How would you evaluate the evolution of the business environment in Kazakhstan over the past decade?
Over the past decade, the business climate in Kazakhstan has improved despite the challenges entailed by the global financial and economic crises of recent years. For many years, Kazakhstan had average annual growth of 10-15%, propelled by the country's dominant oil industry. The government understands that a positive business environment is necessary to attract foreign investment, but there are still many impediments. Economic diversification is a necessity, though it has proven a challenge, as it has for many countries with oil-fuelled economies. Creating a broad-based economy is a government priority and there have been some successes, but there are areas where the economy could, and should, improve, notably agriculture, where Kazakhstan has all the prerequisites for a robust agriculture and agribusiness industry. Foreign investors have been attracted to areas such as consumer products, logistics, training, consulting, and tourism. The hospitality industry is strong with many global leaders in the luxury hotel industry represented in Almaty and Astana, where business is centered and international conferences are plentiful. There are many other areas of the economy that could benefit from foreign investment and be of interest to investors in search of new markets.
Which sectors are currently the most attractive for investors?
The oil industry is always attractive, but is well established with a 25-year history behind it. The major oil companies from North America, Europe, and Asia and their supporting oilfield service providers have been in Kazakhstan for a long time. Given that the price of oil is currently volatile and under extreme pressure, now is not the right moment for oil companies or their related services to enter the market. Looking at other areas of the economy, Kazakhstan has an endless appetite for consumer goods of all types and the means to pursue a solid middle-class lifestyle, even a luxurious lifestyle for those who have benefitted from economic growth. The areas that traditionally have performed well are continuing to be the most attractive for foreign investment. Agriculture is an industry that Kazakhstan could excel in given its climate and vast, yet under-utilized, territory. Provided that agriculture receives a good balance of investment and planning, it will be critical to reducing the country's reliance on food imports and establishing a firm basis for self sufficiency and food security.
Where can reforms be implemented to facilitate the country's economic growth?
Kazakhstan has a strong reform agenda and is continuing to implement reforms in many areas that will be helpful not only to foreign investors, but also to local investors. However, there are some crucial areas that continue to be in need of fundamental reform. First and foremost this refers to the country's judicial system, which is still struggling to emerge from the post-Soviet mold; judges are not always well-qualified, nor independently appointed, and tend to issue judgments in support of the government, rather than recognizing the merits of investor cases. Many of these disputes relate to tax issues, where systemic reform is needed to remove legislative inconsistencies that repeatedly bring the same issues back to the courts again and again. Tax legislation changes frequently, yet these changes too often cause more difficulty and more uncertainty, rather than removing difficulties. Every business needs a reliable legal environment in which it can operate. Investors value stability—not just in taxes, but in everything relating to their business operations. One impending change in the country's tax legislation is of particular concern to foreign investors. Kazakhstan intends to abolish VAT and introduce a sales tax model on January 1, 2017, a fundamental change that most investors oppose. VAT is used throughout the EU and is recognized as a model for economically developed countries. AmCham, its members, and many other businesses in Kazakhstan are discussing the pros and cons of this change with the government, and are offering expert tax advice from international sources, including the OSCE, to ensure that whatever changes may be made conform to best international practices. One very significant change Kazakhstan has made this year is to float the national currency, the tenge, rather than continuing to artificially support the currency at a time of extreme international financial volatility. Although this has also made the national currency and the exchange rate vis-a-vis the US dollar highly volatile—and has reduced the value of the tenge by half since August when the currency was floated—most investors accept that this step by the National Bank was necessary and overdue. However, it has introduced an element of extreme unpredictability into financial operations in both the public and private sectors, particularly given the current plummeting price of oil. This scenario is still being played out, but will prove the best course of action in the long run. AmCham has always urged the government of Kazakhstan to carry out its reform agenda, even if this involves short-term pain. The result will be long-term gain as Kazakhstan joins the world's developed nations as an economic leader in Central Asia and the CIS.
What is your outlook for the local economy in the short term?
2016 has had a rocky start on the world's stock markets and with their effect on exchange rates vis-a-vis the US dollar. This has inevitably affected Kazakhstan, where the price of oil will remain a central factor in the country's economy for the foreseeable future. Kazakhstan's main trading partners—Russia, China, and the EU—are all experiencing economic difficulties. The US economy is in recovery mode and is a more stable trading partner at present. I would remind readers that AmCham is a broad-based international business association, representing investors from around the world, not just US investors, so we represent a very diversified business environment in which different regions of the world and different industries have different perspectives on economic development and on their trading relationships with Kazakhstan. Many of our members are therefore feeling the pain right now, but with an eye to the future. Some smaller companies have exited the market, while the larger, more stable investors are here for the long haul and believe in Kazakhstan as a good market for the future. Kazakhstan has ambitious plans and aspirations that will continue to be pursued in 2016. In our frequent meetings with the government of Kazakhstan, and we are fortunate to meet with the Prime Minister and a panel of Cabinet Ministers responsible for the economy on a monthly basis, AmCham articulates its members' concerns and hopes, and offers its support for the government's long-term reform agenda. We will continue to work closely with the Prime Minister and the government to help Kazakhstan reach its goals as a vibrant, economically developed country attractive to foreign investors. Due to the devaluation of the tenge, the local economy is currently experiencing a difficult period. The price of oil is going to stay down for the foreseeable future, and next year is going to be difficult for Kazakhstan. The country, however, has a good economy in general, as it has been well grounded. Despite the tough environment, the public and private sectors are focused on the economy and they have a large reserve fund from oil surpluses over the past several years. They have reliable trading partners, and they are working to diversify their economy. In general, Kazakhstan has a promising future; however, it must weather these current financial hardships first.