Executive summary

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.

Over the past few years, Kazakhstan has made significant progress in improving its investment regime and business environment. The government has notably lifted foreign equity restrictions in air transport and fixed-line telecommunications, allowing for complete foreign ownership. These reforms have brought Kazakhstan closer to OECD standards. As part of its accession to the World Trade Organization (WTO) in 2015, Kazakhstan has also begun to simplify the procedures for hiring foreigners. Additional changes, expected to be implemented within five years of Kazakhstan’s accession to WTO, will support an even more open environment for foreign investors. WTO accession has also led to far-reaching changes in Kazakhstan’s trade regime, in particular in services; further reductions of trade barriers are expected in the future to facilitate trading activities.

Kazakhstan has also made important efforts to provide adequate levels of investment protection and effective dispute resolution mechanisms. It has also steadily simplified establishment and licensing procedures over the past years, a progress which has been reflected in the country’s improved World Bank Doing Business rankings: at the end of 2016, Kazakhstan ranked 35th out of 190 countries – an improvement of 16 places since 2015. The enactment of a new Public Private Partnership law in 2015 and the upgrading of the concession law seek to propel infrastructural development. Tax reforms are also under way in order to increase revenues, which may result in better tax transparency and revisited investment incentives schemes.

Additional efforts are required, however. To be successful, the ambitious plan to attract more foreign investment must be supplemented by further governance reforms, clearer strategies for attracting FDI, and proving to foreign investors that the institutional system is transparent and accountable. More should also be done to foster domestic entrepreneurship and local skills: despite a number of initiatives to strengthen the important economic role of SMEs, the SME contribution to GDP and the share of population employed in the SME sector remain low when compared with other emerging economies and OECD countries.

Another central determinant of Kazakhstan’s capacity to attract FDI is the extent to which the regulations and laws governing economic activity are conducive to competition. State and natural monopolies still apply in some significant sectors such as oil transport via trunk pipelines, transmission of electricity, ports and airports, and railways, sectors which are vital for trade and investment in a country the size of Kazakhstan. In addition, several sectors of the Kazakh economy remain difficult to access in practice for investors, due to the prominence of state-owned enterprises (SOEs), despite an active policy of market liberalisation over the past decades. By some measures, SOEs account for approximately 35% to 40% of Kazakhstan’s GDP. Given the significant presence of SOEs in many sectors of the economy that have been opened up to market forces, it is important to ensure that they are, to the greatest possible extent, subject to the same competition and corporate disciplines as private enterprises. The government of Kazakhstan is moving in the direction of adhering to high standards of corporate governance. It is also conducting a large-scale privatisation programme which should decrease the SOEs’ share in the economy to 15% by 2020.

The success of Kazakhstan in attracting more investment will also hinge on the authorities’ management of one of the main concerns of investors: bribery, favouritism and other forms of unfair treatment of business. The authorities appear committed to cleansing the system of corruption. The real test will however be met only through determined implementation of actions on the ground.

Creating an enabling environment for business to act responsibly and meeting the duty to protect the public interest from potential negative impacts of business activities will also help to retain and attract responsible investors, ensure broader value creation and promote more sustainable development. Recent efforts to raise the quality of investment, notably in the extractive sectors and with regards to environment, are crucial for more inclusive growth. Issues nevertheless remain particularly acute in the areas of human rights and employment and industrial relations. The establishment of Kazakhstan’s National Contact Point should be at the centre of the efforts and reforms – whose role is to promote awareness of the OECD Guidelines for Multinational Enterprises as they relate to ensure that supply chain responsibility – a key issue for a more responsible and inclusive globalisation – becomes a regular way of doing business.

This Review describes the most recent reforms. Its purpose is to help the government of Kazakhstan prioritise its actions for improving the framework conditions for investment by providing a broad set of recommendations to make the country an even better place in which to live and invest. The information in this Review is current as of 1 January 2017.