2009 INVESTMENT CLIMATE STATEMENT FOR THE KYRGYZ

UNCLAS SECTION 01 OF 07 BISHKEK 000079

C O R R E C T E D C O P Y (TAG AND ADDRESEE)

SIPDIS

DEPT FOR SCA/CEN (GORKOWSKI),EB/IFD/OIA
DEPT PASS TO USTR (JKALLMER)
TREASURY FOR DO/JMACLAGHLIN
USDOC FOR ITA

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB OPIC USTR KG
SUBJECT: 2009 INVESTMENT CLIMATE STATEMENT FOR THE KYRGYZ
REPUBLIC

REF: 08 STATE 123907

BISHKEK 00000079 001.2 OF 007



1. This cable provides Embassy Bishkek's submission of the
2009 Investment Climate Statement for the Kyrgyz Republic.


2. Begin text:

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

The Kyrgyz Republic has a liberal investment regime on paper
with a broad base of commercial laws in place.
Unfortunately, these laws are not implemented consistently.
Foreign investors must register their firms with the Ministry
of Justice. In addition to registration, expatriate
employees must obtain a work permit from the State Committee
on Migration and Employment. Foreign investors usually form
joint ventures with local partners.

The legal Qncept of contract sanctity is not consistently
observed. Kyrgyz law on foreign investment guarantees
protection for foreign investors from expropriation and
nationalization. Individual investors have become involved
in disputes over licensing, registration, and enforcement of
contracts and, in one case, the government has persistently
entertained the issue of nationalization. Corruption is also
a serious problem, although the Government of the Kyrgyz
Republic has publicly denounced corruption and implemented
some steps to counter this problem. The Commercial
Arbitration Court of Kyrgyzstan began considering cases in
April 2004.

Under the aegis of the World Bank-sponsored "Doing Business"
project, Kyrgyz authorities have taken steps to cut
regulatory measures to benefit the business sector. Under
the U.S.-funded Millennium Challenge Program, the Kyrgyz
Republic is implementing reforms to reduce corruption and
improve the judicial system.

Banking laws do not discriminate against foreign banks.
However, foreign institutions seeking new banking licenses
from the Kyrgyz Central Bank may encounter difficulties in
trying to establish new operations in the country. At least
eight foreign banks operate in the Kyrgyz Republic: Demir
Bank (Turkey),Bank of Asia (South Korea),National Bank of
Pakistan, ATF Bank - Kyrgyzstan (91.8% controlled by the Bank
of Austria Creditanstalt BA-CA),Kazcommerce Bank
(Kazakhstan),Halyk Bank (Kazakhstan),the Kyrgyz Investment
and Credit Bank (owned mostly by international public and
private development institutions),and FinanceCreditBank
(Kazakhstan). Manas Bank recently began operations in the
Kyrgyz Republic, and is believed to have significant Latvian
interests. Asia Universal Bank also has significant foreign
ownership.

There is no discrimination against foreign investors
enshrined in official government policy. However, procedures
for licensing and approvals are not transparent, which can
make the process seem discriminatory. Tax authorities may
apply greater scrutiny to foreign entities operating in the
Kyrgyz Republic. However, spurred by external initiatives,
Kyrgyz officials have cut some regulatory procedures for
conducting business and have sought to streamline customs
procedures to spur foreign trade and investment.

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

Foreign exchange is widely available, and the local currency,
the som, is freely convertible. As of January 2009, the
exchange rate was 40.4 soms to the U.S. dollar. The National
Bank of the Kyrgyz Republic (NBKR) conducts weekly inter-bank
currency auctions, in which competitive bids determine
market-based transaction prices. Banks usually clear
payments within a single working day.

Complaints of currency conversion issues are rare. With
occasional exceptions in the agricultural and energy sectors,
barter transactions have largely been phased out. Payment
disputes adjudicated through the court system can be
extremely lengthy.

In 2000 and 2001, several Kyrgyz banks declared bankruptcy,

BISHKEK 00000079 002.2 OF 007


lost their licenses or were restructured. Depositors at
these banks lost significant sums. The government recently
introduced a minimal level of deposit insurance for
individual investors at Kyrgyz banks. There have been
uninvited takeovers of some Kyrgyz banks in the past two
years, with at least one facilitated by government
authorities.

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

To date, the Kyrgyz government has not expropriated any
properties. However, in 2006, local officials assisted in
the seizure of equipment and other property of one foreign
investor. In recent years some Kyrgyz parliamentarians and
government officials have advocated the nationalization of a
foreign-run gold mine. Another foreign investor has
complained about attempts by a state-owned company to seize
assets. Foreign investors have the right to compensation in
the case of government seizure of assets. However, there is
little understanding of distinctions among historical book
value, replacement value and actual market value, which
brings into question whether the government could calculate a
fair basis for compensation in the event of expropriation.
The government has frozen bank accounts and other liquid
assets until disputes were resolved.

Foreign ownership of land continues to be prohibited;
however, there is no prohibition on foreign rental of land
for residences or factory sites. A central land registry has
helped potential lenders and others deal with the financing
of real property (e.g., land, buildings, and other
improvements) in a more sophisticated manner. The
introduction of property taxes may make land ownership more
transparent.

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

The Law on Commercial Arbitration allows for international
and domestic arbitration of disputes. If feasible, the
arbitQ should be a neutral entity that is identified in the
contract, along with the specific terms of arbitration.
Establishing the terms for arbitration beforehand will
prevent further complications in the event of a dispute.
However, Kyrgyz business partners may attempt to ignore
arbitration requirements.

The Kyrgyz Republic is a member of the International Center
for the Settlement of Investment Disputes (ICSID). It signed
the ICSID agreement on June 9, 1995, and ratified it on July
5, 1997. The Kyrgyz Republic became a member of the 1958 New
York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards on March 18, 1997.

Performance Requirements and Incentives
--------------

The Kyrgyz Republic is compliant with World Trade
Organization (WTO) Trade Related Investment Measures
obligations. The Kyrgyz government has also reduced the tax
burden on repatriation of profits by foreign investors to
conform to the tax rate for domestic investors. There are no
specific conditions for permission to invest. However, any
project is likely to be scrutinized for its effect on
employment and tax revenues.

Visa requirements and fees may change on short notice. In
2006, the Kyrgyz government adopted a measure limiting the
period expatriates can work in Kyrgyzstan. Government
ministries, lacking adequate budgets, often finance their
operations through user fees. Such fees may appear
arbitrary.

The Kyrgyz government adopted a new tax code, which took
force in January 2009, that is supposed to be more business
and investment friendly. Under the new tax code, a number of
taxes were abolished and some new taxes were introduced. The
VAT rate has been decreased from 20 to 12%. Hotel,
advertising and resort taxes were abolished. A unified sales
tax has consolidated several previous taxes, and property
taxes have been approved.


BISHKEK 00000079 003.2 OF 007


The new tax code also establishes a presumption of innocence
of the taxpayer, improves collection provisions and supports
automation and e-filing.

Payroll taxes such as social fund payments, used for the
National Pension System, are complex. Many recent tax
inspections have focused on social fund payments.
Transparency is a problem, as even basic laws and regulations
are seldom published.

Right to Private OwneQhip and Establishment
--------------

Foreign and domestic private entities may own business
enterprises and engage in a broad range of commercial
activities. Foreign entities are expressly forbidden from
owning land, including farmland, although regulations allow
for up to 99-year leases of property, which is adequate for
most business purposes. However, 49-year leases are more
common.

Foreign investors are theoretically given equal treatment
under Kyrgyz law. In reality, well-connected Kyrgyz private
or state-owned companies are able to utilize their contacts
to achieve their business aims. Foreign investors are
disadvantaged less by outright discrimination than by a
simple lack of knowledge on how to "work the system."

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

Property right protections are slowly emerging. However, the
judicial system remains under-developed and lacks
independence. Court actions can force the sale of property
to enforce payments and other contractual obligations.

The Kyrgyz Republic is obligated to protect intellectual
property rights as a member of the WTO. However, an
estimated 98% of DVDs, CDs and other audio-visual products
sold in the Kyrgyz Republic are counterfeit. The Kyrgyz
Republic acceded to both the WIPO Copyright Treaty and the
WIPO Performances and Phonograms Treaty in 2002.

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

The legal and regulatory system of the Kyrgyz Republic
continues to develop. The process of implementing
regulations and court orders relating to commercial
transactions remains inconsistent. Some court decisions,
which appear to contradict established procedures, can be
implemented expeditiously in certain cases and are subject to
outside influence. The Kyrgyz system is heavily
bureaucratic. Consequently, investors must overcome a great
deal of red tape in order to conduct business.

There is an investment department at the Ministry of Economic
Development and Trade, which assists investors with
bureaucratic procedures. This department also consolidates
information about potential investment projects in the Kyrgyz
Republic. However, the ability of this office to steer firms
through the system has not been fully demonstrated. An
investment council, under the auspices of the president,
exists ostensibly to further regulatory improvements for the
business climate. Contradictory government decrees often
create bureaucratic paralysis or opportunities for
undocumented incentives.

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

The National Bank of the Kyrgyz Republic is a nominally
independent body which, in 2008, intervened repeatedly in the
market to stabilize the Kyrgyz national currency, the som,
against the U.S. dollar. The currency is freely convertible,
Kyrgyz bonds are available for foreign ownership, and the
stock market is developing. According to the Kyrgyz National
Statistical Committee, the Kyrgyz Republic's Consumer Price
Index surged 20% in 2008.

As of December 2008, the value of transactions at the Kyrgyz
Stock Exchange amounted to 4.1 billion soms ($104.5 million).
There were 3,305 transactions in the first 11 months of

BISHKEK 00000079 004.2 OF 007



2008. As of December 2008, Kyrgyz Stock Exchange listed 14
companies (primarily brokerage companies),which represent
around 140 Kyrgyz companies, that trade their shares at the
stock exchange. The stock market has not fully matured.
Individuals have limited access to buy stocks.

Total capitalization of the banking sector as of October 2008
was about $310 million while in October 2007 the figure was
$202 million. There are currently 21 commercial banks in the
Kyrgyz Republic, with a total of 227 branches throughout the
country.

Several foreign banks now operate in the Kyrgyz Republic.
Demir Bank, Bank of Asia, National Bank of Pakistan, Halyk
Bank, Kazcommerce Bank - Kyrgyzstan, FinanceCredit Bank and
ATF Bank - Kyrgyzstan are entirely foreign held. Other banks
are partially foreign held, including the Asia Universal Bank
(95% foreign held),Manas Bank and KICB (Kyrgyz Investment
and Credit Bank). Although no U.S. bank has set up
operations in the Kyrgyz Republic to date, many Kyrgyz banks
maintain correspondent relations with U.S. and other foreign
banks to facilitate short-term commercial lending, such as
letters of credit.

The Kyrgyz Investment and Credit Bank (KICB) began operating
in mid-2001. Established to provide commercial lending and
other services, the KICB introduced western banking practices
and encouraged the entry of other banks into the Kyrgyz
market. KICB's principle shareholder is the Aga Khan Fund
for Economic Development, which has a 21% stake. Habib Bank
Ltd (Pakistan),which is the newest shareholder, has an 18%
stake. The International Finance Corporation, the European
Bank for Reconstruction and Development, and the German
Corporation for Investments and Development each hold 17%
stakes. The Kyrgyz government retains a 10% share.

The Kyrgyz Republic is largely a cash society, and outside
investors have rarely sought financing from domestic banks.
Bank lending is heavily biased towards short-term loans and
traditionally has not favored using physical assets as
collateral. Some banks do not engage in retail banking.

Since March 2008, new banks must have a minimum charter
capital requirement of 600 million soms ($14.8 million).
Banking laws also require that banks maintain a 10% reserve
with the National Bank. A deposit insurance system was
recently established for the benefit of individual investors.


Between 1999 and mid-2001, seven banks became insolvent and
suspended operations. The Supreme Court, in 2005, ruled
Qainst the National Bank's attempt to declare the commercial
bank, "AkBank," bankrupt. The Central Bank intervened in
late 2007 and early 2008 to halt KyrgyzPromStroiBank's (KPSB)
operations and later approved the transfer of the institution
to one of KPSB's competitors.

Accounting systems in banks and enterprises are being
converted to international standards. The Kyrgyz government
has supported this exercise. International assistance
programs have contributed to rapid progress in reaching these
standards via accounting training and certification.

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

In March 2005, a popular uprising led to the overthrow of
President Askar Akayev. The change of power was precipitated
by smaller uprisings in southern Kyrgyz towns, such as Osh
and Jalalabad, in which citizens rallied against perceived
flaws in earlier parliamentary elections. The uprising was
swift, and there was substantial looting in Bishkek. Losses
due to looting in Bishkek are estimated at almost $100
million. Kurmanbek Bakiyev was elected president in July

2005.

Since the March 2005 uprisings, there have been no known
incidents of politically motivated damage to projects and
installations. Demonstrations in November 2006 and April
2007 were largely peaceful. Although Kyrgyz citizens enjoy
basic rights, including the right to protest and demonstrate,
the Kyrgyz government has increasingly restricted these
rights.

BISHKEK 00000079 005.2 OF 007



Supporters of extremist groups such as the Islamic Movement
of Uzbekistan (IMU),Al-Qaeda, and the Eastern Turkistan
Islamic Movement remain active in Central Asia. These groups
have expressed anti-U.S. sentiments and may attempt to target
U.S.-affiliated interests in the region, including in the
Kyrgyz Republic. Because of increased security at official
U.S. facilities, terrorists seek softer civilian targets such
as residential areas, clubs, restaurants, places of worship,
hotels, schools, outdoor recreation events, resorts, beaches,
maritime facilities and planes. In December 2002, a bombing
occurred at the Dordoi Bazaar, a market mostly frequented by
locals. In May 2003, a bank in Osh was bombed. The Kyrgyz
Government blamed the IMU for both bombings.

In May 2006, suspected Islamic militants attacked a border
post on the Kyrgyz-Tajik border, and ensuing skirmishes took
place between the militants and Kyrgyz military forces
throughout the southern Batken region. U.S. citizens
planning to travel to the Kyrgyz Republic should refer to the
U.S. Department of State for updated security information.
This information is available on the Internet at
http://travel.state.gov.

The Kyrgyz government has expressed concern about the
presence of extremist groups with radical religious or
political agendas, including Hizb ut-Tahrir (HT). HT, which
is banned in the Kyrgyz Republic, maintained that it was
committed to nonviolence, but the party's virulently
anti-Semitic and anti-Western literature called for the
overthrow of secular governments, including in Central Asia,
to be replaced with a worldwide Islamic government.

In the summers of 1999 and 2000, armed IMU insurgents entered
the southern Kyrgyz Republic and took a number of Kyrgyz
citizens and foreigners captive. While subsequent military
operations in Afghanistan have eliminated many resources used
by these insurgents, the Department of State urges U.S.
citizens to avoid travel to the following areas of the Kyrgyz
Republic: the rural areas along the Kyrgyz-Uzbek and
Kyrgyz-Tajik borders, and the areas to the south and west of
the provincial capital Osh.

There are occasional tensions among ethnic Kyrgyz, Russian,
Uzbek and other ethnic nationalities in the Kyrgyz Republic
over such issues as language, land rights, and religion.
North-south divisions are also palpable in the Kyrgyz
Republic. Such tensions, however, seldom affect foreign
employers directly. The Kyrgyz Republic's relations with its
neighbors sometimes are complicated over disagreements
regarding water rights, energy supplies, refugees and other
issues. However, it is unlikely that such tensions would
translate into disputes directly affecting foreign investors.

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

Corruption remained a serious problem at all levels of
society. According to the Transparency International
Corruption Perception Index, in 2008 the Kyrgyz Republic
ranked 166 out of 180 countries surveyed - on par with
Cambodia, Turkmenistan, Uzbekistan and Zimbabwe.

The Kyrgyz Government recognizes the damage corruption can
cause. As part of an IMF Poverty Reduction and Growth
Facilitation program, the Kyrgyz government agreed to take
action to stem corruption. In 2003, the law on combating
corruption was adopted. On June 21, 2005, the Kyrgyz
Government adopted the National Anti-Corruption Strategy. On
June 29, 2005, the Parliament of the Kyrgyz Republic ratified
the UN Convention Against Corruption. On October 21, 2005,
the Kyrgyz Government founded the National Anti-Corruption
Agency and the National Anti-Corruption Council, which were
tasked with implementation of the Anti-Corruption Strategy.
The U.S. government is aiding anti-corruption activities
through its Millennium Challenge Threshold Program with the
Kyrgyz Republic.

The law provides criminal penalties for official corruption;
however, the government did not implement the law
effectively. There were reports of arrests of government
officials on corruption charges. The Ministry of Internal
Affairs (i.e., the police) investigates corruption, together

BISHKEK 00000079 006.2 OF 007


with the Prosecutor General and subordinate prosecutors. The
government has also created special police anti-corruption
units. However, they have yet to show their effectiveness.

U.S. firms complying with the Foreign Corrupt Practices Act
can be disadvantaged vis-a-vis other foreign firms operating
in the Kyrgyz Republic. However, most U.S. firms that have
decided to conduct business in the Kyrgyz Republic have
eventually been able to do so. To date, measures targeting
bribery and other such economic crimes have been selectively
enforced.

The Kyrgyz Republic is not a signatory to the OECD Convention
on Combating Bribery. However, the OECD and the World Bank
have previously reported on the progress of anti-corruption
measures.

Bilateral Investment Agreements
--------------

The Kyrgyz Republic currently enjoys bilateral investment
treaties with the United States, Armenia, Azerbaijan,
Belarus, China, Finland, France, Georgia, Germany, India,
Indonesia, Iran, Kazakhstan, the Republic of Korea,
Lithuania, Malaysia, Moldova, Mongolia, Pakistan, Sweden,
Switzerland, Tajikistan, Turkey, United Kingdom, Ukraine and
Uzbekistan.

The Kyrgyz Republic has also signed double taxation treaties
with Armenia, Austria, Belarus, Canada, China, Finland,
Germany, India, Iran, Kazakhstan, Lithuania, Malaysia,
Moldova, Mongolia, Pakistan, Poland, Russia, Switzerland,
Tajikistan, Turkey, Ukraine and Uzbekistan. The U.S.-U.S.S.R.
treaty on double taxation, which was signed in 1973, remains
in effect between the U.S. and the Kyrgyz Republic.

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

OPIC is active in the Kyrgyz Republic. The event of an
inconvertibility claim against OPIC is highly unlikely, given
the Kyrgyz Republic's liberal conversion regime.

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

Labor is widely available, but the number of skilled
individuals is decreasing as Kyrgyz citizens find more
lucrative job opportunities abroad. International
organizations are generally able to employ competent staff,
often bilingual in English or other languages, but are
starting to encounter difficulties retaining staff members.
Literacy in the Kyrgyz Republic is approximately 97 percent.
According to Kyrgyz government sources, the official
unemployment rate stood at 11 percent in 2008. The
unemployment rate would actually be higher if Kazakhstan and
Russia did not absorb up to one million Kyrgyz migrant
workers.

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

There are four Free Economic Zones (FEZs) in the Kyrgyz
Republic: Bishkek, Naryn, Karakol and Maimak. Each is
situated to make use of transportation infrastructure and/or
customs posts along the Kyrgyz borders. Goods entering and
traded within the zones are duty free within the Kyrgyz
Republic. Government incentives for investment in the zones
include exemption from several taxes, duties and payments;
simplified customs procedures; and direct access to utility
suppliers. The production and sale of petroleum, liquor, and
tobacco products in FEZs are banned.

Foreign Direct Investment Statistics
--------------

According to the Kyrgyz National Statistical Committee,
Foreign Direct Investment (FDI) totaled $436.8 million in
2007, $335.6 million in 2006, $210.3 million in 2005 and $176
million in 2004. For the first nine months of 2008, FDI
amounted to $481 million.

The problem of registering and tracking numerous new private

BISHKEK 00000079 007.3 OF 007


businesses has rendered government statistics on employment,
the tax base and national economic performance questionable.
The shadow economy may account for up to one-half of overall
economic activity.

Foreign direct investment is chiefly oriented towards
manufacturing, food processing, banking and mining. Many
foreign firms conduct contract work for foreign assistance
organizations. U.S. direct investment is concentrated in the
hotel and telecommunications sectors, with increasing
interest in construction and mining.

Joint ventures and foreign companies in the Kyrgyz Republic
include the Reetsma Kyrgyzstan Company (cigarettes),the
Plaskap Bishkek Company (packaging/bottling),the Central
Asian Group (entertainment/garments),the Hyatt Regency
Bishkek, and the Kyrgyz Petroleum Company. A joint venture
operates a Coca-Cola franchise that bottles its soft drinks,
and the Canadian gold-mining firm Centerra Gold has formed
the largest western joint venture in the Kyrgyz Republic, the
Kumtor Operating Company. Joint ventures play a leading role
in the mining, petrochemical, hotel, and food processing
sectors.

According to the National Statistical Committee, the
following countries were the largest sources of FDI in first
nine months of 2008: Kazakhstan 50.76%, Germany 8.17%, Great
Britain 6.34%, Russia 4.8% and Cyprus 4.59%. In 2007, the
largest sources of FDI were Kazakhstan 41.83%, Great Britain
13.76%, China 6.66%, Germany 6.56% and Turkey 3.79%.

Bishkek and the surrounding Chui region absorbed more than
92% of FDI in 2008. An additional 4.5% went to the Talas
region, with the remaining amounts scattered among the other
five regions of the country.

Web Resources
--------------

http://travel.state.gov

General
--------------

In connection with the war on terrorism, a Coalition airbase
operates out of the Manas International Airport near Bishkek.


The capital city of Bishkek has an international
English-language elementary school and other services for
expatriate families. The Hyatt Regency is the only five-star
hotel. The Golden Dragon is a four-star alternative. There
are several three-star hotels in Bishkek, including the
British-owned Silk Road Lodge. There are direct air
connections to Istanbul and London. Other cities, such as
Amsterdam, Vienna and Frankfurt, are served from Almaty,
Kazakhstan, a three-and-a-half hour drive from Bishkek.

End text.
GFOELLER