By U.S. Commercial Service

Business in Kazakhstan is often focused on the oil and gas sector, which has been responsible for the country’s strong economic expansion over the last eight years.

Kazakhstan is developing into one of the most important markets in Eurasia and is uniquely positioned to serve as an economic and trade leader in the region. Though often overshadowed by the business press received by neighboring BRIC countries, Russia and China, Kazakhstan is quickly developing as the trade and investment gateway for Central Asia and has the potential to play an important role as a transit route between Asia and Europe. Kazakhstan is also actively seeking ways to use its new mineral wealth to diversify its economy. These efforts, combined with a growing middle class, are providing trade and investment prospects for U.S. firms seeking new opportunities in one of the most dynamic of the “emerging” markets.

Like other former Soviet republics, Kazakhstan is still going through the long process of developing a transparent and effective business culture that is attractive to foreign investment. Though the government of Kazakhstan (GOK) publicly supports economic reform, changes are slow, and commerce is plagued by a bureaucracy that is unable to initiate needed change. Foreign investors, as well as local firms, complain about burdensome regulations that often reflect a way of doing business that is reminiscent of the Soviet Union. Challenges remain in addressing problems related to the country’s competitiveness and economic diversification, its over-reliance on the oil sector, continued corruption, need for increased rule of law, and concentration of political power.

Market challenges

Over the past decade, Kazakhstan has made some progress in transforming its economy to create a more transparent, less regulated and more market-driven business environment. Nonetheless, this progress continues to be undermined by continued developments that have caused increased concern for American investors and the U.S. government alike. Firms that have experience in Russia, the Ukraine, and other post-Soviet economies will be familiar with some of these challenges:

• Continuing concerns over interpretation of laws by the central government, which often is at variance with that of local officials, especially in the implementation of Kazakhstan’s system of taxation and collection of revenues. U.S. investors report taxation as one of their top concerns, noting frequent harassments by local and national “financial police” and other taxation authorities through generally intrusive inspections. Quite often, settlement of these cases with the tax authorities has led to criminal charges by local governmental officials as a pressure tactic.

• As the Heritage Foundation reports, “the government constantly challenges contractual rights and legislates to favor domestic investors over foreign ones, all of which significantly deter foreign investment.” The investment climate took a turn for the worse in 2007 with the passage of an amendment to the “Law on Subsoil and Subsoil Use,” which may have substantial negative consequences for the oil and gas and mining sectors in Kazakhstan. According to the amendment, the GOK has the right to require changes to contracts or to refuse unilaterally to perform its contractual obligations based on the country’s economic interest.

• Despite attempts to improve the business environment and join the World Economic Forum’s “Global Competitiveness” Top 50, Kazakhstan continues to fall in the rankings. The country’s 2006 ranking of 56th in world (with a score of 4.19) fell to 61st in 2007 (with a score of 4.14). The report highlighted problematic areas of corruption, tax regulations/rates, and inadequate infrastructure.

• Kazakhstan performed poorly on the World Bank’s Ease of Doing Business Report for 2008 again, ranking 71st out of 178 countries. Except for dropping nine places in “Starting a Business,” Kazakhstan saw little change in most of the report’s indicators and was ranked last in “Trading Across Borders” and 173rd in “Dealing with Licenses.”

• Corruption, which increases the cost and difficulty of doing business for foreign and local firms alike, especially as it relates to customs. Corruption remains widespread, and the judiciary is often perceived as an arm of the executive branch rather than as an enforcer of contracts and guardian of property rights. Kazakhstan ranks 150th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007. The country was ranked 107th in 2005.

• A customs regime that is hampered by the incomplete implementation of customs codes, regulations and instructions, excessive and unclear documentation requirements and the need to provide “facilitation payments.” Though Kazakhstan boasts the most improved customs administration in Central Asia, it is far from effective. As an example, in August 2007, an unannounced change to the customs code requiring the submission of the shipper’s export declaration resulted in hundreds of millions of dollars in goods being held at the border due to improper documentation. The GOK took nearly three months to reverse the order, which left importers paying high warehouse fees and exporters unable to meet contractual obligations.

• Competition is increasing, as Russia and China vie for access to the country’s energy resources and growing buying power. The EU is also a major player and, as a group, is Kazakhstan’s single largest investor. Turkey is another formidable competitor, using its strong presence in the construction and retail sector to position itself better.

• The ability to create a modern trade route through Central Asia is hampered by the reluctance of Central Asian countries to work together to increase cross-border traffic. This impacts Kazakhstan’s plans to position itself as a transit area for goods between Asia and Europe, and the GOK is increasingly pursuing its own plans of developing road and rail links between China and Russia.

Market opportunities

Demand in this developing market goes beyond the few best prospect sectors that this article covers. Kazakhstan’s strategic aspiration is to become a modern, diversified economy with a high value-added and high-tech component, well integrated into the global economy, and the country is cognizant of the need for foreign expertise to accomplish this task. Kazakhstan’s infrastructure is a nightmare like that of other former Soviet republics – especially roads, transportation, and telecommunications. Nevertheless, Kazakhstan has the means to repair the nation’s infrastructure. Likewise, areas such as health and environment need an infusion of investment to reach European standards.

Despite the recent impact that global liquidity has had on the construction sector, the GOK is aware that this is a key industry driving economic growth, and it is taking steps to inject sizable funds into that industry sector. Though slowed in 2008, the construction boom will continue, creating opportunities for U.S. engineering and design firms and demand for building and construction equipment and materials. Though per capita GDP is far below that of developed countries, anecdotal evidence suggests that Kazakhstanis are seeking out higher end goods.

Prospects for U.S. companies

Agriculture

U.S. exports to Kazakhstan mostly consist of grain harvesting combines, reapers, sprayers, tractors, seeders, cultivators, and grain-drying and cleaning equipment. American products enjoy an excellent reputation with Kazakhstani producers. In light of the lower dollar exchange rate vs. the Euro, Kazakhstani producers are very much interested in purchasing U.S.-made equipment. From 2007-2008, interest by large agricultural producers in importing Western-made equipment will remain high due to the need for replacing worn-out equipment and the availability of financial resources. In 2007, record high grain yields (22.4 million tons) combined with a record high price (USD 200-USD 260 per ton) created many opportunities for U.S. exporters of agricultural machinery and equipment to Kazakhstan.

Best prospects include: 100-150 hp tractors and combines for southern regions, tractors of greater than 250 hp and combines for northern regions, pneumatic seeders, reapers, sprayers, grain drying and cleaning technologies, storage quality control systems, engineering and design services for cattle feed facilities and on-farm processing facilities.

The GOK and local producers are looking for partners to increase domestic production of some agricultural equipment and set up new manufacturing facilities of agricultural machinery and equipment by attracting foreign investment and expertise.

Building products

Less than half of the construction materials used in Kazakhstan are available domestically. Locally-produced materials include cement, bricks, wooden doors, windows, steel doors, and soft and iron roofs. A fairly high portion of locally-produced materials and products are not considered to be up to international standards. Most other materials are imported, mainly from Turkey, China, and Germany.

Currently, this sector of the market is dependent on high-quality imported products and materials used in the finishing and renovation process, including wall & floor coverings, ceiling products, doors and windows, kitchen and bath accessories, plumbing and electrical equipment, hardware, and DIY products. In recent years, the output of building products grew between 3 and 30%, depending on the product category. Domestic production of a number of new quality and cost-competitive basic building products was established.

Among these products are fiberglass insulation materials, new types of roofing and waterproofing products, energy-efficient glass, aluminum extrusion, engineering equipment, cement, bricks, and wall panels. Imported technologies and equipment significantly contributed to the overall improvement in the industry. Due to the government’s emphasis on import substitution and diversification of the industry, many opportunities exist for suppliers of manufacturing machinery and for new technologies.

Drugs and pharmaceuticals

The pharmaceutical market is divided almost equally into two major segments: state procurement and retail sales.

State procurement

U.S. companies producing the following pharmaceutical products have strong prospects.

• Vaccines and other immuno-biological medications for immuno-prophlaxis of the population;

• Anti-tuberculosis medications;

• Anti-diabetic medications;

• Oncology medications;

• Medications and dialyzers, as well as medical supplies for patients with renal deficiency and patients operated on for kidney transplantation.

Generally, foreign suppliers participate in state-funded tenders through their local distributors.

Retail sales

According to the statistics for 2007, the following pharmaceuticals are the best selling products on the retail market:

• Systemic action antibiotics

• Anticatarrhal pharmaceutical products

• Analgesics

In January 2008, the World Bank approved a USD 117.7 million loan for Kazakhstan’s Health Sector Technology Transfer and Institutional Reform Project. The project will help introduce international standards and build long-term institutional capacity in the Ministry of Health and related healthcare institutions in support of key health sector reforms pursued by the Government of Kazakhstan. The project includes a Pharmaceutical Policy Reform Component of USD 4.2 million.

It will help improve the safety, efficiency, economy, quality, and affordability of pharmaceuticals in Kazakhstan by supporting reforms in pharmaceutical procurement, pricing, monitoring, information provision, and benefit package design and quality– control.

Electric power generation

Overall, 94% of Kazakhstan’s gas turbines, 57% of its steam turbines, and 33% of its steam boilers have been in use for at least twenty years.

Electricity transmission networks are inefficient, with losses during transmission and distribution estimated at approximately 15% of the energy produced, although the actual number may be higher. Construction of new power plants and expansion of power distribution networks are priorities for the government and are likely to be implemented in the medium term. Some observers project steady growth in the market for a wide range of power-generation and distribution equipment.

Major categories of goods imported by the electric-power-generation sector include fuel products, liquid dielectric transformers, inverters, parts for transformers and inverters, and vapor-generating boilers and parts. Considering the overall remodeling of KEGOC’s systems and development of new power generation facilities, it is likely that the demand for IT support, management, and communications systems will increase as well.

U.S. companies will need to be prepared for competition with Russian and German companies that have acquired strong positions in the market and sometimes are entitled to tax breaks and other preferential treatment (particularly when they qualify as investors and not only as importers). Attempts to sell equipment for the power generation sector are more likely to be successful if based on a strategic approach to the market and accompanied by appropriate training, servicing, and consulting programs. The ability of U.S. suppliers to secure project financing is also key.

Food-processing equipment

The domestic production of food-processing and packaging equipment is very limited in Kazakhstan, with major demand satisfied by imports. U.S. food-processing and packaging equipment, though holding an insignificant market share, has a good reputation for quality and durability, and with the depressed dollar, U.S.-made equipment is viewed as more cost-effective. U.S. exporters are encouraged to increase the awareness of Kazakhstani managers of the availability of U.S.-made food-processing and packaging equipment. There are no restrictions on imports of food-processing and packaging equipment, nor any non-tariff barriers affecting imports.

Best prospects include equipment for processing of vegetables and fruits, including production of natural juices and canned products, for production of vegetable oil, ready-to-finish products for supermarkets, canned products, processing of meat/poultry, movable facilities for animal slaughter and processing, packaging equipment and materials, and small capacity laboratory testing equipment for milk– and dairy-processing industries.

In the next few years, the fish-, meat– and dairy-processing industries, which have been stagnant since independence, are likely to develop. The GOK adopted a program for developing the fish industry in 2007-2015. Kazakhstani companies are launching new fish-processing productions, such as fish-skin processing, artificial breeding of sturgeon on plots off the coast for further caviar production, production of oil for the perfume industry, and manufacturing of long-shelf life preserves. Traditional fish-processing is also very limited, and there will be new processing facilities set up for the production of finished products, such as dried and smoked fish, fish fillet, and freshly-frozen fish. Processed fish products produced at new facilities in Kazakhstan are mainly exported to Western and Eastern Europe.

Medical equipment

The best sales potential for U.S. medical equipment is expected to be in the following areas: electro-medical diagnostic and therapy equipment, diagnostic imaging with a special emphasis on X-ray equipment and supplies, surgical supplies, equipment for cardio surgery, dental equipment and supplies, laboratory equipment and test kits including HIV/AIDS blood testing sets.

Mining equipment

Kazakhstan is endowed with a wide range of mineral resources – including coal, and ferrous and non-ferrous metals. Because of this mineral wealth, the country has a large mining sector and over 230 separate enterprises producing or processing coal, iron & steel, copper, lead, zinc, manganese, gold, aluminum, titanium sponge, uranium, barites, etc. The sector is responsible for over 30% of export earnings, over 16% of GDP, and 19% of industrial employment.

Kazakhstan produced 92 million tons of coal in 2006, ranking 9th in the world in terms of coal production. The country is the 8th largest in iron ore reserves with 12.5 billion tons. The nation ranks second globally in manganese ore reserves, which are estimated at 600 million tons. Kazakhstan boasts 30% of the worldwide chromite ore deposits. The country is also a significant producer of beryllium, tantalum, barite, cadmium, and uranium among the C.I.S. countries. Kazakhstan is paying particular attention to developing its gold mining (ranked 10th globally) and uranium mining (25% of world reserves) as commodity prices rise and will need to attract foreign investment in order to expand current production. Overall, the Kazakhstan mining industry is forecast to grow on average 9.2% over 2008-2011, with the industry value reaching USD 4.83 billion in 2011.

Taking into consideration the price increase for non– ferrous metals, gold, uranium, and a growing demand for coal, Kazakhstan’s mining industry is developing rapidly. Currently, Kazakhstan is an attractive market for U.S. mining equipment/machinery suppliers. American companies can provide needed products and services to the Kazakhstani mining companies, such as bulldozers, drilling equipment, explosives, trucks, drill rigs, trams, cranes, crushing and pulverizing machinery, dredges, hydraulic excavators, quarrying machinery and equipment, elevators, compressors, hammer mills, special trucks, etc. Among the best sales prospects and services are diamond drilling contractors and people that perform geological, geochemical, and geophysical surveying, equipment involved in bulk sampling such as a processing plant, small aircraft, fuel supplies and geological supplies, such as sample bags. American companies that can provide goods and services that address erosion, formation of sinkholes, loss of biodiversity, and contamination of groundwater and surface water by chemicals from the mining process and products, which may minimize the harm to the environment, will also have great demand in Kazakhstan. Explosives also present interesting export opportunities in the region.

Telecommunications equipment

Kazakhstan spent approximately USD 565 million on imports of telecommunications equipment in 2007, an increase of 21% from the previous year. As there is almost no domestic production of telecom equipment (except coaxial and fiber-optic cables, and small PBXs), the volume of domestic production is a fraction of market demand. As a result, imports represent 99% of the telecommunications equipment market, with the U.S. commanding a 21% share.

There is a growing demand for telecom equipment and services for mobile devices, fixed line telephony, cable, broadband, mobile (value-added) data services, digitization of the existing telecommunication networks, including digital and/or interactive TV systems working on a frequency of 40 GHz and more, and all types of Internet-related communication services, including Wi-Max and Wi-Fi technologies and equipment, VSAT terminals, DWDM technologies, and DECT technologies.

Oil & gas equipment and services

Kazakhstan has the Caspian Sea region’s largest recoverable crude oil reserves and accounts for approximately two-thirds of the roughly 1.8 million barrels per day (bpd) currently being produced in the region. The government of Kazakhstan and foreign investors continue to focus heavily on the hydrocarbons sector, which so far has received approximately 60% of the estimated USD 58 billion in foreign direct investment in Kazakhstan since 1991 and makes up approximately 53% of its export revenue.

Existing oil extraction sites offshore in the North Caspian, combined with onshore fields currently under development, mark Kazakhstan as a potential major near-term oil exporter. Its oil production already has reached 1.4 million bpd, with daily output expected to total 2.6 million bpd by 2015. As a result, foreign investors are intensifying their focus on the country’s energy infrastructure, including oil transportation routes, such as the Baku-Tbilisi-Ceyhan pipeline.

Oil industry sources estimate that Kazakhstan could eventually attract up to USD 140 billion of foreign investment in its oil infrastructure. Industry experts and the U.S. Commercial Service in Almaty estimate that the current market for oil and gas field equipment and services grew to USD 6.8 billion in 2008, and will continue growing at 15-30% annually over the next three years. There are opportunities for U.S. companies in virtually every sub sector associated with oil extraction, processing, and transportation. The best prospects include geological exploration, geophysics, hydrogeology, drilling, research and data management, laboratory studies, oil spill cleanup technologies, and pipeline equipment and services.

Kazakhstan as yet has no experience in offshore production and operations. This experience gap offers many opportunities for U.S. service companies in rig work, support infrastructure, and environmentally-sensitive technologies. The Caspian basin’s oil-bearing formations are generally quite deep (15 000 feet), under considerable pressure, and often contain a high degree of sulfur and other contaminants, making special Western-made drilling and processing equipment necessary.

U.S. oil and gas field equipment suppliers have the potential for solid growth over the next decade as new fields are brought on-stream and secondary recovery methods are introduced to existing deposits. The most promising sub sectors are the following: offshore/onshore oil and gas drilling and production equipment; turbines, compressors and pumps for pipeline applications; measurement and process control equipment for pipeline applications; industrial automation, control and monitoring systems for refineries, gas-processing and petrochemical plants, seismic processing and interpretation, petroleum software development, sulfur removal and disposal technologies, well stimulation and field abandonment services.

Plenty of other opportunities exist for U.S. companies producing oil and gas field equipment and machinery such as drilling and wellhead equipment, Christmas trees, valves, pumps, motors, compressors, electrical, submersible, and jet pumps, underwater repair equipment, and oil spill containment equipment. Good prospects also exist for U.S. small– and medium-size firms offering downstream engineering and such services as fabrication, welding, engineering services, and testing in accordance with API and ASME standards.