KAZAKHSTAN: 2007 INVESTMENT CLIMATE STATEMENT

UNCLAS ASTANA 000173

SIPDIS

SIPDIS

DEPT FOR EB/IFD/OIA
STATE PLEASE PASS USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR KZ
SUBJECT: KAZAKHSTAN: 2007 INVESTMENT CLIMATE STATEMENT

REF: 06 STATE 178303


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

Openness to Foreign Investment
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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 2006,
foreign investors had invested a total of about $46.2
billion in Kazakhstan, primarily in the oil and gas
sector, during the country's fifteen 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.

Despite continuously increasing investment into
Kazakhstan?s energy sector, concerns remain about a
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 an enduring perception that Kazakhstan is
becoming less open to investment.

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.

Since 1997, there has been a growing trend to favor
domestic investors over foreigners in most state
contracts. Furthermore, amendments passed in 1999 to the
Oil and Gas Law require mining and oil companies to use
local goods and services. According to these ?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. Since 2002, a designated government body must
approve all tender documents, participate in tender
committees, and approve all tender committee decisions,
in order to ensure compliance. The 2005 ?Production
Sharing Agreements (PSA)? law, which applies primarily to
Kazakhstan?s offshore oil development projects, binds
companies to similar local context provisions.
Amendments to the Subsurface Law adopted in December 2006
further tighten the government?s application of local
content requirements, requiring companies to meet local
content benchmarks annually, rather than on average over
the lifetime of a project.

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..."

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, and provides, inter alia, guarantees
of national treatment and non-discrimination for 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 2003 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, the RK Constitution, as well
as the 2003 law "On Investments," specifies that ratified
international agreements have precedence over domestic
law. The May 2005 Law on International Agreements
appears to contradict this legal hierarchy, setting
precedence of domestic law of the RK over its
international agreements. For the purpose of eliminating
this contradiction from the law, the Parliament has
recently passed amendments to the Law on International
Agreements that re-state the precedence set by the
Constitution of ratified international agreements over
domestic law. The amendments will become effective once
they are signed by President Nazarbayev. 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 exemption