Kazakhstan woos investors in diversification bid

After going through an active period of reforms, Kazakhstan now leads central Asia in FDI inflows and the soundness of its business environment. The country ranks 36th globally in the World Bank’s latest Doing Business report – twice as high as the regional average. The country is promoting its improved investment environment to international investors as part of a drive to diversify the economy and reach ambitious development goals. 

While traditionally known for its oil and gas sector, Kazakhstan has its eyes set on diversification and is presenting a wealth of investment opportunities in such sectors as manufacturing, agro-industry, financial services, chemicals, mining and metallurgy, alternative energy and clean tech, infrastructure, logistics and digital industries. 

UK interest?

UK companies are among those that have not yet fully tapped into Kazakhstan’s potential, but a blossoming bilateral relationship and active promotional efforts might prompt more of them to take a closer look at this fast-evolving economy that sits at the crossroads of Europe and Asia. The UK government is keen to pursue new trading and commercial relationships as Brexit looms: Kazakhstan’s strategic position as a central cog of China's vast Belt and Road Initiative and its inclusion in the Eurasian Economic Union (EEU) – as well as its trade ties with Europe and the rest of the world – make it a key player in new trading patterns and present it as a potentially exciting new trade partner for the post-Brexit UK. 

Along with such countries as the US, Russia, Turkey, Germany, France, Italy, China, Japan, South Korea and the United Arab Emirates, the National Investment Strategy of Kazakhstan lists the UK as a priority country that Kazakhstan would like to attract FDI from.

“The UK is one of our key partners that support us both politically and economically. The numbers prove this statement quite explicitly. The UK is one of the largest investors in Kazakhstan’s economy. It accounts for $13bn in 27 years. Today, almost 700 British companies operate in Kazakhstan’s market. I think it is a good indicator of strong partnership,” deputy prime minister Askar Zhumagaliyev said in an address to the Kazakhstan Global Investment Forum held in London on October 2 (organised by Financial Times Live along with fDi Magazine).

Supported by Kazakhstan president Nursultan Nazarbayev and leading business and political figures from the UK, the bilateral relationship was upgraded to strategic partnership level in 2013.

“We in the British government see a lot of positive incentives for investment in Kazakhstan. It’s an important market for the UK; last year we did £2.3bn-worth [$3bn] of business with Kazakhstan in goods and services. A lot of that was in the oil sector but we have promising leads in agriculture, in mining and in financial services and other specialist areas,” says Michael Gifford, the British ambassador to Kazakhstan.  

“Kazakhstan has got a very young and growing population, it is well educated and the government is spending a lot of money investing in educational links with the UK. I’d also like to say that Kazakhstan is tackling some of the issues that often arise in emerging markets, such as corruption; the over-reliance on one sector – the oil and gas sector; and also issues of predictability in its rules and regulations,” he adds. “What I’ve seen in my experience over the past nine months of doing this job is that the government of Kazakhstan is tackling all of those challenges very energetically. It wants to create a really vibrant and attractive destination for investment.” 

Chasing success stories

To better engage with the UK and other investors, Kazakhstan has launched what Mr Zhumagaliyev called “a very aggressive” investment promotion strategy. “We promote, facilitate and help investors to do business in Kazakhstan. Today, the pipeline includes 188 new projects with the participation of foreign investors worth $50bn. The success stories include such companies as Leroy Merlin, Coca-Cola, BAE Systems, WILO, Farm Frites, Airbus, OBI and many others,” he added.  

Saparbek Tuyakbayev, CEO of Kazakh Invest, the national investment promotion and support company, says the priority industries for attracting investment are agribusiness, machinery, chemicals and petrochemicals, retail and infrastructure. Kazakh Invest was established in March 2017 by the government to support investment into the country.

“We house our own experts on each industry, define the most lucrative investment projects, find the local partners, and ensure financing and implementation of the projects in partnership with the national companies and the local business,” says Mr Tuyakbayev. “For example, we have 70 niche projects in the priority sectors of the economy, which are developed by PwC and Deloitte. These investment projects have a financial model, a feasibility study and a marketing strategy to enable investors to make decisions in time.”

New opportunities

The ninth largest country in the world by area and the largest economy in central Asia accounting for 60% of the region’s GDP, Kazakhstan has a geographical landmass equivalent to that of western Europe. But with a population of only 18 million, its small domestic market is not very attractive in its own right. The government is therefore counting on a rebound in world trade, shifting trade patterns and enhanced connectivity to overcome this.

“A few years ago, if you mentioned Kazakhstan, the reference you would probably hear is that it is a landlocked country somewhere in central Asia with a very small market. [But] we have improved and managed to turn disadvantages into strengths,” says Kairat Kelimbetov, governor of the Astana International Financial Centre. “Thanks to our versatile external policy we secured a bigger market consisting of 500 million people including the EEU, countries bordering the Caspian Sea, central Asian markets as well as western China.”

According to the World Trade Organization, the volume of trade in goods increased by 4.7% in 2017, up from 1.8% in 2016. Rapid recovery in the terms of trade, demand, and production chains resulted in an especially strong performance in highly globalised and export-heavy economies. Recovery has been especially pronounced in Kazakhstan. In 2017, the country traded almost $80bn-worth of goods with the rest of the world.

“The changing dynamic in current economic trends indicate major shifts in the level of emphasis placed upon conventional development frameworks. Emerging markets are gaining greater dominance in shaping global economic growth,” says Mr Kelimbetov. 

“Kazakhstan has a great potential for showcasing its competitiveness and attractiveness on the regional and global stage. The geographic and socioeconomic aspects of the country set a solid foundation for an extensive integration with global markets. Today, the country plays a strategic role in recreating a trade corridor connecting East and West through China’s Belt and Road Initiative. Astana in particular has a tremendous opportunity to become a delivery point for the Belt and Road Initiative infrastructure financing office.”

Developing logistics

The growth in Kazakhstan's trade would not have been possible without sustained development of the country's transport and logistics capacity, according to Kazakh officials. Being one of 45 landlocked countries in the world, Kazakhstan is cut off from the opportunities of maritime trade so instead has had to focus on creating land transit corridors. It now only takes 12 to 13 days to deliver cargo from China to Europe or 18 days by railway network, compared with 45 days by the existing maritime routes. In the past few years alone, the volume of container traffic across Kazakhstan has increased by 2.5 times. 

The China-Europe route has been one of the main engines of this dynamic. The volume of China-EU traffic since 2011 has increased by a factor of 300. At almost 10%, the transport sector is now the fourth largest sector making up Kazakhstan's GDP, and the third largest contributor to economic growth.

The mainstreamed state development programmes are aimed at the continued development of transport and logistics, industrial and energy infrastructure, as well as housing and construction and innovation. These programmes provide various incentives and mechanisms including state support measures such as innovation grants, business incubators, tax incentives, special economic zones (there are 11 in Kazakhstan, along with 25 industrial zones), free infrastructure, public-private partnership mechanisms and off-take contracts.

Another avenue for potential investors is the ongoing privatisation programme. The government is preparing to decrease its shares in the economy, which creates vast opportunities for investors to enter Kazakhstan’s market. The largest assets to be sold via initial public offerings include Air Astana, KazAtomProm and KazMunayGaz.

AIFC's key role

The establishment of the Astana International Financial Centre (AIFC) is intended to play a key role in enhancing economic growth and further enabling the structural diversification of strategic directions in Kazakhstan. The AIFC’s primary objective is to develop a liquid and well-balanced capital market with a broad range of financial instruments. It provides a special tax regime with exemption from payment of corporate tax, individual income tax, land tax and property tax for a period of 50 years (until the end of 2065). Tenants can also have rent-free offices for the first two years. 

The AIFC uniquely applies general law and has its own independent dispute resolution system. The legal system in the financial centre – which investors in other sectors and areas of Kazakhstan can opt into – is based on the principles and jurisprudence of England and Wales, and uses English as an official language.

On the digital industries front, Mr Nazarbayev has commissioned a task of digitising the economy. As a result, the government has developed a state programme – Digital Kazakhstan – which consists of five main pillars: the development of human capital; building a digital government; creating a digital economy; providing broadband to every corner of the country; and supporting an innovative ecosystem. To support the last pillar, an international technopark for IT start-ups, the Astana Hub, was created. Though it is already functioning, the official opening is planned for November 5.