Once considered remote and unfathomable to the Western imagination, Kazakhstan today plays host to envoys from the world's most powerful states and corporations. During its first ten years of independence, the country has enacted farsighted reforms and managed fiscal and monetary policies with commendable deftness. Add to this the republic's huge oil reserves and Kazakhstan can expect diplomats and businessmen to remain engaged for years to come.

Vassal State to Pseudo-Democracy

The Kazakhs are a mixture of Turkic tribes that inhabited the area of present day Kazkhstan in the eighth century, and the Mongol nomads who invaded their region in the 1200s. They became sufficiently differentiated from their Turkic neighbors by the 15th Century to gain a distinct identity. Harassed by neighboring peoples, they placed themselves under the protection of the Russian tsar. This became a pretext for nearly three centuries of Russian encroachment and domination. Russian colonization dispossessed the Kazakhs of their most fertile lands. In the 20th Century, the social upheaval of the Bolshevik Revolution, famine, and collectivization took a grave human toll, while Joseph Stalin's policy of uprooting, purging, and depositing nations in the Kazakh steppes left its native people a minority in their homeland. Like most of the Soviet republics, Kazakhstan tested the limits of nationalism in the 1980s, declaring its sovereignty in October 1990. The Soviet Union's second largest republic achieved de jure independence in December 1991.

The collapse of Soviet power left Nursultan Nazarbayev the most powerful figure in the new Republic of Kazakhstan. A former steel worker, Nazarbayev began his political ascent in 1984 with his appointment as Chairman of the Council of Ministers. During the waning days of the Soviet Union, he was elected to successive leadership positions within both the government and the Communist Party of Kazakhstan (CPK), accepting the newly-created post of President of the Supreme Soviet in March 1990.

Just weeks before the republic's formal declaration of independence, the charismatic Nazarbayev was elected president as the sole choice on the ballot in Kazakhstan's first direct presidential election. A referendum, held after Parliament's dissolution in 1995, approved a new constitution that greatly enhanced the president's powers and extended his term until December 2001. In 1999 Nazarbayev won a new seven-year term with 80 percent of the vote in elections that OSCE observers concluded fell far short of international standards. The election was held two years early and only three months after a supine parliament changed the constitution to permit the advance date and the extension of the term of office. What is more, the government declared two of Nazarbayev's opponents ineligible, based on spurious grounds.

The marginal role that political parties play in local politics, and the importance of family and personal ties, may be contributing factors to the power entrusted to Nazarbayev. His quasi-autocratic rule has, nonetheless, enabled a largely successful top-down reform of the economy. In his emotional address marking the tenth anniversary of Kazakh independence, he set "[securing] the predominance of the middle-class" as a key goal. Demands for political power will follow in the wake of economic enfranchisement. The president's remarks may hint that he is prepared to loosen the reigns of authority as the Kazakh middle-class grows.

Post-Communist Success

While many observers of post-Soviet reform have focused on Eastern Europe and the Slavic republics of the former USSR, Kazakhstan's progress is often overlooked. Growth in GDP exceeded 9 percent in both 2000 and 2001, and is estimated to increase 12 percent this year. On balance, Kazakhstan has emerged a relative paradigm of market reform, placing it on a par with front-runners Poland and Hungary. During a visit in December to the new capital city of Astana, EBRD president Jean Lemierre praised Kazakhstan for achieving "outstanding results," calling its economic performance "among the best in the CIS, if not the best." In 2000, Kazakhstan repaid its $400 million debt to the IMF, seven years ahead of schedule. It ranks as the first former Soviet republic to do so, and is testimony to the country's current economic and financial health.

Mr. Lemierre deemed Kazakhstan's banking sector the best among the former Soviet states. Under central planning, there had been no need for a financial system to allocate savings to investment. Kazakhstan has promoted such a mechanism, in large part, through an ambitious pension reform undertaken in 1998. By July 2001, Kazakhs had contributed over $1 billion to their privately managed personal pension accounts, creating a huge demand for quality investment instruments. The National Bank has introduced deposit insurance to strengthen the banking sector, and system capitalization currently surpasses $1 billion. Citibank and ABN-AMRO are among several major banks with branches in Kazakhstan.

Kazakhstan's trade regime is comparatively liberal, though laws have recently been amended requiring use of local goods and services by foreign oil and gas developers. In 2001, the country held its first working party meeting with the WTO to begin negotiating its admittance.

Oil, FDI, and Geopolitics

In spite of broad and enlightened reforms, the price of oil, and Kazakhstan's ability to develop new deposits, will remain key factors to growth. The course of the economy has remained closely tied to world crude oil prices. Kazakhstan has proven oil reserves of 16 billion barrels and estimates indicate at least an additional 30 billion barrels both onshore and underneath its approximate share of the Caspian seabed. The country's oil and mineral wealth has attracted more than $12 billion in foreign investment since 1993.

The TengizChevroil joint venture is Kazakhstan's landmark investment project, founded by Chevron and the Kazakh government, and later expanded to include ExxonMobil and Russia's Lukarco. The Tengiz field is estimated to contain between 6 and 9 billion barrels of crude. However, Agip KCO recently discovered a field in the northern Caspian that presents, by far, the greatest potential for development. Kashagan could hold up to 50 billion barrels of oil, second in the world only to Saudi Arabia's Ghawar field. How to share the Caspian's oil wealth has been a matter of contention between Kazakhstan, Russia, Turkmenistan, Azerbaijan and Iran since the collapse of the Soviet Union. Landlocked Kazakhstan must depend on neighboring states for export routes. Russia and Kazakhstan have forged a cooperative relationship through the Caspian Pipeline Consortium (CPC), providing a key export route for Tengiz oil from the Caspian to the Russian Black Sea port of Novorosiisk. Meanwhile, Kazakhstan has also committed to the Baku-Tbilisi-Ceyhan pipeline, which Moscow had opposed. The republic continues to seek further export routes, including a cost-effective pipeline through Iran. However, the inability of US companies to participate in the scheme weighs against it.

A Legal Land of Nod

The national government's premier law governing FDI is the Law on Foreign Investment, passed in 1994 and amended in 1997 and 1998.

# Its salient features are: Guarantees with respect to currency convertibility, repatriation of profits, and non-expropriation;

# Unambiguous access to international arbitration in any dispute between a foreign investor and the State;

# A guarantee that only those state bodies vested with carrying out examinations of foreign operations shall do so;

# Exemptions from customs duties for equipment and spare parts imported for the charter fund of an enterprise involving foreign investors.

The law also included generous investment incentives, including partial or full customs duty exemptions on equipment and other inputs needed for investment. Despite this and other investment law, foreign companies function within arbitrary and unpredictable conditions. Vagueness of tax laws encourages "creative interpretation" by the Tax Police and other agencies. Customs regulations are similarly interpreted in an arbitrary manner, adding a further element of uncertainty to daily operations. Implementation at the regional level is often poor, and interpretation commonly at odds with that of the central government.

During the mid-1990s, control over the reform program was strongly concentrated within the presidential apparat, including such important areas as privatization tenders, contracts, and licensing. A trend toward decentralization has been underway for the last several years, however, which has seen overlapping prerogatives exercised by both national and regional officials. The regional governments have gained authorization to set their own local taxes on the operations of foreign companies. These governments have also gained by a standard clause included in contracts requiring that the foreign enterprise either pay a "social tax," direct funds into local development projects, or both. Local governments interpret guest companies' obligations to their projects in a remarkably open-ended fashion. Astana not only acquiesces to such activities, but even directs the akims, or provincial governors, to pressure and cajole foreign companies within their oblast for the needed resources.

Corruption is also pervasive throughout Kazakhstani business culture and at all levels of government. Transparency International compiles a Corruption Perceptions Index (CPI) to rank countries by the degree to which bribe-taking is perceived to be an integral part of civic life. Kazakhstan was ranked 86th out of 99 countries included in the survey. Russia's ranking of 83rd place lends additional perspective to the problem. Furthermore, there is little dispute that privatization tenders were largely co-opted by corrupt politicians and businessmen.

Conclusion

During President Nazarbayev's visit to the United States in December 2001, a "Joint Statement [] on the New Kazakhstan-American Relationship" was issued addressing the usual bilateral issues of energy development and the republic's integration into the global economy. While the statement emphasized the importance of a "transparent and predictable investment climate," the US administration is loath to criticize a valuable strategic partner that has lived up to expectations in every other sphere of market reform.

Kazakhstan offers strong growth potential and minimal financial risk for foreign investors and exporters. Many opportunities exist for foreign companies in the oil and gas, energy generation, telecommunications, mining, agricultural machinery, and construction and engineering sectors, among others. But mere survival in Kazakhstan's capricious business climate is challenge enough. To prosper, counsel in risk avoidance and advice from a resource experienced in CIS operations is indispensable. With a reliable guide, your company can successfully navigate the trackless steppe of the Kazakh business environment.

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