Originally published in Russia/Eurasia Executive Guide, September 2007
Fundamental geopolitical change and rising oil prices have turned the Central Asian region surrounding the Caspian Sea into a new and dynamic investment focal point. The former Soviet republics that constitute the Caspian region’s Commonwealth of Independent States (CIS) - including Azerbaijan, Turkmenistan and especially Kazakhstan - welcome Western capital and businesses. Kazakhstan was the first CIS country to undergo massive privatization, open its energy industry, and overhaul its pension and banking systems. With the success of these actions, Kazakhstan is now positioned for regional economic leadership.
Tempering the enthusiasm is the fact that the CIS countries all began their transition from state-planned to market-directed economies just 15 years ago. The evolution of their judiciary systems is inseparable from each country’s business, cultural and economic environment. Privatization and resulting rapid economic growth have created change that challenges the traditional judicial and cultural frameworks in these countries. Under these circumstances, flexibility and local knowledge are essential for developing the personal trust and relationships that support pursuit of market opportunities.
When newly independent Kazakhstan began the process of creating a market economy, multilateral government agencies and Western law firms played key roles. The World Bank for Reconstruction and Development and the United States Agency for International Development helped craft economic infrastructure of corporate governance and banking and securities regulation. This included drafting Kazakhstan’s Law on Securities and Stock Exchanges, Law on Investment Companies and Law on Foreign Investment and Law on Economic Entities, as well as establishing the country’s National Securities Commission and Central Bank.
The creation of the legal system followed a similar path. Kazakhstan’s civil code consists of General Provisions enacted in 1995 and Special Provisions enacted in 1999. The General Provisions set forth basic principles underlying such concepts as legal entities, property and terms, general principles of transactions and obligations between parties. The Special Provisions consider contracts in detail and contain dispute resolution provisions. When creating its new civil code, Kazakhstan adjusted traditional legal models to the specific requirements of its economic evolution. Beginning with incentives to privatize property, the civil code details property rights and regulates the legal relationships between business parties, involving such commercial necessities as contracts, loans, security interest and equity capital.
Effective interaction with Kazakhstan’s economic and financial agencies is essential to a successful business venture in that country. Knowledge of the laws and the key regulatory officials helps with the day-today requirements of doing business, involving labor, taxation, corporate governance, trade and competitive issues. Investors need strong working relationships with the Kazakh governmental agencies most responsible for regulating the market economy, including the Financial Market Supervision Agency, the Ministry of Finance, the nation’s Central Bank, and both the Customs Committee and Antitrust Authority of the Ministry of Trade.
The importance of personal relationships also applies to dispute resolution. In Kazakhstan’s civil law system, although the civil code sets forth general principles, specific rules for business conduct are created in laws and regulations that are subordinated to the civil code. Good working relationships with those who make and administer commercial laws is invaluable in protecting business interests at trial.
A variety of large and mid-size multinational corporations are engaged in a mix of energy and infrastructure transactions throughout Kazakhstan. Energy companies based in the country include KazTransOil, KazTransGas, Kazmunaygas, and KazakhoilAktobe LLP. These businesses work with multinational energy and financial corporations on financing transactions, asset purchases and sales, production and exploration contracts, establishment of joint ventures and negotiations of production sharing contracts. All the major exploration companies have progressed well and are working flat out, but the energy infrastructure has not kept pace and production facilities are being strained. Also, the high price of oil has raised the value of oil companies in the region, restraining mergers and acquisitions.
The Ministry of Natural Resources is heavily involved in regulating the entire oil and gas industry. The Government of Kazakhstan is also playing an active role in the rehabilitation of the Uzden Oil Field and the construction of a pipeline across Eastern Kazakhstan to China. Kazakhstani energy companies are active in the private financial markets, and actively pursue Eurobond financing for their transactional and operating needs. The European Bank for Reconstruction and Development (EBRD) is also active in project financing transactions involving the Kazakhstan power industry. The recent financial market turmoil has made it more challenging for energy projects to get Eurobond financing and syndicated commercial loan deals from international lenders.
The 1990s reforms largely decentralized the national pension system, as most pension assets were assumed by private pension funds. Considered the most advanced in the CIS, the modernized Kazakh banking system boasts a single regulator, effective laws and a handful of healthy, rapidly growing banks. With total assets over US$ 36 billion, Kazakh banks and pension funds form a solid investment foundation.
As the development of a market economy advances in Kazakhstan, numerous opportunities for privatizations continue to emerge through the national securities market. Underwriters in such transactions have included CIBC Oppenheimer, Global Securities, AIG Silk Road Fund, Regent Central Asia Fund and Kazakhstan Asset Management. Transactions include privatizations of banks, the state telecommunications company, oil and gas production companies and mining concerns.
The capstone of this investment growth is the Regional Financial Center of Almaty (RFCA). Based in the nation’s capital, the RFCA follows the pattern of other world financial centers that promote the host country as an investment destination, create a regional financial hub with a first class financial services marketplace, and allow domestic investors to access foreign capital markets. The RFCA Authority was established in 2006 under direct control of the President of Kazakhstan as a special zone with a dedicated regulatory framework and single multifunctional regulatory authority. The Authority encompasses an International Council to guide the Center’s strategic development, and a specialized financial court to serve as a dedicated dispute resolution forum. Members of the RFCA may include both domestic and foreign broker- dealer firms registered and licensed under the RFCA authority. These firms will only be allowed to operate on the special floor of a stock exchange located in Almaty and regulated by the RFCA Authority. Financial offerings will include government securities, equity and debt securities, credit linked notes, and derivatives. There will be special emphasis on domestic securitized assets and on financial instruments that comply with Shariah (Islamic law).
This year a number of RFCA-related amendments to the country’s Tax Code nominally took effect, although their practical implementation date will likely not be until 2008. Under the amended Tax Code, RFCA members will receive income tax preferences with regard to dividends and capital gains from securities purchased or sold on the RFCA trading floor. The amendments also exempt a number of activities from income tax, including broker services, underwriting, research & analysis, and market making activities. The government’s support of tax preferences, when combined with the RFCA’s dedicated organizational structure and wide range of financial instruments, clearly demonstrate the Center’s potential to become a dynamic financial hub for the Caspian region. The key for investors to harness this potential is to fully understand Kazakhstan’s cultural, business and legal realities, to build a foundation of trust and personal relationships that facilitate pursuit of the country’s continually expanding opportunities.
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