In 2017 Kazakhstan was invited by the OECD to become Adherent to the OECD Declaration on International Investment and Multinational Enterprises. This adherence bears witness to the determination that Kazakhstan holds towards its integration into the world economy and promoting development through responsible business practices.

Between 2000 and 2011, supported by a sharp oil price increase beginning in 1999, Kazakhstan’s economy grew by an average of 8.4%, making the country one of the world’s fastest growing economies over the past decade. With the slump in oil prices, the contraction of the Russian economy and the economic slowdown of China, recent years have nevertheless been challenging for Kazakhstan, with real GDP growth slowing from 6% in 2013 to 1.2 % in 2015, and foreign direct investment (FDI) inflows falling by 52% from 2014 to 2015. With excessive reliance on oil, sluggish growth and the decrease of FDI flows, improving further the framework conditions for foreign investment has become among the authorities’ foremost priorities for boosting the diversification of the economy and improving citizens’ well-being.

Kazakhstan has enjoyed a long period of stability and prosperity, with one of the world’s fastest growing economies over the past decade benefitting from high commodity prices. The past 15 years have been in contrast with the immediate post-independence period when the economy suffered from a sharp economic decline. Extensive reforms following independence, in 1991, started bringing benefits, supported by a sharp oil price increase beginning in 1999. Surging commodity prices supported a strong economic performance in particular between 2000-07, reflected in average annual growth of real GDP of 10.2%. On the demand side, growth had been driven by private consumption and private sector investment, fuelled by strong wage expansion and a credit boom increasingly funded by large scale foreign borrowing of Kazakh banks.

In the light of the current global economic slowdown and stagnating commodity prices, attracting foreign direct investment (FDI) has proven increasingly difficult in Kazakhstan. FDI inflows have declined, on average, by 15% since 2011, and 52% in 2015 (reaching USD 4 billion in 2015). This marks a significant decrease compared to the average of USD 10 billion in annual FDI inflows over the past decade. Still, being a small and remote economy, Kazakhstan has performed well in overall FDI attraction relative to the region, with the share of its inward FDI stock to GDP (of USD 119.8 billion or 55%) being higher than in most neighbouring countries. The principal challenge remains to attract investment into sectors and activities other than natural resource extraction, which accounts for more than 70% of total FDI stock, as well as retain investors already present in the economy.

Kazakhstan has been determined to make the regulatory framework more conducive to foreign investment. Reforms have resulted in the removal of obstacles to FDI so that foreign investors can now participate in almost all sectors of the national economy on an equal footing with domestic investors. While Kazakhstan is getting closer to OECD levels in terms of statutory restrictions according to the OECD FDI Regulatory Restrictiveness Index, some sectoral restrictions are still posing constraints on investment. Remaining restrictions include mass-media, where equity limits apply; fixed-line telecommunications, where authorisation is required for foreign participation above a certain threshold; security services, where foreign investment is prohibited; and the use of agricultural forestry and land. Kazakhstan also maintains somewhat burdensome conditions with regards to the employment of key foreign personnel, which apply horizontally across economic sectors, and are relatively less typical among OECD countries. Other investment impediments include the weight of the public sector in the national economy. The share of state-owned enterprises in the economy should nevertheless decrease to 15% by 2020 against over 35% in 2016.

This chapter looks at the policy framework for investment protection at the domestic and international level. A key focus is on the balancing between investor protection and the government’s power to regulate. The chapter analyses protection provisions available to all persons in the general laws and those available only to investors in specific legislation, such as certain provisions under the Entrepreneurial Code. The issue of regulatory stability is addressed separately, both for contracts and investments generally and for investments in the subsurface sector in particular. The chapter also provides an overview of dispute resolution mechanisms, such as the Kazakh court system, arbitration, and mediation, and analyses recent reform efforts. Finally, the chapter analyses Kazakhstan’s investment treaties and dispute settlement under these treaties, identifying options for their review.

Kazakhstan’s ambition of joining the top 30 most developed countries by 2050 will largely depend on its ability to create an investment-stimulating business environment, putting in place the ingredients necessary for the private sector expansion, including, more importantly than ever, diversification of investment into non-extractive industries. Kazakhstan’s tax regime is one of the key policy instruments that can either encourage or discourage investment. Kazakhstan has been offering generous tax incentives to make the investment climate more attractive. Despite on-going efforts aimed at rationalising investment incentives, the taxation regime remains somewhat complex, the country applying tax reliefs that vary depending on the type of investment, its location or activity. There is uncertainty as to whether they meet their intended objectives. In general, there has been inadequate analysis to assess their effectiveness. Establishing mechanisms to regularly evaluate the costs and benefits of tax incentives would help assess them against their intended policy objectives as well as the associated fiscal cost.

The legal regime faced by foreign investors, the protection granted to them, and the design of the country’s tax policy are only a part of the overall investment environment. The quality of domestic regulations and administrative procedures, the incidence of corruption as well as policy transparency and coherence also influence countries’ ability to attract and retain investment. Kazakhstan has recently undertaken many steps to improve the quality of its overall investment climate, including through administrative simplification, changes to the regulatory process and efforts to reduce corruption and other forms of unfair treatment of businesses. In many areas it is too early to assess the impact of recent legal changes while, in others, challenges related to implementation and enforcement persist.

In 2015, after a 19-year long negotiation process, Kazakhstan joined the World Trade Organisation (WTO). The event has marked a milestone in the country’s trade reform process and cemented the trade liberalisation under way. Still, to help reduce high trade costs faced by firms and overcome the geographical disadvantage related to the country’s landlocked position, further reforms are necessary, in particular in the area of trade facilitation and reducing regulatory barriers to trade. Closer economic integration via deep free trade agreements (FTAs) as well as committed domestic reform and investment in infrastructure will play an important role in this process.

Responsible business conduct (RBC) is an important part of the investment climate and is increasingly integrated within policies aimed at attracting better quality investment and enhancing sustainable development. In line with global trends, RBC has also emerged as an important topic in Kazakhstan. Kazakhstan’s adherence to the Declaration, and, in particular, the establishment of a National Contact Point for the OECD Guidelines for Multinational Enterprises, is an opportunity to further promote RBC principles and standards, both within the government and with the wider public, and to further clarify and set out the government’s expectations on RBC.