The Kazakh government is offering a wide range of investment incentives and tax breaks to encourage foreign investment to provide a boost to the ailing economy. It has also designated English commercial law and the English language as a business medium for a would-be international financial centre in Astana - moves designed to give foreign investors more trust in a country that is ranked one of the most corrupt in the world.
Kazakhstan's economic growth slowed to 4.3% in 2014 against 6.0% in 2013, and is expected to fall further to 1.5% in 2015 on the back of low oil and metal prices and lower demand for its imports in major export markets - Russia, the EU and China.
Speaking at the Astana Invest Forum, held on October 28-30, Kazakh Deputy Prime Minister Bakytzhan Sagintayev said the government had adopted a special package of economic incentives to attract foreign investors, including the imbursement of up to 30% of capital expenditure, exemption from corporation, land and property taxes, the stability of legislation for investors, and unrestricted import of foreign labour. In the agricultural sector, the duration of land leased to foreigners has been increased to 25 years, Sagintayev noted.
The new package follows further moves earlier in October. The Kazakh parliament passed legislation allowing foreigners to work in the civil service to improve its standing, and is working on a legislative basis for the implementation of government initiatives. And the government also changed the way it used to subsidise agriculture by abolishing inefficient direct subsidies and switching to subsidising investment in the sector through better interest rates on the leasing of agricultural vehicles and other equipment.
Along with direct incentives provided to foreign investors, the government also wants to attract investment by floating between 25% and 50%-plus-a-share stakes in national companies that are run by the Samruk-Kazyna sovereign wealth fund and the National Management Holding Baiterek, which promotes diversification of the economy and improves corporate governance at its subsidiaries. The plan will be carried out by January 2018, in time for the establishment of an international financial centre in Astana.
“These measures will result in decreasing state involvement in the economy to 15% of GDP,” Sagintayev claimed.
As measures already in place to encourage foreign businesses to enter the Kazakh market, Sagintayev cited the abolition of visas for nationals from 19 countries, including the UK, US, France, Italy, Japan and South Korea, among others. “We will also abolish visas for all 34 member states of the [Organisation for Economic Co-operation and Development] by 2017,” he said.
The government has singled out metals and mining, production of fertilisers, petrochemicals, and the food industry as priority sectors to develop in the medium term. According to government figures, the country attracted foreign direct investment (FDI) worth up to $20bn a year over the past five years and $215bn in the past decade. These figures propelled Kazakhstan into the UN's “top 30 countries in terms of net FDI” and “the first among landlocked countries and second among countries with transitional economies”, Investment and Development Minister Asset Issekeshev told the forum.
In an attempt to diversify the country’s oil-based economy, the government has been expanding road and railway networks to turn the country into a transit hub between Europe and China. The country has built over 2,000 kilometres of railway networks in the past few years and intends to complete the Western Kazakhstan-Western China motorway in 2014 to “cut travelling time for cargo between China and Europe to 10 days from 45 days by sea”.
From Almaty to Astana
The government has long talked about creating a regional financial centre in the country’s former capital of Almaty. But failure to achieve that has now resulted in it designating Astana as the place for an “international financial centre” instead, with the Almaty-based National Bank of Kazakhstan and the Kazakhstan Stock Exchange (KASE) and other financial institutions moving north. The move was prompted by the government’s vision for the future of the buildings and infrastructure that are being built to host the EXPO 2017 international fair in Astana, which risk ending up as white elephants.
As part of the plans for the international financial centre, the government intends to develop capital markets by privatising state-owned assets through IPOs of major national companies. “We will ensure that at least 25% of shares of major companies are always in free float,” the former governor of the National Bank, Kairat Kelimbetov, who oversaw a switch to a free-floating exchange regime for the national currency the tenge before being dismissed on November 2, told the forum. “This will attract additional foreign investment and help economic growth, becoming an important alternative to the banking system.”
Kelimbetov noted that the central bank was now managing over $100bn in assets of the National Fund and forex reserves, and part of this money would be “localised” to the Astana international financial centre. The bank also manages the assets of the Single State Pension Funds, which were worth KZT5.15tn (€16.8bn) as at September 1, up 14.6% from the year before.
Kelimbetov said Islamic banking would also play an important role in making the city an international financial centre, a segment in which “Astana will become a regional leader”. The plan also involves the development of hedge funds, venture capital, asset management funds and private banking. “Entities operating in the centre will be exempt from corporation, individual, land and property taxes for 50 years, and enjoy simplified foreign currency, visa and labour rules for agencies and individuals working in the centre,” Kelimbetov said, adding that new direct air links are also planned between Astana and other global financial centres.
The key selling point for foreign investors to put their money in Kazakhstan, in the government’s view, is the adoption of the English legal system and the English language in the Astana financial centre. “The important characteristic of the centre will be a specialised legal system which will regulate the financial court and international arbitrage of the centre and which will be based on the English law to ensure fair justice and boost foreign investors’ trust in our country,” Kelimbetov said. “The official language of the centre will be English and it will be used in all regulations, public relations and in courts in the centre, as well as all deals concluded in the centre will be written down in English.”
The adoption of English commercial law will help foreign investors avoid dealing with Kazakhstan’s corrupt judiciary and, as a result, improve the investment and business climate in the country. For this, the government is mulling imports of English judges to work in the country. According to Transparency International’s Corruption Perception Index 2014, Kazakhstan was in the bottom 50 most corrupt countries in the world, occupying 126th place out of 177 countries ranked.