personnel. Prospective subsurface
users are required to specify in their tenders the
anticipated local content of their work, goods, and
services. 2004 amendments to the Law on Subsurface Use also
require that tender proposals specify the user's commitment
to developing regional infrastructure and contributing to
the provision of social services.

In January 2003 President Nazarbayev signed a new law "On
Investments" that superseded and consolidated past
legislation governing foreign investment. The law
establishes a single investment regime for domestic and
foreign investors. It guarantees the stability of existing
contracts, with the qualification that new ones will be
subject to amendments in domestic legislation, certain
provisions of international treaties, and domestic laws
dealing with "national and ecological security, health and
ethics."

The new law provides for dispute settlement through
negotiation, Kazakhstan's judicial process, and
international arbitration. However, the law narrows the
definition of investment disputes and lacks clear
mechanisms for access to international arbitration. U.S.
investors should note that the U.S.-Kazakhstan Bilateral
Investment Treaty, as well as the New York Convention,
protect U.S. investor access to international arbitration.
Additionally, Kazakhstan's constitution, as well as the new
law "On Investments," specifies that international
agreements have precedence over domestic law. The May 2005
Law on International Agreements appears to contradict this
legal hierarchy; however, the government has informally
indicated that a clause which seems to subordinate
international agreements to domestic legislation was passed
in error and will be amended. Finally, in December 2004
Kazakhstan adopted a law "On International Commercial
Arbitration" (see "Dispute Settlement" for full discussion).

The 2003 law contains investment incentives and preferences
based on government-determined sectoral priorities, and
provides for investment tax preferences, customs duties
exemptions, and in-kind grants. The law also provides
exemptions for customs duties on imported
equipment/components if Kazakhstan-produced stocks are not
available or do not meet international standards.

Kazakhstan has made several amendments to the 2003 law. The
amendments, which were accepted and came into force in May
2005, will eliminate five-year corporate income tax
exemptions and replace them with a modified set of ten-year
exemptions. Customs duties exemptions will be limited to
equipment that is destined for use in production processes
exclusively in Kazakhstan.

In 2001, the GOK passed transfer-pricing legislation, which
gives tax and customs officials the authority to monitor
export-import transactions in order to prevent the
understatement of earnings through manipulation of export
prices. Foreign investors are concerned that the government
specifically rejected the use of OECD standards for
determining a proper market price under the transfer-
pricing legislation, creating instead a methodology that
fails to fully account for all cost and quality
differences. The government in effect holds that transfer-
pricing can take place even in transactions between
unrelated parties, because the practice is defined by
transaction prices that differ from market prices by a
certain percentage. Kazakhstan's deviation from
international methodology on this complicates the ability
of firms to obtain relief under treaties on avoidance of
double taxation from their home countries. This remains a
contentious issue with investors.

Four major pieces of existing legislation affect foreign
investment. These are: 1) the 2003 law "On Investment"; 2)
the 1997 law "On Government Procurement"; 3) the 2001 Tax
Code; and 4) the 2003 Customs Code. These four laws provide
for non-expropriation; currency convertibility; guarantees
of stability in the legal regime; transparent government
procurement; and incentives in certain priority sectors,
including electrical infrastructure, telecommunications,
light manufacturing, health and tourism. However,
inconsistent implementation of these laws and reforms at
all levels of government remains the key obstacle to
business in Kazakhstan.

Kazakhstani law holds that no sectors of the economy are
fully closed to investors, although there are some sectoral
limitations, such as a 20% ceiling on foreign ownership of
media outlets and 49% restriction of foreign ownership in
the telecommunications sector. Plans to liberalize the
telecommunications sector did not materialize in 2005.
However, a December 2005 law lifted the restrictions on the
participation of foreign capital in the banking sector.
Finally, the 2005 Production Sharing Agreement law mandates
that the state oil company be a minimum 50% participant in
offshore projects.

The government plays a large role in overseeing foreign
investment. Government officials, sometimes at the highest
levels, screen major foreign investment proposals. Major
projects, such as the Production Sharing Agreement (PSA)
for Kashagan, Kazakhstan's super-giant offshore Caspian oil
field, and the Karachaganak (oil and gas field) PSA, bear
the President's personal imprimatur.

In 2004, the government adopted amendments to the law
governing oil and gas exploration, assigning to the state a
right of first refusal on the purchase of shares in PSAs in
the extractive industries. The law as written applies to
pre-existing as well as future contracts and thus, in the
government's view, supersedes any pre-emptive rights
consortium partners might have negotiated in the original
contracts.

The "pre-emption law," which has its origins in the
government's attempt to purchase British Gas (BG)'s stake
in the Kashagan oil field, is a disturbing development in
the area of contract sanctity. Although the government has
not yet tested the law in practice, its apparent
willingness to dispense with contractual arrangements
through fiat is discouraging. In 2005, the Kazakhstani
government broadened its claim of priority purchase rights
to include shares of companies that have invested in the
oil and gas sector.

Tax experts consider Kazakhstan's tax laws to be among the
most comprehensive in the former Soviet Union. The latest
Tax Code, which entered into effect on January 1, 2002,
applies taxes universally and allows only a limited set of
exemptions. The code applies an international model of
taxation, based on the principles of equity, economic
neutrality and simplicity. This code is an improvement over
its predecessor and a step forward in establishing a
transparent and effective tax system. VAT, as of January
2004, is set at 15%. The maximum rate of personal income
tax is 20%. Also in 2004, the government introduced a
regressive scale for social taxes (applied to the income of
foreign citizens seconded to companies in Kazakhstan and to
payments made to individuals under certain legal
arrangements),with rates ranging from 20% to 7%.

In 1996, the Treaty on the Avoidance of Double Taxation
between the United States and Kazakhstan came into force.
Since independence, Kazakhstan has ratified treaties on the
avoidance of double taxation with 36 countries.

Foreign firms operating in Kazakhstan frequently report
harassment by the Financial Police via unannounced
inspections and other methods. In 1998, the government
limited the number of visits that can be made by government
bodies to small businesses in the course of a year, but tax
inspections were excluded from this limitation. A
"moratorium" on inspections of small and medium firms
decreed in late 2002 has never been fully observed; it
resulted in at 50% decrease in the number of audits, but,
reportedly, no reduction in overall penalties assessed. The
2002 Tax Code provides a basis for improvement because it
limits the powers of tax authorities and defines the rights
of taxpayers more clearly.

It is important to note that in practice the application of
tax laws has been uneven, and in some cases blatantly
unfair. This has particularly true in cases where a company
is involved in another, unrelated dispute with the
authorities.

Investors should not assume that agreeing to a settlement
with tax authorities following an investigation or civil
case will prevent the pursuit of charges under criminal
provisions. At times the authorities have used criminal
charges in civil disputes as a pressure tactic.

The 2003 Investment Law provides for, inter alia,
guarantees of national treatment and non-discrimination for
foreign investors. In general, Kazakhstan allows investment
in all sectors, with certain exceptions, such as a
limitation of 20% foreign ownership of individual media
companies. Kazakhstani law does not subject foreign
investment to any prior authorization requirements.

Despite the general guarantee, national treatment is also
denied in the petroleum and subsurface utilization
(minerals) sectors. In June 2002, the Prime Minister signed
a decree with regulations to implement domestic content
requirements, which were originally enacted in 1999 through
amendments to the Oil Law and the Subsurface Use Law. The
laws require investors to contract with Kazakhstani service
providers, and to purchase Kazakhstani equipment, goods and
raw materials, so long as these meet the requirements for
participating in government tenders. The 2002 decree
required that a designated government body approve all
tender documents, participate in tender committees and
approve the decisions of those tender committees in order
to ensure compliance with these requirements. The 2005 law
on offshore PSAs also has local content requirements for
goods, services and employees, and obligates prospective
subsoil investors to address these requirements in their
tender proposals.

These requirements are being challenged in connection with
Kazakhstan's forthcoming WTO accession negotiations, as
they appear to breach GATT and GATS rules and the Agreement
on Trade Related Investment Measures. They also appear to
contradict the 1994 U.S.-Kazakhstan Bilateral Investment
Treaty, which states in Article II, paragraph 5, that
"neither party shall impose performance
requirements...which specify that goods be purchased
locally..."

By law and in practice, foreign investors are allowed to
participate in all privatization projects. There appears to
be no discrimination against foreign investors after an
investment is made. However, many foreign companies cite
the need to protect their investments from a near-constant
barrage of decrees and legislative changes, most of which
do not "grandfather" existing investments. In addition to
arbitrary tax inspections, foreign investors also complain
of problems with closure on contracts, delays and irregular
practices in licensing, land fees, etc. Some foreign firms
have expressed concern that government organizations fail
to live up to their side of the contract, particularly
regarding payment. This often prevents the foreign partner
from moving ahead with its investment program. When this
occurs, the investor is exposed to government charges of
non-performance and the real possibility that the
government will cancel the contract.

U.S. firms can participate in government-financed research
and development projects on a national-treatment basis. The
Kazakhstani government has recently taken a strong interest
in dedicating state resources to the support of research
and development.

Foreign workers are required to have a work permit to work
legally in Kazakhstan. Obtaining these work permits can be
difficult and expensive. The government cites the need to
boost local employment by limiting the issuance of work
permits to foreigners. U.S. companies should consult legal
firms for assistance (see A.5 for details) in obtaining
work permits. The work permits quota system is based on the
1998 Law on Employment of the Population. Under this
system, the government limits the number of work permits
available to foreigners, based on the area of
specialization and geographic region. Since 2001, the
annual number of work permits has been subject to a
government-established quota. In January 2003 the
government issued a decree (no. 55) which sets forth new
procedures for the annual determination of this quota.
Local authorities submit estimates of the required number
of foreign work permits for the upcoming year to the
Ministry of Labor and Social Protection. The Ministry then
establishes the quota and issues permits based upon a
proven lack of qualified Kazakhstani citizens to fill the
positions in question. In 2003 the government set the work-
permit quota at .14% of the active labor force. The quota
has steadily increased: in 2004 the quota was .21%; in
2005, 0.32%. The quota assumes an active labor force of 8
million people.

Conversion and Transfer Policies
--------------

There are minimal restrictions on converting or
transferring funds associated with an investment into a
freely usable currency at a legal market-clearing rate.

In 1996, Kazakhstan adopted Article 8 of the IMF Articles
of Agreement, which stipulates that current account
transactions, such as currency conversions or the
repatriation of investment profits, will not be restricted.
In 1999, the Government and National Bank of Kazakhstan
announced that the national currency would be allowed to
freely float at market rates, thus abolishing the previous
managed exchange rate system.

There is no distinction made between residents and non-
residents when opening bank accounts. There are no
restrictions whereby different types of bank accounts are
required for investment or import/export activities. For
non-residents, money transfers in currency associated with
foreign investments, whether inside or outside of the
country, can take place without restriction. The National
Bank permits non-residents to pay wages in foreign
currency. Foreign investors may convert and repatriate
tenge earnings made inside Kazakhstan.

The National Bank has established procedures and licensing
arrangements to cover bank payments and transfers relating
to capital movements. Inward capital flows are basically
unrestricted. However, a resident company in which there is
foreign investment exceeding $100,000 must register the
transaction for statistical purposes. There are
restrictions on capital movements when a non-resident sells
or disposes of an interest in a resident company to another
resident company. These are dealt with under the licensing
arrangements of the National Bank.

The procedure for licensing foreign currency transactions
related to capital movements is governed by Regulations
Numbers 129 and 130 of the Procedure for Licensing
Activities Related to the Use of Foreign Currency of April
24, 1997.

In June 2005 the President signed the law "On Currency
Regulation and Currency Control". This law lifted
restrictions on money transfers: both residents and non-
residents are allowed to take up to $10,000 in cash out of
the country without documentation of the money's origin.
The transfer of amounts exceeding $10,000 must be
accompanied by the certification of the National Bank.

The following types of capital movements from residents to
non-residents are subject to licensing:

--investments of residents in the business of non-residents
abroad. (The professional activity of authorized banks on
the securities market -- e.g., broker and dealer activity
with state securities of non-residents -- is exempted.);

--transfers from residents to non-residents for property,
including real estate, transactions;
--repayments of loans extended by residents to non-
residents for a period of more than 180 days. Obtaining the
license is sometimes quite slow.

The Customs Committee and the National Bank require an
"Import [or] export transaction passport," ostensibly for
the purpose of currency control. The document, which re-
states information from other documents, complicates import
and export processing, and there is a real question whether
it is effective for its stated purpose - to ensure that the
proceeds from export sales are returned to Kazakhstan, and
to prevent fraudulent over-invoicing of imports.

The U.S. Embassy is not aware of any concerns with regards
to remittance policies or availability of foreign exchange
for remittance of profits.
Capital inflows and commodity exports have enabled the
National Bank to accumulate foreign exchange reserves, and
at the same time to lower interest rates and control
inflation.

As of October 2005, the net gold and hard currency reserves
of the National Bank stood at $8.7 billion; the total gold
and hard currency reserves of Kazakhstan, including the
National Bank reserves and reserves accumulated in the
National Fund, reached $14.5 billion.

The National Bank has pursued market-based policies that
have contributed to financial sector development and to
exchange rate stability. In 1999 the National Bank created
a deposit insurance system in order to attract the nearly
$1 billion in cash it estimated people were hoarding at
home. In the six years following the launch of deposit
insurance, private deposits grew thirteen-fold, from less
than $300 million in November 1999 to $3.93 billion in
September 2005. In 2001, the government announced an
amnesty for all Kazakhstani citizens repatriating cash or
transferring money during a 30-day period. The legalized
money was not taxed and it became available to its owners
at the end of the amnesty period. Kazakhstan is repatriated
$480 million under this amnesty, of which almost 90% was
brought to banks in the form of cash.

The main sources of inflows are revenues from exports of
oil, gas, and metals as well as foreign direct investment.
In 2004, in response to rising inflationary pressures in
the economy, the Government directed the National Bank to
focus monetary policy primarily on the achievement of price
stability.

In October and November 2005, the National Bank adopted
several rules relating to the control of currency turnover
and capital flows. In particular, starting from 2006, the
National Bank will regularly monitor currency operations of
selected non-residents. This procedure will primarily
affect the following sectors: oil and gas industry,
construction, mining, as well as companies, rendering
architectural, engineering and industrial design services.
According to the National Bank, this monitoring will
furnish the Bank with better statistical data on the
balance of payments and external debt.

Expropriation and Compensation
--------------

The New Investment Law of 2003 represents a step back from
the clarity of the 1994 law. The 2003 law allows
nationalization by the state in cases "as provided in
legislative acts of the Republic of Kazakhstan." Unlike the
1994 law, it does not provide clear grounds for
expropriation. Similarly, the 1994 law required "prompt,
adequate and effective" compensation at fair market value,
with interest. The new law differentiates between
nationalization and requisition, providing full
indemnification of the investor in the case of the former,
but only payment of market value in the case of the latter.
Bilateral investment treaties (BITs) between Kazakhstan and
other countries, including the U.S., also refer to
compensation in the event of expropriation.

There has been one case of legal expropriation of a foreign
investor's property for public purpose. The investor
ultimately submitted the case for international
arbitration. In late 2005, after lengthy delays and
negotiations, the government agreed to pay the amount
awarded by the arbiter.

Some foreign investors have encountered serious problems
short of expropriation. In one instance, in 1996, three
foreign companies were forced to relocate their offices
under pressure from the government. In 1997, investors,
after reviving an important mine, found they could not
obtain export licenses for their ore, although the right to
export was written into their contract. The same year
another investor alleged forgery and fraud by government
officials, claiming its employees had been physically
threatened in a management dispute at its ferro-alloy
venture in northern Kazakhstan.

The Embassy is aware of one case, in 1992, of government
action tantamount to expropriation, when a U.S. company was
deprived of its rights to explore and develop an oil
deposit in Atyrau Oblast. In 1999, the Stockholm Arbitral
Court found that the government's action was tantamount to
expropriation. After the U.S. Embassy raised the case with
the government, it paid in full the amount of compensation
called for in the arbitral award.

Under the Law on Insurance (December 18, 2000),foreign
legal entities, including foreign insurance organizations
and foreign citizens, are permitted to participate in
insurance and re-insurance organizations in Kazakhstan.
However, the total registered charter fund of general
insurance companies with foreign participation may not
exceed 25% of the overall registered charter fund of all
general insurance companies in Kazakhstan. In the life
insurance sub-sector, this limit on foreign participation
is set at 50% of the overall registered charter fund of all
life insurance companies operating in Kazakhstan.

Insurance supervision and licensing powers are exercised by
the National Bank. After enactment of the insurance law,
which granted the National Bank greater powers to supervise
the insurance industry, the number of insurance companies
dropped from 68 in May 2000 to 37 in May 2005. Total
capital of insurance companies is $208.3 million as of the
same date. Restrictions also exist on foreign ownership of
land in Kazakhstan. See below (A.6 "Right to Private
Ownership and Establishment").

Dispute Settlement
--------------

There have been a number of investment disputes involving
foreign companies in the past several years. While the
disputes have arisen from unrelated, independent
circumstances, many are linked to alleged breaches of
contract or non-payment on the part of Kazakhstani state
entities. Some disputes relate to differing interpretations
of joint-venture agreement and production sharing agreement
(PSA) contracts; one questions the legality of the
government's use of ex-post facto regulations governing
value added taxes. The disputes involve, in some instances,
hundreds of millions of dollars.

Kazakhstan is still in the process of building the
institutional capabilities of its court system. Until this
is complete, the performance of courts in the country will
be less than optimal. Further problems exist in enforcing
judgments. The Ministry of Justice is only beginning to
establish a judicial executory system. Given this lack of
development, there is ample opportunity for interference in
judicial cases.

General commercial law principles are established in
Kazakhstan's Civil Code.

The January 2003 law "On Investments" defines an investment
dispute as "a dispute ensuing from the contractual
obligations between investors and state bodies in
connection with investment activities of the investor." It
states that such disputes can be settled by negotiation, in
Kazakhstani courts, or through international arbitration.
According to the law, disputes not falling within the
above-noted category "shall be resolved in accordance with
the laws of the Republic of Kazakhstan." While some
investors find this legislation problematic since it does
not address disputes between private entities, others
believe that Kazakhstan's Civil Code and Civil Procedure
Code provide private parties with recourse to foreign
and/or third party courts.

Additionally, in December 2004, Kazakhstan adopted a law on
international arbitration. The law appears to give broad
authority for judicial review of arbitral awards in
Kazakhstan. It remains to be seen how this law will affect
the integrity of the arbitral process as applied to
business in Kazakhstan. However, an early test case did not
yield positive results. In 2005 a U.S. company became
embroiled in a dispute over payment for the sale of its
shares in a joint venture to a group of Kazakhstani
companies. The London Court of International Arbitration
(LCIA) issued a preliminary ruling ordering that the shares
be frozen pending its final decision. The acting
Kazakhstani court, however, ignored the LCIA's ruling, and
proceeded with its own hearings. The case was ultimately
decided by the Superior Court of Kazakhstan in the U.S.
company's favor. In January 2006, however, the Astana
Economic Court declined to enforce an LCIA ruling awarding
legal costs to the U.S. firm on the grounds that doing so
would be detrimental to "public order" in Kazakhstan.

The United States has also raised concerns about the May
2005 Law on International Agreements. On its face, the law
seems to state that international agreements signed by
Kazakhstan are subordinate to post-agreement domestic
legislation. The government has informally indicated that
the relevant clause contains an error and will be amended
in 2006.

The Committee for Investments of the Ministry of Industry
and Trade should be consulted before entering into any
contracts with government entities, since the agencies
authorized to act on behalf of the government may change.
In order for a dispute to qualify as an investment dispute
and therefore qualify for foreign arbitration, the state
body itself must have been authorized to act or contract.

Any international arbitral award rendered by the
International Center for the Settlement of Investment
Disputes (ICSID),any tribunal applying the United Nations
Commission on International Trade Law Arbitration rules,
the Stockholm Chamber of Commerce, or the Arbitration
Commission at the Kazakhstan Chamber of Commerce and
Industry should, by law, be enforced in Kazakhstan. The
U.S.-Kazakhstan Bilateral Investment Treaty can serve to
buttress the law "On Investment" in this area. Kazakhstan
ratified the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards in 1995.

Despite such safeguards, foreign investors continue to face
great practical difficulties in enforcing arbitral awards
against government enterprises in Kazakhstan, particularly
given the poor financial health of many such enterprises.
The U.S. Government can support investors through
encouraging the Government of Kazakhstan to honor arbitral
awards.

Creditor rights are set forth clearly under the current law
on bankruptcy. However, the 1997 bankruptcy legislation is
hindered by its complexity and numerous subsequent
amendments, resulting in considerable misapplication in
practice.

Kazakhstan's bankruptcy agency became a self-financed
government-owned enterprise in 1997.

In general, the Government of Kazakhstan has a mixed record
of addressing investment disputes. Foreign investors have
often had to endure protracted negotiations. Most investors
prefer to handle investment disputes privately, rather than
make their cases public. In addition, the law "On
Investments" restricts recourse to international
arbitration and places more reliance on the Kazakhstani
judicial system for dispute resolution. The U.S. Embassy
advocates on behalf of U.S. firms with investment disputes.

Performance Requirements/Incentives
--------------

Performance requirements, with the exception of domestic
content requirements, are negotiated as part of a contract
between the individual investor and the Committee for
Investments, which is now part of the Ministry of Industry
and Trade. They are the quid pro quo for tax, customs duty,
or other privileges and benefits. Typically, an investor's
obligations might include financial obligations,
obligations to train local specialists, and contribute to
social funds.

Performance requirements, in some cases, are central to
investment or privatization contracts. Companies are
frequently required to pay back wages, rebuild factories
and plants, and meet certain production targets. In several
instances, the government has revoked contracts because
firms did not meet their performance obligations.

The Committee for Investments is responsible for monitoring
the fulfillment of obligations undertaken by investors. If
the committee determines that a company has not complied
with its financial or other contractual obligations, the
government may revoke the operating license of the company.

In order to obtain the benefits and privileges of investing
in Kazakhstan, an investor is typically required to provide
the agency with detailed information on technical and
financial matters of the proposed project. In many
instances companies consider this information confidential
or proprietary.

With the exception of investments in oil production or
mining, rules on local content and local sources of
financing vary from contract to contract.

With the exception of the banking, media and
telecommunications sectors, and new offshore oil projects,
there are no legal requirements that Kazakhstani nationals
own shares in foreign investments. There is no general
requirement that the level of foreign equity be reduced
over time. In practice, however, investors may find that a
joint venture with a well-connected local partner is a
prerequisite to navigating the legal and political
complexities of operating in Kazakhstan. Technology
transfers frequently occur and sometimes are written into
contracts, but are not explicitly required for foreign
investment.

The Investment Law of 2003 includes investment incentives
that allow for preferences based on government-determined
priority activities and provides for investment tax
preferences, customs duties exemptions, and in-kind grants
to legal entities of the Republic of Kazakhstan only. Under
the law, the government may rescind such incentives, and
collect back payments on duties, etc. including fines, if
the investor fails to fulfill contractual obligations.
Because the application process calls for a business plan
and is, therefore, largely based on forecasting, virtually
all projects are potentially subject to having their
incentives removed.

The government has liberalized its trade policies and has
passed legislation to begin bringing its legal and trade
regimes into conformity with World Trade Organization (WTO)
standards. Kazakhstan submitted its Memorandum on the
Foreign Trade Regime (MFTR) in 1996 and the first round of
consultations on WTO accession took place in 1997. In June
2005 Kazakhstan's WTO Accession Working Party met for the
eighth time. Kazakhstan has signed bilateral protocols on
market access for goods and services with several of its
major trading partners. Kazakhstan also hopes to
synchronize its accession with that of the Russian
Federation, to the extent that this is possible.

The Eurasian Economic Community was established in 2000 as
a successor to an unsuccessful customs union between
Kazakhstan, Russia, Belarus, Kyrgyzstan, and Tajikistan.
The EAEC was created in order to harmonize customs duties
and promote free trade between the partners. The EAEC has
made little progress in creating a free trade zone, as had been
the case with the now defunct Customs Union.

Kazakhstan permits the importation of goods from EAEC free-
trade partners and certain developing or less-developed
countries free of duty or at a reduced rate within the
framework of the Generalized System of Preferences.

There are very few quotas and duties on exports affecting
foreign investors. Among the more important is an agreement
signed with the EU concerning quotas on textiles.

There are no special requirements for engaging in trade-
related activities. In keeping with internationally
accepted practices, registration as an entrepreneur, legal
entity, or branch/representation office is required.

There are no known cases in which U.S. or other foreign
firms have been denied participation in government-financed
or subsidized research and development programs on
anational treatment basis.

Right to Private Ownership and Establishment
--------------

Foreign and domestic private entities have the right to
establish and own business enterprises and to engage in all
forms of remunerative activity. Private entities can freely
buy and sell interests in business enterprises. Public
enterprises sometimes enjoy better access to markets,
credits, and licenses than do private entities. However,
this is changing as Kazakhstan has privatized a large part
of its economy.
Kazakhstan's constitution provides that land and other
natural resources may be owned or leased by persons who are
Kazakhstani citizens according to conditions established by
law. The 2003 Land Code allows citizens of Kazakhstan to
own agricultural land and urban land with commercial and
non-commercial buildings and complexes, including dwellings
and land used for servicing these buildings. Under the 2003
Land Code, only Kazakhstani citizens (natural and
legalized) and Kazakhstani companies may own land. The Land
Law does not allow private ownership for the following
types of land:

-- land used for national defense purposes;
-- specially protected natural territories, resorts;
recreational land and territories of a historical and/or
cultural significance;

-- forests, water reservoirs (lakes, rivers, canals etc.);
glaciers, swamps, etc.;

-- public areas (urban or rural settlements);

-- lands that belong to the state land reserve.

The law permits only state-owned entities to permanently
use land. Short-term land leases may last for up to five years.
The maximum period for long-term land leases are 49 years.
Foreigners may rent agricultural land for up to 10 years.
Foreigners may also own agricultural land through a
Kazakhstan-registered joint venture or a full subsidiary.

Protection of Property Rights
--------------

Secured interests in property (fixed and non-fixed) are
recognized under the Civil Code and the 2003 Land Code.
Mortgage lending is still a relatively new phenomenon in
Kazakhstan but it is a rapidly growing sphere of financial
activity. The development of credit risk assessment tools
for banks, including credit bureaus, will help mitigate the
risks inherent in mortgage banking. The National Bank has
created a national mortgage agency, which issues bonds
secured by mortgages purchased from banks. All property and
lease rights for real estate must be registered with
special government-owned Real Estate Centers, which exist
in cities and rural district centers.

In principle, Kazakhstan's Civil Code protects U.S.
intellectual property. In addition, the U.S.-Kazakhstan
Trade Agreement, which came into force in 1993, obliges
Kazakhstan to protect intellectual property rights (IPR.).
In the last two years Kazakhstan has taken positive
legislative steps to improve its IPR regime. In 2004,
Kazakhstan ratified the 1997 World Intellectual Property
Organization (WIPO) Copyright Treaty and the WIPO
Performances and Phonographs Treaty, and amended the
Copyright Law to affirmatively protect pre-existing works
and sound recordings. In 2005, Kazakhstan amended its
Criminal and Civil Codes to make IPR crimes easier to
prosecute and to toughen penalties for violators. While the
legislative environment has improved, only time will tell
whether the legislation will translate into stronger
enforcement.

Patents and trademarks: Patent protection is available for
inventions, industrial designs and prototypes. Patents for
inventions are available with respect to processes and
products that are novel and have industrial applications.
However, patent protection for certain types of products
and processes -- such as layout designs and plant variety -
is not yet available. A National Patent Office, established
in 1992, performs formal examination of patent
applications. Existing Soviet patents are being converted
to Kazakhstani patents.

Patents for inventions are granted for a period of 20
years; patents for industrial designs are granted on a
preliminary basis for five years. This period may be
extended for an additional 10 years if the preliminary
patent is converted to a patent. Prototypes are granted a
five-year initial period of protection, with the
possibility of an additional three-year extension.
Unsuccessful applicants have the right to appeal decisions
of the National Patent Office.

Trademark violation is a crime. Enforcement has
historically been questionable, but in 2004 US companies
were generally confident that their trademarks were
protected in Kazakhstan. There are marked disparities in
fees charged to domestic patent and trademark applicants,
as compared to foreign applicants. Applications for
trademark, service mark and appellations of origin
protection may also be filed with the National Patent
Office. Trademarks and service marks are afforded
protection for a period of 10 years from the date of
filing. In 2004 the Embassy received anecdotal evidence
from US companies that the situation with respect to
trademarks is improving.

Copyrights: The Law on Copyrights and Related Rights was
enacted in 1996. The law is largely in conformity with the
requirements of the WTO TRIPS Agreement and the Berne
Convention.

In 2000, the government amended the Customs Code to provide
ex-officio authority to Customs Committee officials to
seize contraband at the border, as required by the WTO
TRIPS Agreement. Moreover, amendments to the
Administrative, Criminal and Civil Procedural Codes have
been adopted to bolster enforcement capabilities.
Nevertheless, systematic violations persist and enforcement
remains sporadic. According to the IPR Agency, 1475 IPR
cases were identified in the first 10 months of 2005.
Criminal proceedings were initiated in 1358 of them,
including 1098 cases of copyright violation and 260 cases
of trademark violation. By November 1, 2005, 1169 cases had
been heard in court.

As a result, 206,111 counterfeit items, estimated in value
at KZT 60.558 million, had been withdrawn from the market,
and fines totaling KZT 8.11 million (about $60.3 thousand)
had been imposed.

Illegal software development and manufacture generally is
not conducted in Kazakhstan; Russia and Ukraine are
believed to be the major sources of bootleg software to the
local market.

Kazakhstan ratified the Berne Convention for the Protection
of Literary and Artistic Works in 1998 and the Geneva
Phonograms Convention in 2000.

Piracy of copyrighted products is widespread and there have
been only limited enforcement measures to date. Although
Kazakhstan enacted a number of laws and changed many
policies during the last few years, a number of additional
changes are still required. Bilateral negotiations must be
concluded in order to comply with WTO standards. Since
2000, USTR's Special 301 review has put Kazakhstan on the
Watch List for intellectual property rights violations,
primarily for the country's lack of enforcement of
copyrights.

Transparency of the Regulatory System
--------------

Transparency in the application of laws remains a major
problem in Kazakhstan and an obstacle to expanded trade and
investment. Foreign investors complain of changing
standards and corruption. While foreign participation is
generally welcomed, some foreign investors point out that
the government is not always even-handed and sometimes
reneges on its commitments. Although the Committee for
Investments of the Ministry of Industry and Trade was
established to facilitate foreign investment, it has had
limited success in addressing the concerns of foreign
investors.

Often, contradictory norms hinder the functioning of the
legal system. While Kazakhstan has recently defined more
clearly which laws take precedence in the event of a
contradiction, it has become clear that stability clauses
granted investors under previous versions of the Foreign
Investment Law or other legislation may not necessarily
protect investors from changes in the legal and tax
regulatory regime. The 2003 law "On Investments" holds that
contracts signed subsequent to its enactment may be subject
to amendments in domestic legislation and international
treaty provisions that change "the procedure and conditions
of the import, manufacture, and sale of goods subject to
excise duties." As an additional complication, oblasts
often take a very liberal view of national laws and
policies (especially licensing and permitting),
implementing their own regulations and thereby increasing
instances of conflict with the law.
Kazakhstan, by law, will provide compensation for
violations of contracts that were properly entered into and
guaranteed by the government. Where the government has
merely "approved" or "confirmed" a foreign contract,
Kazakhstan's responsibility is limited to performing
administrative acts necessary to facilitate the subject
investment activity (acts "concerning the issuance of a
license, granting of a land plot, mining allotment, etc.").

Kazakhstan's institutional governance is weak, further
adding to the problems of transparency in commercial
transactions. Senior government officials have a large say
in minor and major transactions, and decisions are often
made behind closed doors.

A 1995 Licensing Law established the legal framework for
licensing activities in Kazakhstan. It requires the
relevant agency to issue a license within one month of a
company's submitting all required documents. Unfortunately,
the implementation of this law has been inadequate. For
example, the government has not yet approved most of the
qualification and procedural requirements for issuing
licenses. This situation has left some businesses
vulnerable to inspection bodies, which have threatened them
with fines and shutdowns for not having licenses that are,
in many instances, impossible to legally obtain. In 1998,
several additional procedural acts were adopted to
implement the requirements of the Licensing Law. However,
many areas still lack implementing legislation. The number
of licenses required for most activities is also an
obstacle to business.

Nevertheless, the Government intends to streamline the
licensing rules. In particular, the amendments to the
Licensing Law were passed in the first half of 2005. The
new law excluded a wide variety of business activity from
licensing requirements, including aircraft repair, airport
services, sale of topographic and geodesic maps, excursion
and tourist business, and legal services (except advocacy).
There are some transparency problems connected with the
customs regime in Kazakhstan. These include the following:

--Granting customs exemptions stipulated in the Law on
Foreign Investment continues to be problematic, because the
Customs Committee has failed to issue any regulations or
instructions for its implementation. Instead, Customs
decides claims in an ad hoc manner, which has resulted in
inconsistent and unclear application of the law.

--Kazakhstan has adopted the international tariff
nomenclature as the basis of its Tariff Schedule and has
prepared a tariff schedule, but it has not been published
in full. As a result, regional customs offices continue to
use the old tariff schedules. According to businesses, this
leads to unnecessary delays in processing and increased
costs for importers.

In December 2004 the formerly independent Customs Agency
was subordinated to the Ministry of Finance, where it was
re-established as the Customs Control Committee.

Efficient Capital Markets and Portfolio Investment
-------------- --------------

Kazakhstan's efforts to create a sound financial system and
a stable macroeconomic framework have been notable among
former Soviet republics. Much progress has been made in
creating and implementing an adequate legal framework. By
comparison with other parts of the economy, reform of the
financial system has been deeper and more effective. The
financial system has started to mediate financial resource
flows and direct them to the most promising parts of the
economy. Official policy is clearly supportive of credit
allocation on market terms and the further development of
legal, regulatory and accounting systems that are
consistent with international norms.

Most domestic borrowers receive credit from Kazakhstani
banks. However, foreign investors find the margins taken
by local banks and the security required for credit to be
very onerous. It is usually cheaper and simpler for them to
use retained earnings or borrow from their home country.
Kazakhstan's stock exchange is tiny and, as such, not yet a
realistic source of funds (see below). Kazakhstani banks
have, since 1998, placed Eurobonds on international markets
and obtained syndicated loans, the proceeds of which have
been used to support domestic lending. Leading Kazakhstani
banks have been able to obtain reasonably good ratings from
international credit assessment agencies. All Kazakhstani
banks are to meet Basel I risk-weighted capital standards
by 2007. The National Bank supervises the banking system
and has overseen a steady consolidation and strengthening
of the system. In 2005 the National Bank raised the reserve
requirements for second-tier banks, in part to control the
growth of monetary aggregates but also to apply discipline
during the current "credit boom". The National Bank further
changed the method banks use to calculate reserves by
requiring them to count foreign liabilities as well as
domestic.

With the implementation of deposit insurance in 1999,
private deposits in the banking system grew from less than
$300 million in November 1999 to $3.93 billion at the end
of September 2005.

Since 1999, a market for debt securities has been rapidly
developing in Kazakhstan. Several dozen bank and non-bank
corporations - large and small - have issued bills, notes
and bonds with maturities ranging from three months to
seven years. Earlier issues have matured and been redeemed
and, so far, there have been no defaults. Rates for
borrowers have declined on average from approximately 16%
in September 1999 to approximately 10% in 2005. Maturities
have increased from 1.5 years to up to 10 years during the
same period. Kazakhstan's pension system reform has
boosted the bond market by creating a pool of capital; in
September 2005 private pension funds managed over $4.4
billion. The government intends to privatize the one
remaining state pension fund. In November 2005, this fund,
the Ministry of Finance and EBRD signed the protocol of
intention on the sale of 10% of the fund's stake to EBRD.
The market for fixed-income securities has grown from
$74,000 in September 1999 to over $2.3 billion in September

2005.

In September 2005, the rate on short-term government notes
was 2.94%. Longer-term government notes (with maturities up
to 10 years) were offered at 6.08%.

The Kazakhstan Stock Exchange (KASE) has been in operation
since 1997. As of November 2005, there were 93 listed
companies with 31 "A-listed" stock issues; 28 companies
with "B-listed" stock issues; and eight non-listed issuers.
There are also 44 "A-listed" and six "B-listed" corporate
bond issues. Inadequate financial records prevent many
other companies from being put on the exchange. Moreover,
company managers fear diluting control of their enterprises
by selling more shares.

The National Securities Commission has been operating since
1996 in compliance with the norms of the International
Organization of Securities Commissioners. In 2001, the
Commission was made a department of the National Bank, and
renamed the "Securities Market Regulation Department. In
2003, functions of this Department were given to a newly-
created Financial Supervision Agency (FSA). The FSA has
broad authority over the banking insurance sectors, as well
as the stock market. The FSA is financed from the National
Bank's budget and subordinated to the President of the RK.

Resident Kazakhstani companies must compete for capital
with the attractive (and tax deductible) returns offered by
government debt, although these interest rates have been
steadily decreasing.

In 1998, the government introduced an accumulation pension
system that requires all employed persons to contribute 10%
of their salary to accumulation pension funds. As of
September 2005, the 14 private (and one state) funds
operating in Kazakhstan held approximately $4.4 billion in
assets. Asset management companies invest the contributions
on behalf of the pension funds. The pension assets must be
invested only in specific categories of instruments, such
as government bonds and A-listed securities. The largest
concentration of investments is in dollar-denominated
Kazakhstani Eurobonds. Custodian banks hold pension assets.
The government plans to sell some shares of state
enterprises on the national stock market, partly to provide
a more profitable alternative vehicle for the investment of
pension fund assets.

There appear to be no "cross-shareholding" or "stable
shareholder" arrangements used to restrict foreign
investment in private firms through mergers and
acquisitions. Joint stock companies may not cross-hold more
than 25% of each other's stock unless they have an
exemption codified by law and may not exercise more than
25% of the votes in a cross-held joint stock company.
Kazakhstani law recognizes companies as "related" if one
company or legal entity holds more than 20% of the shares
of another. However, the owning company may not vote more
than 25% of the total shares at the general meeting of
shareholders of the related company. The general meeting
must approve various corporate actions, such as mergers and
acquisitions. This rule applies to all persons, domestic or
foreign.

There have been very few hostile takeovers in Kazakhstan,
primarily because there are few publicly traded firms.
Defensive measures are not targeted toward foreign
investors in particular. Current legislation provides a
legal framework for takeovers. The Civil Code requires a
company that has purchased a 20% share in another company
to publish information about the purchase.

Kazakhstan has a well-developed infrastructure for equity
and debt trading with a network of brokerage firms. This is
a resource for future corporate finance. However, at
present, the dearth of attractive stocks for trading is a
significant obstacle to the further development of the
securities market. This is another weakness that the
government's plan for offering shares in state enterprises
is meant to address.

The 1998 Law on Joint Stock Companies provides the basis
for regulation of open and closed-type joint stock
companies. It also contains clauses to protect investors in
often-abused circumstances, such as:

-- issuance of additional shares

-- maintenance of charter capital and restrictions on
payments of dividends

-- re-purchase by a company of its own shares

-- debt-to-equity conversions

-- fiduciary duties imposed on company officers

-- proxy votes

-- independent audit

-- determination of asset values during the sale of company
property.

The Law on Joint Stock Companies also regulates tender
offers for stock of open joint stock companies by requiring
the purchaser to notify the Securities Market Regulation
Department and the target company of their intention to
purchase 30% or more of the target company and, after such
purchase, to make an offer to all remaining shareholders to
purchase their shares at the average price during the last
six months before the purchase.

There are no laws or regulations specifically authorizing
firms to adopt articles of incorporation or associations
that limit or prohibit foreign investments. The Law on
Joint Stock Companies, however, allows charter limits on
the number of shares or votes that one shareholder may
have.

Standards, including sanitary and phyto-sanitary standards,
are promulgated solely by the Committee for Technical
Regulation and Metrology (Gosstandard). Proposals for
adoption, amendment, or abolishment of state standards are
normally prepared by technical committees constituted by
Gosstandard, and may include producers, scientific and
engineering associations, and technical experts. Foreign
participation in the standardization process is regulated
by international multilateral and bilateral agreements.

Political Violence
--------------

There have been no incidents of politically-motivated
violence against foreign investment projects. Kazakhstan
has been stable since independence. Politically-motivated
civil disturbances remain exceptionally rare. Kazakhstan
has good relations with its neighbors. The government
continues to express concern over the security of its
borders with Kyrgyzstan and Uzbekistan, which it view as
vulnerable to penetration by extremist groups.

Kazakhstan's 2005 presidential elections took place without
significant violence or unrest. President Nazarbayev was
reelected with an overwhelming majority of the votes. In
its preliminary assessment the OSCE noted that the
presidential election did not meet a number of OSCE
commitments and international standards for democratic
elections. Although some opposition groups denounced the
election as fraudulent, there have been no significant
demonstrations against the announced results. The next
parliamentary election is scheduled to take place in 2009.

Kazakhstan's economy has grown steadily in the last four
years. 2005 GDP growth is estimated at 9%, and the highest
year-on-year rate was 13.5% in 2001. Although incomes and
consumer spending have risen across the board, the minimum
subsistence wage is still only $46.53 per month, and 18.8%
of the population receives income below that level.
Starting on July 1, 2006, the minimum pension payment will
be $ 68.1 per month. By government estimates, unemployment
has remained near 8% since 2002.

Corruption
--------------

Although the Kazakhstani Criminal Code contains special
penalties for accepting and giving bribes, corruption is
widely perceived to be prevalent throughout Kazakhstan. The
Ministry of Interior, the Financial Police and the
Committee for National Security (KNB) are responsible for
combating corruption. The latest national commission to
fight government corruption - the Disciplinary State
Service Commission - was established in June 2003.

U.S. firms have cited corruption as a significant obstacle
to investment. Law enforcement agencies have on occasion
brought pressure on foreign investors perceived to be
uncooperative with the government. The government and local
business entities are widely aware of the legal
restrictions placed on U.S. business abroad (i.e., the
Foreign Corrupt Practices Act).

In 2002, a former Minister, a Minister, and a former Oblast
Akim were separately indicted on corruption charges. The
timing of two of these cases appears to have been
politically motivated, as they were co-leaders of a major
new opposition political movement started only months
before. Two were convicted and sentenced to lengthy jail
terms, though one was pardoned and released in May 2003.

The third case also resulted in a conviction, though the
by-then former minister was given a suspended sentence.

In 2003 in the United States two American citizens were
charged with violating the Foreign Corrupt Practices Act in
a case that received significant international media
attention. The two allegedly channeled tens of millions of
dollars in bribes to two senior Kazakhstani officials
during the 1990's in order to facilitate oil deals for
American companies. One is currently serving a jail term;
the trial of the second, James Giffen, is scheduled to
begin in 2006 in the Federal District court in the Southern
District for New York.

Bilateral Investment Agreements and Double Tax Treaties
-------------- --------------

The United States-Kazakhstan Bilateral Investment Treaty
came into force in 1994. In 1992, the United States and
Kazakhstan signed an Investment Incentive Agreement. In
1996, the United States and Kazakhstan ratified the Treaty
on Avoidance of Dual Taxation.

Kazakhstan has bilateral investment agreements in force
with over three dozen countries, including the United
States, Great Britain, Germany, France, Russia, Korea,
Iran, China, and Turkey. Kazakhstan also has ratified 36
treaties on avoidance of dual taxation.

OPIC and Other Investment Insurance Programs
--------------

The Overseas Private Investment Corporation (OPIC),an
independent U.S. Government agency that provides project
financing, political risk insurance, and a variety of
investor services, has been active in Kazakhstan since

1994. OPIC is seeking commercially viable projects in the
Kazakhstani private sector. OPIC offers a full range of
investment insurance and debt/equity stakes.
Kazakhstan is a member of the Multilateral Investment
Guarantee Agency (MIGA).

Labor
--------------

Kazakhstan has an educated and technically competent
workforce. The demand for specialized skilled labor created
by the simultaneous development of several major oil fields
in western Kazakhstan has exceeded locally available
supply. Management expertise and marketing skills are also
in short supply. U.S. firms employ Kazakhstani specialists
across a broad spectrum of industries, although additional
training to qualify specialists is often necessary.

The 1999 Labor Law and the Constitution guarantee basic
workers' rights, including the right to organize and the
right to strike. Teachers, miners and workers at a variety
of enterprises have conducted occasional strikes for
generally short periods during the past several years. The
1993 Law on Professional Labor Unions provides a legal
guarantee against limitations of labor. It also grants
social-economic, political and personal rights and freedoms
as a result of membership in a union and prohibits the
denial of employment, the denial of promotion or the
release from employment on the basis of such membership.
Kazakhstan joined the International Labor Organization
(ILO) in 1993. As of January 2006, Kazakhstan has ratified
16 ILO conventions, including those pertaining to minimum
employment age, forced labor, discrimination in employment,
equal remuneration, and collective bargaining.

The 1996 Law on Labor Disputes and Strikes lays out the
procedure for resolving disputes. However, the law also
restricts strikes by requiring that a peaceful attempt at a
solution first be made, that two-thirds of the labor
collective must approve the strike, and that the employer
must be warned 15 days in advance in writing, among other
restrictions. In addition, strikes for political purposes
are forbidden.

A separate 1992 Law on Collective Bargaining Agreements
sets out the basic framework for concluding such
agreements. There are instances of unions successfully
negotiating collective bargaining agreements with
management.

The Government of Kazakhstan has made it a priority to
ensure that Kazakhstani citizens are well-represented on
foreign enterprise workforces, and is particularly keen to
see Kazakhstanis hired into the managerial and executive
ranks of those enterprises. Changes in 2001 to the quota
system for foreign labor work permits has increased
pressure on employers to hire local labor through the
introduction of requirements to search for local workers
prior to the issuance of work permits for foreign labor
(see section A.1.). All U.S. companies are strongly advised
to contact locally-based law and accounting firms, as well
as the U.S. Commercial Service in Almaty, for the latest
information on work permits.

Foreign Trade Zones/Free Ports
--------------

The government established special economic zones in the
capital city of Astana (as of July 2001) and on the
territory of the seaport of Aktau (as of April 2002). Under
the law, the Astana Special Economic Zone must be abolished
no later than five years after its foundation, while the
Aktau Special Economic Zone must be closed by January 2007.
In the special economic zones, foreign companies have the
same privileges as Kazakhstani entities. A third Special
Economic Zone has been established near the city of
Shymkent as an incubator for the cotton textile industry.
The Shymkent zone is an example of the Government's
"cluster" strategy, whereby the state is attempting to
create new industrial sectors where it has identified the
potential for the growth of competitive firms. In addition
to the cotton textile industry, there are plans to build
clusters in the petrochemical, oil machinery, food
processing, tourism, transport and metallurgical sectors.

As a part of Kazakhstan's national strategy to diversify
the economy, the government has begun to establish
"technoparks" where investors, including foreigners, can
take advantage of incentives to develop trade-intensive
high-tech industries.

Foreign Direct Investment (FDI) Statistics
--------------

Annual Gross Foreign Direct Investment Flows by Country of
Origin (Millions of Dollars; nominal)

1993-2003 2004 2005(Jan-Sept) Total

USA 7738.5 2970.6 759.5 11 468.6
UK 3516.6 924.6 179.6 4261.6
South Korea 1750.8 72.5 40.5 1863.8
Italy 1848.7 313.0 213.4 2375.1
Canada 1065.2 169 224.0 1458.2
Switzerland 1682.5 235.6 76.6 1994.7
Netherlands 1622.7 1782.2 1070.6 4475.5
China 1076.6 397.7 103.6 1577.9
Turkey 742.1 92.1 68.3 902.5
Russia 787 200.6 158.2 1145.8
Japan 491.6 178.5 238.7 908.8
Others 3527.3 956.6 1495.9 5979.8
Total 25,849.6 8,293.0 4,269.7 38 412.3

Source: National Bank of Kazakhstan

Annual Gross Foreign Direct Investment Flows by Sector
(Millions of dollars; nominal)

1993-2003 2004 2005(Jan-Sept) Total

AGRICULTURE, 16.5 -2.0 0.7 15.2
HUNTING AND
FORESTRY

MINING AND 15241.8 5268.4 1237.5 21747.7
QUARRYING

mining of coal 33.6 9.7 2.4 45.7
and lignite,
extraction
of peat

extraction of 13546.8 5200.5 1150.0 19897.3
crude
petroleum
and natural
gas

mining of 43.3 34.8 47.9 126
uranium and
thorium ores

mining of 1570.8 13.5 42.9 1627.7
metal ores

other mining
and quarrying 47 9.9 -5.8 51.1

MANUFACTURING 4242.2 519.1 202.1 4963.4

including but 607.2 36.4 45.8 689.4
notlimited
manufacture of
food products,
beverage and
tobacco products

manufacture of 438.9 20.4 34.1 493.4
coke, refined
petroleum
products
and nuclear
fuel

manufacture of 115.5 25.2 -3.8 136.9
chemicals
and chemical
products

manufacture of 14.2 9.1 6.7 30.0
rubber and
plastics
products

manufacture of 63.8 11.2 9.5 84.5
other
non-metallic
mineral products

manufacture 2622.3 323.8 71.5 3017.6
of basic metals:

manufactures 401.8 0.7 2.7 405.2
of ferrous
metals

manufacture of 2212.9 319.8 67.6 2600.3
basic precious
and non-ferrous
metals

manufacture of 7.9 3.3 1.2 12.4
fabricated
metal products
except
machinery
and equipment

manufacture 15.7 7.5 -5.1 18.1
of machinery
and equipment

manufacture 316 71.4 37.3 424.7
of electric
and computing
machinery
manufacture of 4.4 1.1 2.7 8.2
transport
equipment

manufacture, 4.1 1.8 -1.1 4.8
n.e.c

ELECTRICITY, 568.1 11.4 116.7 696.2
GAS AND WATER
SUPPLY

CONSTRUCTION 161.8 159.9 87.6 409.3

WHOLESALE AND 482.3 271.8 251.4 1005.5
RETAIL TRADE,
REPAIR OF
MOTOR VEHICLES,
MOTORCYCLES
AND PERSONAL AND
HOUSEHOLD GOODS

HOTELS AND 96.1 13.4 3.3 112.8
RESTAURANTS

TRANSPORT, 491.4 83.2 89.6 664.2
STORAGE AND
COMMUNICATION
land transport 324.2 29.4 19.8 373.4

including 319.8 28.8 20.0 368.6
transport
via pipelines

water 14.2 -26.4 0.0 -12.2
transport

air transport 21.7 0.5 2.4 24.6

supporting 65.1 15.7 44.5 125.3
transport
activities

post and 66.4 63.9 22.9 153.2
telecommunication

including 65.5 63.5 22.6 151.6
telecommunication

FINANCIAL 315.3 71.0 52.8 439.1
ACTIVITY

REAL ESTATE, 3731.8 1806.1 2184.5 7722.4
RENTING
AND BUSINESS
ACTIVITIES

Including 82.6 11.6 4.3 98.5
but not limited
real estate
activities

other business 3642.7 1788.5 2167.4 7598.6
activities:

Including 64.4 51.5 1.2 117.1
legal,
accounting, book-
keeping and
auditing
activities,
tax consultancy,
market research,
business and
management
consultancy
geological 3458.4 1717.6 2113.5 7289.5
exploration and
prospecting
activities

EDUCATION, 141.7 90.8 43.5 276
HEALTH AND
SOCIAL WORK

ACTIVITIES, 360.8 0.0 0.0 360.8
N.E.C.

TOTAL 25,849.8 8,293.1 4269.7 38 412.6
Source: National Bank of Kazakhstan

2003 2004 2005

FDI as a Percentage of GDP 15.2% 20.3% 12%

Source: National Bank of Kazakhstan

Largest Investments as of 2005:
--------------


1. TengizChevrOil (TCO). The TCO joint venture (50% owned
by Chevron, 25% by ExxonMobil, 20% by the Government of
Kazakhstan, and 5% by LucArco),launched in 1993, was the
first major international oil project in post-independence
Kazakhstan. Through 2004 the joint venture partners
invested more than $7 billion in TCO. In 2005 TCO is
expected to produce 280,000 bpd. By 2007, TCO will
complete a three-year expansion project, which will
increase production to an estimated 570,000 bpd. TCO member
companies are also major shareholders in the Caspian
Pipeline Consortium (CPC),a $2.5 billion project which
began transporting Tengiz crude to the Black Sea port of
Novorossiysk in 2001. Negotiations among CPC shareholders
to more than double CPC pipeline capacity continued through

2005.


2. AGIP Kazakhstan North Caspian Operating Company. Formed
in 1997 to develop the super-giant offshore Kashagan field
in the North Caspian, this consortium has undergone
numerous partner changes. Current members include Agip-ENI,
ExxonMobil Shell, Inpex, ConocoPhillips, Total, and
KazMunayGaz. Estimated reserves of extractable oil stand at
7-9 billion barrels. First Kashagan oil is likely to be
exported via the BTC pipeline, and IGA and HGA negotiations
are ongoing to facilitate movement of Kazakhstani oil along
that route. Under terms of the initial PSA, Agip KCO was to
start commercial production in 2005, but that date has been
moved back to at least 2008. Project partners planned to
invest $3.5 billion in Kashagan in 2005 alone.


3. Karachaganak Consortium. Chevron, British Gas, Agip, and
Lukoil signed a PSA in 1997 to develop the Karachaganak oil
and gas condensate field, estimated to hold 2.3-6 billion
barrels of oil / gas condensate and 16-46 Tcf of natural
gas reserves. In 2003 Western partners completed a 400 mile
pipeline to connect the field to the CPC pipeline in
Atyrau. A "Phase Two" expansion project was completed in
2004, in which an estimated $4.3 billion was invested to
construct a new gas and liquids processing facilities, gas
re-injection facilities, and a 120-megawatt power station.
According to a 40-year agreement, the company will invest
$10 million annually in local social projects.


4. PetroKazakhstan (PK). Until its sale in October 2005 to
a subsidiary of Chinese National Petroleum Corporation
(CNPC),PK ran one of Kazakhstan's three major oil
processing plants, the Shymkent refinery, which meets about
50% of the domestic demand for refined products. PK also
operated the Kumkol deposits in southern Kazakhstan.
According to an agreement between the GOK and CNPC
International, the GOK will purchase 50% of the Shymkent
refinery and one-third of additional PK assets. In 2004
PK's capital investments reached $82 million, and were
planned at $40 for 2005. In addition to the former PK
assets, in 1997 CNPC bought 60.2% of state-owned
Aktobemunaygaz, and in 2003 CNPC purchased a further 25.12%
stake for $150 million. By 2004 the company's investments
were over $1 billion. In addition, CNPC, together with
national oil company KazMunayGaz, is constructing an oil
pipeline to China. The second, $700 million stage was
completed in December 2005.

5. Nelson Resources (Canada). In 2000 the company
purchased a 50% interest in Kazakhoil Aktobe, in
partnership with KazMunayGaz. In 2004 production reached
20,000 bpd and is projected to increase three-fold by 2007.
In 2004 Nelson invested about $140 million in the project.
Since 2004 Nelson Resources has developed North Buzachi
field on a parity basis with CNPC. In 2004 the company
produced 10,000 bpd. In 2005 $125 million was invested into
the project. In late 2005 Russian Lukoil purchased 100% of
Nelson Resources.


6. Nations Energy (Canada). In 1997 the company bought a
94.64% stake in the Karazhanbasmunay state oil company for
$45 million. The company produces about 50,000 bpd. By 2005
the company had invested about $250 million into the
project, targeting planned production at 80-90,000 bpd over
the next two years.


7. AES Kazakhstan and AES Ekibastuz. In 1996, the American
energy company AES bought the Ekibastuz-1 power plant. In
the fall of 1997, AES purchased two hydroelectric power
generation plants and several other coal-fired
power/heating plants in and around Ust-Kamenogorsk, in
eastern Kazakhstan. In 1999, AES gained management control
of two regional electric distribution companies (REC) in
Kazakhstan for 15 years. Since 1996, AES has invested over
$220 million. In 2005-2008 the company plans to invest
$300-500 million in Kazakhstan's economy.


8. Bogatyr Access Komir. In 1996, the American firm Access
Industries bought the Bogatyr coal mine and 66% of the
neighboring Stepnoy coal mine (both part of the giant
Ekibastuz mining complex) for more than $40 million. Access
pledged to invest $550 million toward upgrading the
coalmines over the next five years. Access Industries
continues its investment program at the Ekibastuz mining
complex. Nearly 36 million tons of coal were delivered from
the Bogatyr mine in 2004. About $18-million investments
into production are planned in 2005.

Other major investments in the past several years have
included:

Philip Morris-Kazakhstan. Philip Morris signed an agreement
with the Almaty Tobacco Company in 1993, under which it
pledged to invest USD 350 million through 1998. Philip
Morris has been producing cigarettes in Kazakhstan for
domestic consumption since 1994. In spring 2000, it
completed its USD 200 million Greenfield cigarette
manufacturing plant in the Almaty Oblast. The plant is
slated to produce over 25 billion cigarettes annually.

Trans World Metals. A UK-registered company, which in 1995
purchased Kazakhstan's chromium plant and associated mine.
Trans World paid USD 65 million for the facilities and
pledged to invest a further USD 400 million. In 2000, after
two years of legal battle in Kazakhstani and foreign courts
with local company Kazakhstan Mineral Resources Corp (KMRC)
over rights to its chromium operation and rights to other
properties in Kazakhstan, Trans World Metals left the
country and dropped its court cases against the KMRC for a
reported USD 200-USD 250 million settlement.

The LNM Group (UK),in 1995, purchased the Karaganda
metallurgical plant (KARMET),which was subsequently
renamed to Ispat-Karmet. The LNM Group paid USD 225 million
and invested a further USD 450 million by 2000. The new
owner significantly improved the plant's product quality
and packaging and now exports 95% of Ispat-Karmet's output
to over 60 countries. In late 2004 LNM's Kazakhstani steel
operation was renamed "Mittal Steel Temirtau".

ASQUINO