Foreign direct investment (FDI) in Kazakhstan

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty has put significant downward pressure on global FDI in 2022, and new investment project numbers, including greenfield announcements, international project finance (IPF) deals, and cross-border mergers and acquisitions, all shifted in reverse after the first quarter of 2022 to start declining. Cross-border M&A sales were 6% lower and IPF values more than 30% lower in 2022. The outlook for global FDI in 2023 appears weak, with a significant number of economies around the world expected to enter a recession. Negative or slow growth in many economies, further deteriorating financing conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing risks associated with debt levels will put significant downward pressure on FDI (UNCTAD Global Investment Trends Monitor, January 2023). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession.

Since declaring independence, Kazakhstan has passed a series of reforms to liberalise its economy and attract foreign investment. However, regional conflicts, sanctions imposed on Russia and negative growth prospects have more recently deterred foreigners from investing in the region. According to UNCTAD's 2022 World Investment Report, FDI inflows into the country totalled USD 3.17 billion in 2021 against 3.65 billion the previous year, due to the global health and economic crisis triggered by the Covid-19 pandemic. The total stock of FDI stood at 151.95 billion in 2021. The country remained the 2nd largest recipient of FDI in the region that year, behind Russia. Rising investment in the mining, transport, financial services, telecommunications and energy sectors has offset falling inflows in construction, metalworking and trade, which have been particularly hard hit by the effects of the pandemic. The oil industry and metallurgy are the main sources of FDI in the country. Most of the FDI in the country's large hydrocarbons industry has been related to the Tengiz megaproject with Chevron (United States), expected to be completed by 2023. Kazakhstan's main challenge remains attracting investment in sectors and activities other than oil extraction and natural resources, which account for more than 70% of the total FDI stock, and retaining investors already in the economy. In international project finance deals, the Kazakhstan QazTechna bus manufacturing plant project - involving Chinese capital - became operational at the end of 2020. Another project involving Chinese capital was the construction of the DoubleStar rubber and tyre factory, which started in 2020. In telecommunication, the Netherlands-based VEOL (VimpelCom) (Russian Federation) launched a new project.

Kazakhstan is reputed to have a very good investment climate and several international companies have established their regional headquarters there. In general, the government has been gradually improving the business climate for foreign investors and plans to create a national company, "Qazaq Invest", which would facilitate the activities of foreign investors in Kazakhstan. The country facilitated the creation of businesses, exchanges with neighbouring countries (lower administrative costs and electronic reporting) and strengthened the execution of contracts.

Kazakhstan remains the number one investment destination in the Central Asian region, accounting for approximately 70 percent of the total FDI inflows into the region. The FDI growth in Kazakhstan was largely driven by increased investment in mining, transport, financial services, telecommunication, and energy that compensated for decreasing investment inflows in construction, metallurgy, and trade. The Prime Minister of Kazakhstan, Alikhan Smailov, has stated that the country Kazakhstan aims to attract foreign direct investment (FDIs) worth around US$25 billion in 2023, adding that 46 projects involving international financial investments were implemented in the country during 2022 in renewable energy, metallurgy, agriculture, mining industry, and engineering. Kazakhstan’s top-10 FDI donors in 2022 included the Netherlands, the US, Switzerland, Belgium, Russia, South Korea, China, France, the UK, and Turkiye. (Silk Road Briefing, 2023).

What to consider if you invest in Kazakhstan

Strong Points

The main assets of the country are:

• Kazakhstan's economy is primarily based on its large hydrocarbon resources and strong production capacity in this area.
• Located at the crossroads of Europe and Asia, the country has benefited from the huge investments made by China through its China's Belt and Road Initiative program to improve its transport infrastructure.
• The economic situation is relatively good and growing (4.5% in 2019 - IMF) despite a financial sector affected by the financial crisis.
• Kazakhstan has strong economic potential, a skilled and abundant workforce and a quality banking system.
• Kazakhstan is the largest economy in Central Asia: the country accounts for more than 60% of the region's GDP (The Astana Times, 2020)
• With a favourable investment climate, the country ranked 25 in the World Bank's Ease of Doing Business ranking 2020.
• Reliable transport and communication infrastructures (24 airports and the region's highest internet penetration rate 81.9% in 2019 - World Bank, latest data available).

Weak Points

Heavy constraints weaken Kazakhstan's economic potential and hinder the attraction of FDI:

• An economy highly dependent on commodity prices and Russian economic conditions
• Weak liberalisation of the economy: the strategy of the government in place is interventionist and protectionist
• An authoritarian political regime as a solution to chronic political instability in the region: a generally weak legal, legal and administrative framework, thus slowing down trade and allowing corruption to operate (Kazakhstan ranked 94th out of 180 according to Transparency International, 2020)
• The right to intellectual property is poorly protected
• The infrastructure is below international standards
• Landlocked country with a low population density
• Vulnerability of the exchange rate to foreign shocks

Government Measures to Motivate or Restrict FDI

Government policy has been encouraging foreign investment for nearly two decades (thanks to December 1994 and February 1997 laws) with measures such as reduction and even waiver of taxes for 5 years, a state subsidy, partial or total exemption from duties and taxes on equipment, raw materials and other material necessary for investment.

A new law aimed at making significant improvements to the investment climate in Kazakhstan was passed by the government on 24 June 2014 and has applied since 1 January 2015. The law introduces preferential treatment for investors involved in "priority investment projects". To counteract the economy's great dependence on its hydrocarbon production, the state has put in place programmes to diversify the economy by encouraging all initiatives relating to industrialisation, innovation and new technologies. For example, in 2017, the country launched the "Kazakhstan National Technology Initiative" program which by 2025 is supposed to accelerate technology renewal and create new digital-based industries in all sectors. At the same time, the state wants to liberalise the economy gradually, through the development of public-private partnerships and thus seeks to minimise its participation in the national economy.

As of January 2020, the restriction on opening branches of foreign banks and insurance companies has been lifted, in line with Kazakhstan's WTO commitments.