Identifier
Created
Classification
Origin
09ASTANA2131
2009-12-08 09:08:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

KAZAKHSTAN: 2009 NATIONAL TRADE ESTIMATE

Tags:  PGOV PREL ECON ETRD EFIN EINV KIPR KZ 
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VZCZCXRO0307
OO RUEHIK
DE RUEHTA #2131/01 3420908
ZNR UUUUU ZZH
O 080908Z DEC 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6961
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 2225
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1589
RUEHKO/AMEMBASSY TOKYO 2290
RUEHUL/AMEMBASSY SEOUL 1224
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1784
RUEKJCS/SECDEF WASHDC 1634
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2608
RUEHNO/USMISSION USNATO 2906
RUEHAST/AMCONSUL ALMATY 2073
UNCLAS SECTION 01 OF 07 ASTANA 002131 

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC
PLEASE PASS USTDA, OPIC, EXIM, USTR

E.O. 12958: N/A
TAGS: PGOV PREL ECON ETRD EFIN EINV KIPR KZ
SUBJECT: KAZAKHSTAN: 2009 NATIONAL TRADE ESTIMATE

REF: STATE 10598

ASTANA 00002131 001.3 OF 007


UNCLAS SECTION 01 OF 07 ASTANA 002131

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC
PLEASE PASS USTDA, OPIC, EXIM, USTR

E.O. 12958: N/A
TAGS: PGOV PREL ECON ETRD EFIN EINV KIPR KZ
SUBJECT: KAZAKHSTAN: 2009 NATIONAL TRADE ESTIMATE

REF: STATE 10598

ASTANA 00002131 001.3 OF 007



1. The following information responds to reftel request.

TRADE SUMMARY

The U.S. goods trade deficit with Kazakhstan was $618 million in
2008, an increase of $119 million from $499 million in 2007. U.S.
goods exports in 2008 were $986 million, up 30.9 percent from the
previous year. Corresponding U.S. imports from Kazakhstan were $1.6
billion, up 28.1 percent. Kazakhstan is currently the 76th largest
export market for U.S. goods.

The stock of U.S. foreign direct investment (FDI) in Kazakhstan was
$4.9 billion in 2007(latest data available),up from $4.6 billion in

2006.

Kazakhstan has been negotiating membership in the WTO since January
29, 1996. As part of the process, Kazakhstan is still negotiating
bilateral market access agreements with a number of WTO Members,
including the United States, the EU, and Australia. In 2007,
Kazakhstan signed market access agreements with Malaysia, Brazil,
and Israel. Currently, 21 out of 40 Members of the WTO Working
Party for Kazakhstan have signed bilateral market access agreements,
the most recent of which were Canada and Australia. While progress
was made in 2008, in implementing WTO-consistent legislation, more
work remains in a number of areas, including reform of customs
practices, sanitary and phytosanitary (SPS) regulation, technical
barriers to trade (TBT),government procurement, and taxation.

The United States-Kazakhstan Bilateral Trade Agreement, which came
into force in 1993, grants conditional normal trade relations
treatment. A bilateral investment treaty came into force in January

1994.

IMPORT POLICIES

Kazakhstan is a member of the Eurasian Economic Community (EAEC),
along with Russia, Kyrgyzstan, Belarus, Tajikistan, and Uzbekistan.
Armenia, Moldova, and Ukraine currently have observer status. Five
of the EAEC members (all but Uzbekistan) have formed a free trade
area. In 2006, Kazakhstan, Russia, and Belarus announced the

formation of a trilateral customs union. Significant progress was
made in 2008 on formulating the underlying legal basis for the
customs union. The progress included the Russian Duma's
ratification of a free trade agreement, and agreements on the
establishment of both regulatory and dispute resolution agencies in
October 2008. Russia, Belarus, and Kazakhstan intensified
consultations and negotiations in early 2009, and officially signed
legal agreements for its creation on November 27 in Minsk.
According to the agreements, a common external trade tariff will be
enacted as of January 1, 2010. Kazakhstan's entrance into the
Customs Union will increase its import tariffs, which already
increased from 6.6 percent in 2008 to almost 13 percent in 2009
according to the Custom Committee of the Republic of Kazakhstan.

According to current Customs Union agreements, Kazakhstan will
retain some flexibility in determining the common external import
tariff regime. For example, according to officials from the
Ministry of Industry and Trade, Kazakhstan will have no tariff on
over 900 specific commodity items, including modern aircraft,
certain types of engines, and raw materials needed in the food
processing industry, such as tropical fruits. Over 400 specific
commodity items will be subject to a transitional period varying
from one-and-half to five years. These items include
pharmaceuticals, medical equipment, processed aluminum products, raw
materials for the petrochemical industry, paper products, rail
wagons, combines, and tractors. In some specific cases, Customs
Union member states also can apply protective import tariffs on

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selected goods without the consent of the other members, but only
for six months per year and for a maximum of five years. The member
states have agreed to grandfather all previously existing protective
and anti-dumping measures at the time of accession into the Customs
Union. The Customs Union implementation timeline anticipates
implementation of the new common Customs Code and abolishment of the
Russian-Belarus customs border on July 1, 2010. The
Kazakhstani-Russian customs border is scheduled for abolishment on
July 1, 2011.

The Law on Investments, enacted in January 2003, provides customs
duty exemptions for imported equipment and spare parts, but only if
Kazakhstani-produced stocks are unavailable or not up to
international standards. Despite the creation of the Customs Union,
Kazakhstan is expected to continue to offer preferential treatment
to investors outside of the extractive sector in an effort to
promote economic diversification.

U.S. exporters to Kazakhstan have consistently identified the
requirement to obtain a "transaction passport" (providing
information on, inter alia, the importer, contract details, local
bank of importer/exporter, and a foreign partner) to clear goods
through customs as a significant barrier to trade. The transaction
passports are designed to stem capital outflows and money laundering
by requiring importers to show documents that verify the pricing of
import/export transactions. In July 2006, the National Bank of
Kazakhstan (NBK) enacted new regulations that simplified -- but
retained -- the transaction passport requirement. Principal changes
included elimination of the trade distorting maximum financing term
of 180 days for imported goods and transfer of the authority to
issue transaction passports from customs to the NBK and commercial
banks. According to Kazakhstani regulations, the transaction
passports contain concise information on trade partners and include
a unique transaction code; specific payment information such as
currency, means, and deadlines for payment; and complete contact
information for contracting parties. Kazakhstan amended the Law on
Currency Control in August 2009, thereby changing the ceiling on
transactions from $10,000 to $50,000. Despite some internal
Kazakhstani opposition to the transaction-passport system, the
National Bank of Kazakhstan insists on its necessity to control
capital movement and prevent capital flight.

In 2009, Kazakhstan established and later lifted, thanks largely to
effective communication between the U.S. Department of Agriculture's
(USDA) Animal and Plant Health Inspection Service (APHIS) and the
Kazakhstani Ministry of Agriculture, several trade bans. For
example, the appearance of H1N1 led to a ban on the import of all
pork and pork products from Texas, California, and Kansas on June 5,
2009, which was lifted on October 19, 2009. Similarly, to address
the perceived threat of Hemorrhagic disease, Kazakhstan banned all
rabbits and rabbit products on December 10, 2008, which it lifted on
October 19, 2009. During the same period, as a result of the
perceived threat of Bovine Sponge Encephalitis (BSE),a ban on beef
and beef products was established in December 2008 and removed in
October 2009.

Although Kazakhstani officials are diligently addressing the
problematic structure of Kazakhstan's customs control agencies,
customs administration and procedural implementation remain a
principal barrier to trade. Kazakhstan's planned entrance into the
Customs Union has not negatively impacted its own attempts to
streamline the customs process. Since August 2008, the Kazakhstani
Customs Control Committee has been participating in a Parliamentary
working group, convened at the direct request of the Prime Minister,
to develop a new overhauled Customs Code, bring Kazakhstan's
legislation into compliance with WTO standards, and remove several
identified barriers to trade. Amendments currently being considered
by President Nazarbayev are designed specifically to meet standards
required for WTO accession and include declaration rights for

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foreign citizens (bypassing the current legal requirement for the
participation of domestic brokers),ex officio rights for customs
agents, and standardized guidelines for the valuation of goods.
Kazakhstani customs authorities expect approval of these amendments
by the end of December with their entry into force the beginning of

2010.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

In 2007, Kazakhstan adopted a number of laws in furtherance of its
efforts to develop a national system of standardization and
certification, such as laws on Safety of Chemical Products, Safety
of Food Products, Safety of Toys, and Safety of Equipment and
Machinery, as well as a series of amendments to the Law on Technical
Regulation.

In 2008, this package of laws was augmented by the Law on
Accreditation, which regulates the accreditation of entities that
conduct conformity assessment.

The Kazakhstani Law on Technical Regulation distinguishes the
state's responsibilities from those of the private sector. The
government is responsible for establishment of product safety
standards, but delegates quality control responsibilities to
authorized private institutions. A wide range of goods are subject
to mandatory certification requirements, which apply to both
domestically-produced and imported goods. A related regulation
lists the specific categories of products subject to certification,
including machines, cars, agricultural and telecommunication
equipment, construction materials, fuel, clothes, toys, food, and
drugs.

The Law on Technical Regulation requires that contracts for the
delivery of imported goods include a special clause which confirms
the goods comply with Kazakhstani standards. Delivery contracts
must also be accompanied by documents that describe the products and
list the country of origin, the producer, the expiration date, any
storage requirements, and instructions for the use of the product in
both the Kazakh and Russian languages. In addition, the law states
that foreign certificates, testing protocols, and compliance
indicators must be in accordance with international treaties.
Kazakhstani authorities normally recognize foreign certificates, but
the verification process can take 10-25 days depending on the
industry.

The National Accreditation Center of Kazakhstan intends to become a
full member of the International Laboratory Accreditation
Cooperation in 2010 and the International Accreditation Forum in

2012. It is currently developing legislation to accomplish this
goal. This step would automatically make the Kazakhstani National
Accreditation Center a signatory to a number of international
treaties on metrology and standards.

President Nazarbayev's National Program for Accelerated Industrial
and Innovative Development announced in May 2009 and the
Russia-Belarus-Kazakhstan (RBK) Customs Union might affect technical
regulatory policies in Kazakhstan, by incorporating new industrial
standards based on international best practices and a harmonized
system of technical regulation designed largely to comply with WTO
standards.

GOVERNMENT PROCUREMENT

Some potential U.S. suppliers have raised concerns about the
transparency and efficiency of Kazakhstan's government tender
process. Corruption and lack of transparency remain major
challenges for both local and foreign companies.

In July 2007, Kazakhstan enacted the Law on Government Procurement,

ASTANA 00002131 004.3 OF 007


which was designed to increase the transparency of the procurement
process and provide relevant state agencies with greater operational
flexibility. Concurrent amendments to the Administrative Code
stipulated administrative penalties for violations of the Law on
Government Procurement. In November 2008, Parliament approved
amendments to this Law on Government Procurement, which became
effective in December 2008. The amendments are primarily designed
to further reduce corruption and introduce an e-procurement system.
As mandated by President Nazarbayev, the changes to the Law on
Government Procurement should also enhance the participation of
domestic suppliers in government procurement, and whenever possible,
give preference to them.

During the first half of 2009, Kazakhstan adopted regulations and
amendments to several laws designed to increase the proportion of
local content in government procurement procedures. The exact
proportion of the required purchase of local goods and services is
calculated according to a specific formula, which was approved by
Kazakhstan's Foreign Investor Council. It will be applied to
domestic and foreign operators in Kazakhstan, including government
agencies, state-owned enterprises, national holding companies such
as Samruk-Kazyna, and subsoil users. According to new tender
requirements, proposals that include significant proportions of
locally-produced goods and services will receive preferential
treatment. Conversely, tender commissions without them will be
charged administrative fees and may face administrative prosecution.
The Kazakhstani government is elaborating its official concept for
the development of Kazakhstani content. A mandate of substantial
increases by 2014 in the local-content share of Kazakhstani-produced
goods (up to 50 percent) and Kazakhstani-produced services (up to 90
percent) is expected.

Kazakhstan's largest national companies, governed under the umbrella
of the Samruk-Kazyna national holding company, including Kazakhstan
TemirZholy (national railway),KazMunayGas (national oil and gas
company),KEGOC (electricity transmission company),and other
companies with their subsidiaries are subject to the local-content
requirements, but are thus far exempted from the Law on Government
Procurement.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

The Kazakhstan government's effort to diversify the economy away
from the energy sector and spur the growth of a domestic high
technology industry, combined with the WTO accession process, has
led to a strong emphasis on IPR protection. Kazakhstan is currently
considering a number of changes to its IPR legislation that will
strengthen IPR protection and provide tools for improved IPR
enforcement.

In 2009, Kazakhstan adopted several amendments to IPR legislation,
including the legal recognition of vendors who possess associated
rights for the distribution of print and digital media. This
amendment allows licensed vendors to seek damages from unauthorized
dealers selling pirated merchandise that is otherwise properly
licensed internationally for resale. Kazakhstan also amended its
patent law to re-define a patent holder, including detailed
descriptions of the relationship between an employer and an employee
with respect to an employee's invention.

Although domestically-produced pirated films and music are available
in Almaty and Astana. Thanks largely to decreasing costs of making
copies, the vast majority of pirated goods in these regions appear
to be imported, predominantly from Russia and China. Armed with
statutes enacted in November 2005 that authorize stiffer penalties
for infringers, the authorities have conducted numerous raids
against distributors of pirated products. The government's efforts
have greatly helped to expand the Kazakhstani market for licensed,
non-infringing products. Still, much remains to be done,

ASTANA 00002131 005.3 OF 007


particularly in ensuring that Customs controls are applied more
effectively against imported infringing goods. Legislation to
strengthen intellectual property protection and enforcement is under
Presidential review, including a proposal to grant customs
officials' badly-needed ex officio power to seize infringing goods
at the border. Amendments to trademark legislation are being
developed.

Further progress is also needed in the realm of civil enforcement,
which is serving as an increasingly prevalent method of IPR
enforcement. Although civil courts have been used effectively to
stem IPR infringement, judges often lack expertise in the area of
IPR, which is a significant obstacle to further improvement in
Kazakhstan's IPR climate.

SERVICES BARRIERS

Foreign ownership of individual mass media companies, including news
agencies, is limited to 20 percent in accordance with Kazakhstan's
law "On National Security," Article 22, Paragraph 5, Number 4.
Foreign banks and insurance companies are limited to operating in
Kazakhstan through joint ventures with Kazakhstani companies. For
certain professional services, including auditing, architectural,
urban planning, engineering, integrated engineering, and veterinary
services, commercial presence is allowed only in the form of a
juridical person. For telecommunication services, foreign ownership
may not exceed 49 percent, also in accordance with Kazakhstan's
above-referenced law "On National Security. "

INVESTMENT BARRIERS

Kazakhstan's 2003 Law on Investments provides the legal basis for
foreign investment in Kazakhstan. In general, U.S. investors have
concerns about the law's narrow definition of investment disputes,
its lack of clear provisions for access to international
arbitration, and certain aspects of investment contract stability
guarantees.

The vast majority of foreign investment in Kazakhstan is directed to
the oil and gas sector. The Government remains eager to do business
with international companies, but increasingly has emphasized the
importance of "local content" in purchases of goods and services for
petroleum operations. For example, a new draft Law on Subsoil and
Subsoil Use, expected to be adopted in early 2010, contains explicit
requirements regarding the local purchase of goods and services and
the hiring of Kazakhstani nationals for all investments in offshore
oil and gas exploration and production. This law could cause
difficulties for international investors, because the methodology to
calculate local content is not well defined, and Kazakhstani goods
and services do not always fully comply with international
standards. If enforced to the letter, the law could adversely
affect the cost and schedule of contracts. The draft subsoil law
also requires that KazMunayGas, the national oil company, have a
minimum 51 percent share in all new exploration and production
contracts, and it establishes a procedure through which the national
oil company may obtain field rights outside of a tender process.
Taken together, these clauses appear to establish KazMunayGas as a
necessary partner for international oil companies investing in
Kazakhstan.

The proposed legislation would also require separate contracts for
exploration and production operations, put shorter time limits on
exploration contracts, enhance the government's authority to
terminate contracts not in compliance with the law, and require tax
stability clauses in individual contracts to be approved by
parliament. In addition, under the terms of the legislation, no
future contracts would be structured as production sharing
agreements (PSAs),which allow companies to recoup capital
expenditures before making royalty payments to the government.

ASTANA 00002131 006.3 OF 007



Although exploration and production contracts would be separated, a
company awarded exploration rights would nevertheless be given
priority rights to negotiate a production contract with the
government following an oil or gas discovery. However, if the terms
of the production contract were not agreed to within a set time
period, production rights would be opened to other bidders through a
public tender.

The draft law also includes a preemption clause that guarantees the
State the right of first refusal when a party seeks to sell any part
of its stake in a mineral resource extraction project. The State
claims this preeminent right even in cases where the controlling
agreement assigns preemptive rights elsewhere (e.g., to other
investors in a consortium). The proposed draft also fully
incorporates an October 2007 amendment to the current subsoil law
which allows the government to force amendments to existing subsoil
contracts of "strategic significance" -- or even terminate such
contracts -- where the economic interests of Kazakhstan are so
threatened as to create a "national security risk." On August 1,
2009, the government passed Decree No.1213 on "Approving the List of
Subsoil Fields having Strategic Significance." The list includes
over 100 oil and gas fields, including Tengiz, Kashagan, and
Karachaganak. This Decree fuels concerns over the stability of
contracts. It authorizes the government to amend or change
contracts if it determines that the actions of a subsoil user could
lead to a substantial change in Kazakhstan's economic interests or
threaten Kazakhstan's national security. The Decree provides no
further guidance on how the government will define a change in
economic interests or a threat to national security.

Kazakhstan's law allows citizens of Kazakhstan and foreigners to own
land under commercial and noncommercial buildings, including
dwellings and associated land. Such land may also be leased for up
to 49 years. The land code, enacted in June 2003, for the first
time allows private ownership by Kazakhstan's citizens of
agricultural land, in addition to industrial, commercial, and
residential land. An amendment enacted in July 2007 extends the
right to own agricultural land to Kazakhstani owned businesses as
well. Foreigners may still only lease agricultural land for up to
10 years.

Foreign investors continue to have difficulty obtaining work permits
for employees who are not Kazakhstani nationals. Many companies
report that permits for key managers and technicians are routinely
rejected or granted for unreasonably short periods or are
conditioned upon demands for additional local hires. Companies also
report that hiring regulations are confusing and interpreted
inconsistently by local officials and the Ministry of Labor and
Social Protection.

In December 2007, Kazakhstan adopted new regulations on foreign
labor. While the Ministry of Labor and Social Protection claims the
new regulations simplify the issuance of work permits to foreigners,
they impose additional requirements to support the domestic labor
market that many investors find onerous.

In light of these difficulties for investors, the government has
been increasing slightly the number of work permits available. In
2006, the number of permits was limited to 0.55 percent of the
economically active population (estimated at about 8 million
people). The percentage figure was increased to 0.8 percent in 2007
(approximately 640,000 permits). For 2008, it was increased to 1.6
percent; and for managers and professionals it increased from 0.3 to
0.6 percent. For skilled workers, the quota rose from 0.37 percent
to 0.93 percent.

OTHER BARRIERS


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There are other structural barriers to investment in Kazakhstan,
including a weak system of business law, a lack of an effective
judicial system for breach of contract resolution, and an unwieldy
government bureaucracy. Many companies serving the Kazakhstani
market report significant logistical difficulties.

In addition, there is a burdensome tax monitoring system for all
companies operating in Kazakhstan. Many companies report the need to
maintain excessively large staffs in Kazakhstan to deal with the
cumbersome tax system and frequent inspections. The actions of tax
and various regulatory authorities, as well as actions to enforce
environmental regulations, can be unpredictable. The government
has, on occasion, initiated criminal cases against local employees
of foreign firms. Kazakhstani authorities often require, as part of
a foreign firm's contract with the government, that the firm
contribute to social programs for local communities.

Widespread corruption at all levels of government is also seen as a
barrier to trade and investment in Kazakhstan. It reportedly
affects nearly all aspects of doing business in Kazakhstan,
including customs clearance, registration, employment of locals and
foreigners, payment of taxes, and the judicial system.

SPRATLEN