US embassy cable - 05ALMATY4160

UNCLAS  ALMATY 004160 
 
SIPDIS 
 
 
STATE PLEASE PASS TO USTR: G. BLUE 
STATE FOR EB/MTA/MST, EUR/CACEN (JMUDGE) 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, KZ, ECONOMIC, USTR 
SUBJECT:  2006 NATIONAL TRADE ESTIMATE FOR KAZAKHSTAN 
 
REF:  STATE 186692 
 
1.  Per Reftel request, Embassy Almaty submits 2006 National 
Trade Estimate (NTE) below and separately via email to USTR. 
 
TRADE SUMMARY 
 
(UPDATED DATA TO BE PROVIDED BY USTR) 
 
Kazakhstan submitted its application for WTO membership on 
January 29, 1996 and the fact-finding phase of the accession 
process was completed in 2003.  Kazakhstan's Working Party 
met in March and November of 2004, and it recognized 
Kazakhstan's progress by circulating a draft Working Party 
Report in 2005.  Kazakhstan has undoubtedly made progress, 
but the details of market access in several sectors still 
need to be negotiated.  For example, it successfully reached 
bilateral agreements with several of its large trading 
partners in 2005, including China, Pakistan, Turkey and the 
Republic of Korea. 
 
The U.S.-Kazakhstan Bilateral Trade Agreement, which came 
into force in 1993, grants reciprocal, normal trade 
relations treatment.  A bilateral investment treaty (BIT) 
came into force in January 1994. 
 
IMPORT POLICIES 
 
Kazakhstan is a member of the Eurasian Economic Community 
(EAEC) along with Russia, Kyrgyzstan, Belarus and 
Tajikistan.  Moldova and Ukraine currently have observer 
status.  Trade among the five EAEC countries is generally 
duty-free, but protective measures may be applied.  The 
countries have not yet established a common external tariff. 
The EAEC is developing coordinated customs procedures, which 
it hopes to complete in 2006, that would reduce the cost of 
transshipment through the EAEC member states of U.S. goods 
destined for Kazakhstan.  Kazakhstan is also (with Russia, 
Ukraine and Belarus) part of the Single Economic Space 
(SES), a nascent customs union.  Kazakhstan is committed to 
deeper integration with its neighbors through SES, but the 
progress of this organization has been hampered by uneven 
levels of enthusiasm from its members, as well as by the 
sheer number of founding documents that must be negotiated. 
 
The average weighted import tariff in Kazakhstan is 
approximately 7.9 percent, and its value-added tax (VAT) 
rate has been 15 percent since January 2004.  Imported goods 
are subject to VAT on the dutied value of the goods, at the 
time of importation (VAT destination principle.)  In early 
2005, Kazakhstan eliminated the one exception to this rule, 
which had applied VAT before export to oil and oil products 
imported from Russia. 
 
Goods imported for short-term use in Kazakhstan under a 
temporary import regime can be fully or partially exempt 
from duties, taxes and non-tariff regulations.  The 
government has the right to issue a list of goods that 
cannot be temporarily imported into Kazakhstan.  Typical 
examples of goods not eligible for duty exemptions are food 
products, industrial wastes and consumables. 
 
As with the 1994 Foreign Investment Law, the Law on 
Investments, enacted in January 2003, provides customs duty 
exemptions for imported equipment and spare parts, but only 
if Kazakhstan-produced stocks are unavailable or not up to 
international standards. 
 
CUSTOMS PROCEDURES 
 
Kazakhstan's new Customs Code became effective May 1, 2003, 
superseding the law of 1995.  There are positive changes in 
the Code, such as provision for WTO-compliant customs 
valuation methodologies; however in practice customs 
administration remains a problematic aspect of trade.  In 
addition, key provisions for such practices as voluntary 
disclosure are not included in the Code. 
 
The customs authorities continue to discuss the automation 
of customs procedures, but little progress has been made. 
Since October 2002, Kazakhstan has maintained a "customs 
audit" procedure administered by a private contractor.  The 
private contractor determines customs value based on a 
database of world prices, in contravention of international 
standards.  Under this system, approximately 20 percent of 
all goods crossing Kazakhstan's borders are subject to 
valuation uplifts.  While the government pays for 
inspections, the declaring party pays penalties in the event 
of discrepancies.  There are concerns that this process is 
used to generate extra-legal revenues beyond existing duties 
and taxes.  Courts have decided over 85 percent of all 
appeals under this system against the Customs authorities. 
In addition, Ministry of State Revenues Order 402 sets 
 
conditional prices for certain imports, a practice 
inconsistent with international norms. 
 
U.S. companies have consistently identified Kazakhstan's 
requirement that they obtain a "transaction passport" to 
clear imported goods through customs as a significant 
barrier to trade.  This regulation is designed to stem 
capital outflows and money laundering by requiring importers 
to show copies of contracts and other documentation to 
legitimize and verify the pricing of import/export 
transactions.  The practice retards the growth of trade, as 
the regulations place relatively tight restrictions on 
transaction parameters.  For example, the regulations allow 
a maximum financing term for imports of 120 days, after 
which time the transaction passport must be closed out. 
This limits the range of business activity and creates a 
potential bias towards short-term financing in the economy. 
 
STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
Kazakhstan's system of Metrology, Accreditation, Standards 
and Quality (MAS-Q) in Kazakhstan has long been considered 
by businesses to be weak and fragmented.  Many businesses 
complained of mandatory certification requirements that have 
no technical basis or aim.  The Committee on Standards, 
Metrology and Certification - Gosstandart (the national 
governing body operating under the Ministry of Industry and 
Trade) was plagued by frequent management changes that make 
stable, long-term progress difficult.  Government observance 
of existing standards, testing, labeling and certification 
requirements was reported to be uneven. 
 
In response to these well-known deficiencies, Kazakhstan 
adopted new legislation in 2005.  The legislative base 
governing technical regulation and metrology in Kazakhstan 
now consists of the laws "On Technical Regulation", "On 
Ensuring Uniformity of Measurement" and on supporting 
government regulations, which were adopted in furtherance of 
the Government's 2004-2006 national program for the 
development of national systems of standardization and 
certification.  Of the Government's regulations, the most 
fundamental is the entitled "On the mandatory confirmation 
of compliance of products in the Republic of Kazakhstan". 
 
The law "On Technical Regulation" was signed on November 9, 
2004, and came in effect on May 13 2005.  This new law 
supersedes two previous laws, "On Standardization" and "On 
Certification."   The main purpose of this law is to set the 
division of responsibilities between the state and private 
sector: the government is responsible for product safety, 
while the private sector is responsible for quality control. 
 
Though this new law cancels the laws "On Standardization" 
and "On Certification", some approaches from the old laws 
have been maintained.   According to the new law, a wide 
range of goods are subject to mandatory certification 
requirements.  The certification requirements apply to both 
domestically produced and imported goods.   A related 
regulation lists the categories of products subject to 
certification, which include but are not limited to 
machines, cars, agricultural equipment, clothes, toys, food, 
and drugs. 
 
Standards for imported goods are addressed further in the 
law "On technical regulation." That law specifies that 
contracts for the delivery of imported goods subject to 
mandatory certification should have a liability to confirm 
compliance. Such contracts should be accompanied by 
documents describing the products and listing the country of 
origin, the producer, the expiration date, storage 
requirements and code of use in both the Kazakh and Russian 
languages. In addition, the law states that foreign 
certificates, testing protocols and compliance indicators 
will be in accordance with international treaties. 
 
 
The government has accepted placement of Kazakh language 
stickers on products as compliance with the law, instead of 
requiring entirely new labels.  The government has also 
issued a wide-ranging regulation exempting pharmaceutical 
products and several other categories of goods from the 
Kazakh labeling requirement. 
 
GOVERNMENT PROCUREMENT 
 
Kazakhstan is not yet a member of the WTO Agreement on 
Government Procurement.  However, with the support of the 
World Bank, it is reforming and harmonizing its system of 
state procurement.  Nonetheless, some potential U.S. 
investors have raised concerns about the transparency and 
efficiency of Kazakhstan's government tender process. 
 
The State Procurement Agency was established by Presidential 
 
decree in December 1998, and the Regulation on the State 
Procurement Agency was approved in March 1999. 
In October 2004, the State Procurement Agency was merged 
with the Committee on Financial Control, and was accordingly 
subordinated to the Ministry of Finance.  The procurement 
process in Kazakhstan is regulated by the law "On State 
Procurement," and by the Budget Code, the current 
incarnation of which took effect in 2004 and applies to the 
republican budgets for 2005 onward. 
 
The Government has taken steps to improve the transparency 
of the procurement process.  In particular, the Committee 
published on its website the State register of agencies and 
state enterprises subject to state procurement regulations, 
the Rules of Inclusion and Exclusion that determine whether 
an agency or a state enterprise is subject to government 
procurement regulations and a blacklist of unfair and 
unreliable suppliers of goods and services. 
 
However, the situation still leaves much to be desired. 
Since January 2005, about 240 claims against Ministries and 
state enterprises have been lodged in court.  An inspection 
by the Finance Ministry identified procurement violations in 
the amount of 81 billion tenge (about $ 602.2 million) 
during the first nine months of 2005.  The need for 
legislative improvement in this area is basically 
undisputed. 
 
The Rules on Oil and Gas Procurement, which went into effect 
in 2003, also give significant preferences to local 
suppliers, and establish what many firms, foreign and 
domestic, consider unwarranted state interference in even 
small tenders.  Despite governmental promises to amend the 
Rules, they stand as originally written.  There are have 
been no reports yet of attempts to enforce the Rules. 
 
In October 2002, Kazakhstan adopted "Rules for the 
Organization and Holding of State Procurement."  These rules 
established a standardized format for publicizing tenders 
and specified in which newspapers the offers should appear, 
based on the newspaper's circulation and the tender's value. 
 
U.S.-funded assistance projects are helping Kazakhstan to 
establish a database to assist in procurement.  The database 
was launched by the State Procurement Agency in 2003, but 
remains a work in progress. 
 
INTELLECTUAL PROPERTY RIGHTS PROTECTION 
 
The 1992 U.S.-Kazakhstan Agreement on Trade Relations 
incorporates provisions on the protection of intellectual 
property rights (IPR).  As part of its effort to join the 
WTO, Kazakhstan began in 2003 to bring its IPR legislation 
into compliance with the WTO's Agreement on Trade Related 
Aspects of Intellectual Property Rights (TRIPS Agreement) 
and other international conventions and agreements. 
 
Nonetheless, the United States Government has consistently 
identified intellectual property rights (IPR) protections in 
Kazakhstan as needing improvement.  In 2004 Kazakhstan was 
identified on USTR's "Special 301" Watch List and an 
industry-initiated GSP case remains open.  However, in 2005 
as in 2004, the Government of Kazakhstan made steady, if 
slow progress toward bringing the country's IPR regime into 
compliance with its bilateral and multilateral obligations. 
 
In 2004 Kazakhstan ratified the World Intellectual Property 
Organization (WIPO) Treaties on Copyrights and the Uses of 
Performances and Phonograms.  The Law on Copyrights was also 
amended to guarantee retroactive protection to copyrighted 
works.  In addition to legislative initiatives, Kazakhstan 
has worked cooperatively with law enforcement agencies, 
public organizations and international organizations to 
fight piracy. 
 
Criminal penalties for IPR violations were adopted in 2001, 
but the law did not provide deterrent fines and set an 
unreasonable burden for the prosecution to prove the 
seriousness of the damage suffered by the right-holder.  New 
criminal penalties adopted in late 2005 address these 
deficiencies.  Under the new law, penalties are tougher, the 
threshold for an offense to be treated as criminal rather 
than administrative is lower, and the harm standard is 
replaced by a standard that measures the monetary value of 
the violation.  As the law is new, it remains to be seen 
what effect the new penalties will have on enforcement 
nationwide.  The new law is, however, a definite 
improvement. 
 
In 1999, Kazakhstan also amended its Customs Code to provide 
for the seizure at the border of items that violate IPR. 
However, there is little border protection for the importing 
of illegal material, and illegal sound recordings continue 
 
to be imported, particularly from Russia and China. 
 
In October 2003, the Kazakhstani Ministry of Justice held a 
national campaign for IPR in accordance with the Justice 
Minister's decree of September 30, 2003, aimed at studying 
the cause for the high incidence of piracy and developing an 
appropriate strategy for protecting IPR in Kazakhstan.  The 
campaign was held to raise public awareness on property 
rights issues; generate dissatisfaction among the public 
with piracy and other illegal activities violating IPR; 
develop methods of strengthening the working relationships 
between various state authorities concerned with IPR and 
improving law enforcement practices; and soliciting 
suggestions for improving IPR legislation.  The campaign 
continued in 2004, when the IPR Committee of the Justice 
Ministry, among other actions, began publishing a quarterly 
journal on IPR issues. 
 
 
SERVICES BARRIERS 
 
Oil and Gas Procurement Regulations, enacted in June 2002 
(see Investment Barriers, below) stipulate that oil 
companies purchase services only from Kazakhstan-based 
companies unless the required service is unavailable in 
Kazakhstan. 
 
INVESTMENT BARRIERS 
 
Kazakhstan's new Investment Law, passed in January 2003, 
supersedes and consolidates past legislation, but according 
to major investors and law firms, represents no marked 
improvement.  There is concern about the Law's narrow 
definition of investment disputes, lack of clear provisions 
for access to international arbitration, and little 
stability protection for contracts signed after the law went 
into effect.  On the plus side, the Law eliminates time 
limits for stability clauses for existing contracts, and in 
some cases, notably Oil and Gas, gives precedence to sector- 
specific legislation. 
 
For several years, there has been a growing trend to favor 
domestic over foreign investors in most state contracts. 
The 1999 amendments to the Oil and Gas Law required mining 
and oil companies to favor local goods and services.  The 
rules implementing these legal provisions were enacted in 
June 2002 (Decree 612), but were not being enforced as of 
December 2003.  The decree creates onerous requirements for 
government involvement in, and approval at, each stage of 
private companies' procurement processes. 
 
Amendments applied to the Law on Subsurface Use in December 
of 2004 require investors to state in their tender proposals 
what affirmative actions they will take to satisfy local 
content requirements.  Companies' operations can be 
suspended for up to six months if the company is found to 
fail consistently to meet the requirements.  The law "On 
Production-Sharing Agreements (PSAs)" contains explicit 
requirements regarding local purchase of goods and services 
and the hiring of Kazakhstani nationals, and applies to all 
investment in offshore oil and gas exploration and 
production. 
 
Kazakhstan recently added a controversial "pre-emption" 
amendment to its Law on Subsurface Use.  The amendment 
guarantees the state a right of first refusal when a party 
seeks to sell any part of its stake in a mineral resource 
extraction project.  The state claims this preeminent right 
even in cases where the controlling agreement assigns 
preemptive rights elsewhere (e.g. to other investors in a 
consortium.)  The amendment specifically applies the 
preeminent right retroactively, as well.  This new amendment 
raises serious questions about the Kazakhstani government's 
respect for contract sanctity.  In October 2005, the 
Government's assertion of pre-emptive rights under national 
law became even broader.  The Government now claims that the 
pre-emptive right exists when an investor attempts to gain 
access to drilling rights by purchasing a company that had 
them previously.  Theoretically, this latest expression of 
the pre-emptive right (which has not yet been tested) could 
be read as a statement that the Government of Kazakhstan has 
a preferential right to purchase or prevent the sale of 
stock in a company that is involved in the oil, gas or 
mining business in Kazakhstan. 
 
Gas flaring was prohibited altogether by 2004 Law on 
Subsurface Use, except in emergency cases.  Amendments 
adopted in October 2005 mitigate this requirement, providing 
for a transition period up to July 1, 2006 for subsurface 
users to draft and present a program for gas utilization to 
the government authorities. 
 
In July 2005, Kazakhstan enacted a new law "On Production 
 
Sharing Agreements (PSAs)", which establishes the state oil 
company's right to a minimum 50% share in offshore projects. 
The law also defines a new means by which the national oil 
company may obtain field rights outside of a tender process. 
Taken together, these clauses establish KazMunayGas as a 
necessary partner for international oil companies investing 
offshore, at least in the initial stages of an agreement. 
 
In October 2005, customs duties on the export of oil 
products were introduced by a decree of the Prime Minister 
(Decree 1036).  The government's decision is a timely 
political measure to reduce the export of oil products and 
stabilize domestic prices after a "gasoline crisis" in 
autumn 2005. 
 
Kazakhstani law allows both citizens of Kazakhstan and 
foreigners to own land under commercial and non-commercial 
buildings, including dwellings and associated land.  Such 
land may be leased up to 49 years.  In June 2003, a new Land 
Code came into effect, which for the first time allows the 
private ownership by Kazakhstanis of agricultural land, in 
addition to industrial, commercial and residential land. 
However, foreign individuals and companies may still only 
lease agricultural land for up to 10 years, although the 
wording of the law is unclear with regard to purchase of 
such land by local legal entities, either wholly-owned or 
joint ventures. 
 
Kazakhstani authorities often require, as part of a foreign 
firm's contract with the Government, that the firm 
contribute to social programs for local communities. 
 
Foreign insurance companies are limited to operating in 
Kazakhstan through joint ventures with Kazakhstani 
companies.  Overall capital of all foreign insurance 
companies should not exceed 25 percent of the non-life 
insurance market and 50 percent of the life insurance 
market.  The total registered capital of banks with foreign 
participation is less than 25 percent of the total 
registered capital of all banks in Kazakhstan.  Foreign 
ownership of individual mass media companies is limited to 
20 percent.  Legislation is under consideration that would 
lift the restrictions on foreign participation in the 
registered capital of Kazakhstani banks, but it would leave 
the other above-mentioned restrictions in place. 
 
Difficulty in obtaining work permits for foreign investors' 
employees in Kazakhstan continues to be a problem.  In 2001, 
a quota system was established that limited the number of 
work permits for that year to 10,500, with exceptions for 
investor's lead representatives.  The quota is set each 
year, based on a percentage of the total national workforce. 
Many companies report that permits for key managers and 
technicians are routinely rejected or granted for 
unreasonably short periods, or are conditioned upon demands 
for additional local hires.  Companies also note that the 
regulations are confusing and interpreted differently by 
various local officials and the Ministry of Labor and Social 
Protection. 
 
However, the Government has been steadily increasing the 
number of work permits available.  In 2003, the number of 
permits was limited to 0.14 percent of the economically 
active population (reckoned to be 8 million people), an 
amount that increased to 0.21 percent in 2004 and 0.28 (and 
again to 0.32) percent in 2005.  In the first half of 2005, 
15,086 people were holding valid work permits. 
 
Kazakhstan adopted the law "On International Commercial 
Arbitration" in late 2004.  The law regulates the activity 
of international arbitration institutions in Kazakhstan at 
all stages: from the adoption of an arbitration clause in a 
contract through the execution of an arbitration decision. 
This law defines the organizational and legal aspects of 
arbitration proceedings in Kazakhstan, and the conditions 
for recognition and execution of arbitration decisions made 
in foreign states.  In practice, the Government of 
Kazakhstan has not consistently observed international 
practices relating to arbitration awards. 
 
OTHER BARRIERS 
 
There are other structural barriers to investment in 
Kazakhstan, including a weak system of business law, a lack 
of effective judicial process for breach-of-contract 
resolution, and an unwieldy government bureaucracy.  Many 
companies report significant logistical difficulties serving 
the Kazakhstani market.  In addition, there is a burdensome 
tax monitoring system for all companies operating in 
Kazakhstan.  Many companies report needing to maintain 
atypically large back-office operations in Kazakhstan to 
deal with the tax system and frequent inspections. 
 
In 2001, Kazakhstan adopted transfer-pricing legislation 
that gave tax and customs officials the authority to monitor 
export and import transactions in order the stop distortion 
of earnings through manipulation of export prices.  Foreign 
investors are concerned because the government rejected use 
of OECD standards to determine proper market prices, 
creating instead a methodology that fails to account for all 
cost and quality differences.  The government also holds 
that transfer pricing can take place even in transactions 
between unaffiliated parties. 
 
Ordway 
 
 
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