1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The government of Armenia officially welcomes foreign investment. The Ministry of Economy is the main government body responsible for the development of investment policy in Armenia. Armenia has achieved respectable rankings on some global indices measuring the country’s business climate. Armenia’s investment and trade policy is relatively open; foreign companies are entitled by law to the same treatment as Armenian companies. Armenia has strong human capital and a well-educated population, particularly in the science, technology, engineering, and mathematics fields, leading to significant investment in the high-tech and information technology sectors. Many international companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists and position within the Eurasian Economic Union (EAEU). However, many businesses have identified challenges with Armenia’s investment climate in terms of the country’s small market (with a population of less than three million), limited consumer buying power, relative geographic isolation due to closed borders with Turkey and Azerbaijan, and concerns related to weaknesses in the rule of law.
Following a revolution in April/May 2018 fueled in large measure by popular frustration with endemic corruption, Armenia’s government launched a high-profile anti-corruption campaign. The campaign has yielded a number of high-profile cases. Beyond these successes, the fight against corruption needs to be institutionalized in the long term, especially in critical areas such as the judiciary, tax and customs operations, and health, education, military, and law enforcement sectors. Foreign investors remain concerned about the rule of law, equal treatment, and ethical conduct by government officials. U.S companies have reported that the investment climate is tainted by a failure to enforce intellectual property rights. There have been concerns regarding the lack of an independent and strong judiciary, which undermines the government’s assurances of equal treatment and transparency and reduces access to effective recourse in instances of investment or commercial disputes. Concerns about equal treatment, particularly on the basis of nationality, are fueled by perceptions of the uneven application of laws and regulations across enterprises in specific industries. Representatives of U.S. entities have raised concerns about the quality of stakeholder consultation by the government with the private sector and government responsiveness in addressing concerns among the business community. Government officials have publicly responded to private sector concerns about perceptions of slow movement in the government bureaucracy as a function of needing to guard against corruption-related risks. The Armenian National Interests Fund and Investment Support Center are responsible for attracting and facilitating inward foreign direct investment.
Limits on Foreign Control and Right to Private Ownership and Establishment
There are very few restrictions with regard to limitations on foreign ownership or control of commercial enterprises. There are some restrictions on foreign ownership within the media and commercial aviation sectors. Local incorporation is required to obtain a license for the provision of auditing services.
The Armenian government does not maintain investment screening mechanisms for foreign direct investment in particular. Government approval is required to take advantage of certain tax and customs privileges, and foreign investors are subject to the same requirements as domestic investors where regulatory approvals may be involved.
Armenia has traditionally fared well in the World Bank’s Ease of Doing Business report. The government has announced its commitment to addressing deficiencies that prevent Armenia from obtaining a higher ranking. Companies can register electronically here . This single window service was launched in 2011 and allows individual entrepreneurs and companies to complete name reservation, business registration, and tax identification processes all at once. The application can be completed in one day. An electronic signature is needed in order to be able to register online. Foreign citizens can obtain an e-signature and more detailed information from the e-signature portal . In December 2019, the government launched a new e-regulations platform that provides a step-by-step guide for business and investment procedures. The platform is available here . According to the World Bank’s most recent Ease of Doing Business report, it takes four days to complete the company registration process in Armenia.
The Armenian government does not restrict domestic investors from investing abroad.
4. Industrial Policies
Armenia offers incentives for exporters (e.g., no export duty, VAT refund on goods and services exported) and foreign investors (e.g. income tax holidays, the ability to carry forward losses indefinitely, VAT deferral, and exemptions from customs duties for investment projects). Starting in 2018, the Armenian government began exempting imports of capital investment-related goods from VAT payments at the border. In 2015, the Armenian government began exempting from customs duties investment-related imports of equipment and raw materials from non-EAEU member countries. VAT and customs duties exemptions are implemented by government decisions made on a case-by-case basis. Also, in accordance with the Law on Foreign Investment, several ad hoc incentives may be negotiated on a case-by-case basis for investments that are targeted at certain sectors of the economy or are of strategic interest. As part of its response to COVID-19, the government launched several economic response and social support measures in 2020, including to subsidize commercial lending, promote investment in agriculture and other industries, and create an investment fund with authority to undertake equity investment alongside private investors.
Foreign Trade Zones/Free Ports/Trade Facilitation
In June 2011, Armenia adopted a Law on Free Economic Zones (FEZ), amended in October 2018, and developed several key regulations to attract foreign investments into FEZs: exemptions from VAT, profit tax, customs duties, and property tax. The Alliance FEZ was opened in August 2013 to focus on high-tech industries, including information and communication technologies, electronics, pharmaceuticals and biotechnology, architecture and engineering, industrial design, and alternative energy. In 2014, the government expanded operations in the Alliance FEZ to include industrial production. In 2015, the Meridian FEZ, focused on jewelry production, watchmaking, and diamond cutting, opened in Yerevan. The Meghri FEZ, located on Armenia’s border with Iran, opened in 2017. A new FEZ, located in Hrazdan, opened in late 2018 and is focused on the high-tech and information technology sectors. Armenia has signaled an interest in developing logistics hubs, including one in Gyumri, to facilitate goods trade.
Performance and Data Localization Requirements
There are no performance requirements for investment in terms of mandating local employment. The processes for obtaining visas, residence, or work permits are straightforward. There are no government-imposed conditions on permission to invest.
Armenia does not follow any policy that would force foreign investors to use domestic content in goods and technology. There are no requirements for foreign information technology providers to turn over source code or provide keys for encryption. There are no requirements to store data within the country.
5. Protection of Property Rights
Armenian law protects secured interests in property, both personal and real. Armenian law provides a basic framework for secured lending, collateral, and pledges and provides a mechanism to support modern lending practices and title registration. According to Armenia’s constitution, foreign citizens are prohibited from owning land, though they may take out long-term leases. In the World Bank’s 2020 Ease of Doing Business report, Armenia ranked 13th among 190 economies for the ease of registering property. Lack of clear title to land is generally not an issue in Armenia. The World Bank observes that while all land plots in Armenia are mapped, some may not be formally registered with the body responsible for immovable property registration.
Intellectual Property Rights
Armenia has a strong legislative and regulatory framework to protect intellectual property rights (IPR). Domestic legislation, including the 2006 Law on Copyright and Related Rights, provides for the protection of copyright with respect to literary, scientific, and artistic works (including computer programs and databases), patents and other rights of invention, industrial design, know-how, trade secrets, trademarks, and service marks. The Intellectual Property Agency (IPA) in the Ministry of Economy is responsible for granting patents and overseeing other IPR-related matters. The collective management organization ARMAUTHOR manages authors’ economic rights. Trademarks and patents require state registration by the IPA, but copyright does not. There is no special trade secret law in Armenia, but the protection of trade secrets is covered by Armenia’s Civil Code. Formal registration is straightforward, the database of registered IPR is public, and applications to register IPR are published online for two months for comment by third parties. Armenia’s legislation has been harmonized with the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
In 2005, Armenia created an IPR Enforcement Unit in the Organized Crime Department of the Armenian Police, which acts only based on complaints from right holders and does not exercise ex-officio powers.
Despite the existence of relevant legislation and executive government structures, the concept of IPR remains unrecognized by a large part of the local population. The onus for IPR complaints rests with the offended party. The police assert that the majority of cases are settled through out-of-court proceedings. While the Armenian government has made some progress on IPR issues, strengthening enforcement mechanisms remains necessary. UNCTAD reports that low awareness and poor monitoring of IPR violations harm the business climate.
A new Law on Copyright has been drafted. It includes provisions from new international agreements (Marrakesh and Beijing Treaties). A new Law on Patents and Law on Industrial Design have been adopted by the parliament. The new Law on Patents strengthens the requirement for substantive examination before rights registration and introduces the concept of a short-term patent. The new Law on Industrial Design includes some procedural changes, including publishing applications for industrial designs and objects during the state registration process.
Armenia is not included in USTR’s Special 301 Report or Notorious Markets List.
The banking system in Armenia is sound and well-regulated, but the financial sector is not highly developed, according to investors. Banking sector assets account for over 80 percent of total financial sector assets. Financial intermediation tends to be poor. Nearly all banks require collateral located in Armenia, and large collateral requirements often prevent potential borrowers from entering the market. U.S. businesses have noted that this creates a significant barrier for small- and medium-sized enterprises and start-up companies.
The Armenian government welcomes foreign portfolio investment and there is a supporting system and legal framework in place. Armenia’s securities market is not well developed and has only minimal trading activity through the Armenia Securities Exchange, though efforts to grow capital markets are underway. Liquidity sufficient for the entry and exit of sizeable positions is often difficult to achieve due to the small size of the Armenian market. The Armenian government hopes that as a result of pension reforms in 2014, which brought two international asset managers to Armenia, capital markets will play a more prominent role in the country’s financial sector. Armenia adheres to its IMF Article VIII commitments by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms and foreign investors are able to access credit locally.
Money and Banking System
Since 2020, the banking sector has withstood the twin shocks created by COVID-19 and the Nagorno-Karabakh conflict. Indicators of financial soundness, including capital adequacy and non-performing loan ratios, have remained broadly strong, though with some deterioration more recently. The sector is well capitalized and liquid. Non-performing loans have ticked upward slightly from rates of around five percent of all loans. Dollarization, historically high for deposits and lending, has been falling in recent years. There are 17 commercial banks in Armenia and 13 universal credit organizations. There are extensive branch networks throughout Armenia. At the end of 2020, the top three Armenian banks by estimated total assets were Ameriabank (909 billion Armenian drams (AMD), or $1.7 billion), Armbusinessbank (889 billion AMD, or $1.7 billion), and Ardshinbank (880 billion AMD, or $1.7 billion). The minimum capital requirement for banks is 30 billion AMD (around $58 million). There are no restrictions on foreigners to open bank accounts. Residents and foreign nationals can hold foreign currency accounts and import, export, and exchange foreign currency relatively freely in accordance with the Law on Currency Regulation and Currency Control. Foreign banks may establish a subsidiary, branch, or representative office, and subsidiaries of foreign banks are allowed to provide the same types of services as domestically-owned banks.
The Central Bank of Armenia (CBA) is responsible for the regulation and supervision of the financial sector. The authority and responsibilities of the CBA are established under the Law on the Central Bank of Armenia. Numerous other articles of legislation and supporting regulations provide for financial sector oversight and supervision.
Foreign Exchange and Remittances
Armenia has no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, or management or technical service fees. Most banks can transfer funds internationally within two to four days. Armenia maintains the Armenian dram as a freely convertible currency under a managed float. The AMD/USD exchange rate has been generally stable in recent years, but the dram experienced a notable depreciation against the dollar following the fall 2020 intensive fighting in the Nagorno-Karabakh conflict. The depreciation was stemmed in part by sales of foreign exchange reserves by the CBA. The CBA maintains levels of reserves that are broadly seen as adequate.
According to the Law on Currency Regulation and Currency Control, prices for all goods and services, property, and wages must be set in AMD. There are exceptions in the law, however, for transactions between resident and non-resident businesses and for certain transactions involving goods traded at world market prices. The law requires that interest on foreign currency accounts be calculated in that currency, but paid in AMD.
Armenia imposes no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, lease payments, private foreign debt, or management or technical service fees.
Sovereign Wealth Funds
Armenia does not have a sovereign wealth fund.
8. Responsible Business Conduct
There is not a widespread understanding of responsible business conduct (RBC) in Armenia, but several larger companies with foreign ownership or management are introducing the concept. Initiatives, where they do exist, are primarily limited to corporate social responsibility efforts. However, RBC programs that do exist are viewed favorably. Some civil society groups and business associations are playing a more active role to promote RBC and develop awareness.
Major pillars of corporate governance in Armenia include the Law on Joint Stock Companies, the Law on Banks and Banking Activity, the Law on Securities Market, and a Corporate Governance Code. International observers note inconsistencies in this legislation and generally rate corporate governance practices as weak to fair. Specific areas for potential improvement cited by the local business community include improving internal and external auditing for firms, enhancing the powers of independent directors on company boards, and boosting shareholders’ rights. Armenia has outlined commitments to corporate governance reforms, including with regard to mandatory audit, accounting, and financial reporting, within the context of an ongoing Stand-By Arrangement with the International Monetary Fund.
Armenia joined the Extractive Industries Transparency Initiative (EITI) in March 2017 as a candidate country. The first EITI national report for Armenia was published in January 2019. As part of its EITI membership aspirations, the government in March 2018 adopted a roadmap to disclose beneficial owners in the metal ore mining industry. Relevant implementing legislation, including for beneficial ownership disclosure, was adopted in 2019.
Armenia is not a signatory to the Montreux Document on Private Military and Security Companies, and no Armenian party is a member of the International Code of Conduct for Private Security Providers’ Association.
Domestic laws and regulations related to labor, employment rights, consumer protection, and environmental protection are not always enforced effectively. These laws and regulations cannot be waived to attract foreign investment.
Despite the challenges facing Armenia due to the dual shocks of COVID-19 and the Nagorno-Karabakh conflict, the Armenian government’s commitment to eradicating corruption continues. Policy action and systemic change remain strong, and the government has pressed forward with legislative actions to establish investigative and judicial anti-corruption bodies. The government’s anti-corruption agenda is outlined in a 2019–2022 strategy and implementation plan. These documents establish a new anti-corruption institutional framework with separate entities tasked with preventive and investigative functions, set out specific measures for strengthening these functions, and prioritize strategic communication and public education to give citizens ownership of anti-corruption reforms.
The government took concrete steps in 2020 to establish and develop four key anti-corruption institutions: 1) the Corruption Prevention Commission (CPC), which conducts integrity checks on judges and other key justice sector personnel; 2) a civil asset forfeiture department within the Prosecutor General’s Office (PGO); 3) an anti-corruption court; and 4) a new anti-corruption investigative body. The CPC and PGO asset forfeiture department are already established, while the anti-corruption court and investigative body are expected to launch before the end of 2021. International experts are expected to play a role in the selection process for anti-corruption court judges and the head of the new anti-corruption investigative agency, which will serve to improve the legitimacy of the court’s judges and the investigative agency’s leadership.
The government has increased corruption investigations against mid- and high-level government officials since the 2018 revolution. Investigation targets include those appointed by the government that took power following the revolution. Numerous high-ranking officials have stated publicly that corruption within their respective institutions will no longer be tolerated. Though some report that the government has mainly targeted ex-government officials in corruption investigations, there is no indication that Armenia’s anti-corruption laws are being applied by the post-revolutionary government in a discriminatory manner. Armenia’s anti-corruption laws extend to all Armenian citizens.
Corruption remains a significant obstacle to U.S. investment in Armenia, particularly as it relates to critical areas such as the justice system and concerns related to the rule of law, enforcement of existing legislation and regulations, and equal treatment. Investors claim that the health, education, military, corrections, and law enforcement sectors lack transparency in procurement and have in the past used selective enforcement to elicit bribes. Judges presiding over civil matters are still widely perceived by the public to be corrupt and under the influence of former authorities. Anecdotal allegations of corruption or unethical behavior by sitting officials and associates, while less common than in the past, continue to arise and have dampened business sentiment. Although bribery is illegal in Armenia, the government does not actively encourage private companies to establish internal codes of conduct. Several multinational companies, select local companies, and foreign and local companies working with international financial institutions have implemented corporate governance mechanisms to tackle corruption internally. However, such corporate governance principles are not widely implemented among local companies.
According to Transparency International’s 2020 Corruption Perceptions Index, Armenia made the second-best improvement in the world and received a score of 49 out of 100, ranking it 60th among 180 countries. This reflects an improvement by 17 places over 2019.
Armenia’s ability to counter, deter, and prosecute corruption has historically been hindered by the lack of robust enforcement of official disclosure laws meant to prevent corrupt officials from entering and retaining positions of authority and influence. The objective and systematic scrutiny of declarations by government officials had been lacking due to dysfunction within the Commission on Ethics of High-Ranking Officials, but is gradually improving with the establishment of the CPC in November 2019. The CPC has inherited responsibility for scrutinizing officials’ declarations and is scheduled to launch a fully automated system for declarations of assets, income, and conflicts of interest. The CPC has also conducted integrity checks and issued opinions on nominees to public positions. According to international evaluations, Armenian authorities have limited capacities to investigate money laundering and bring such cases to prosecution.
Various laws prohibit the participation of civil and municipal servants, as well as local government elected officials such as mayors and councilors, in commercial activities. However, powerful officials at the national, district, and local levels often acquire direct, partial, or indirect control over private firms. Such control is often exercised through a hidden partner or majority ownership of fully private parent companies. This involvement can occur through close relatives and friends. According to foreign investors, these practices reinforce protectionism, hinder competition, and undermine the image of the government as a facilitator of private sector growth. Because of the historically strong interconnectedness of the political and economic spheres, Armenia has often struggled to introduce legislation to encourage strict ethical codes of conduct and the prevention of bribery in business transactions. In 2016, Armenia adopted legislation on criminal penalties for illicit enrichment and noncompliance or fraud in filing declarations.
Armenia is a member of the UN Convention against Corruption. While not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Armenia is a member of the OECD Anti-Corruption Network for Eastern Europe and Central Asia and has signed the Istanbul Action Plan. A monitoring report released by the OECD in 2018 cited Armenia’s lack of enforcement of anti-corruption laws, together with the continued presence of oligopolistic interests in the economy, as points of serious concern. The report contains a series of recommendations, including to take bold measures to ensure judicial and prosecutorial independence and integrity, introduce corporate liability for corruption offenses, investigate and prosecute high profile and complex corruption cases, and increase transparency and strengthen monitoring in public procurement. Armenia is also a member of the global Open Government Partnership initiative.
No specific law exists to protect NGOs dealing with anti-corruption investigations.
Resources to Report Corruption
For investigating corruption:Investigation Department of Corruption, Organized and Official CrimesSpecial Investigation Service of Armenia13A Vagharsh Vagharshyan StreetYerevan, Armenia+374 11 900 002 email@example.com
For prosecuting corruption:Artur ChakhoyanHead of Department for Combating Corruption and Economic CrimesRA Prosecutor General’s Office5 V. Sargsyan StreetYerevan, Armenia+374 10 511 655 firstname.lastname@example.org
For financial and asset declarations of high-level officials:Haykuhi HarutyunyanChairpersonCorruption Prevention Commission24 Baghramyan StreetYerevan, Armenia email@example.com
Watchdog organization:Sona Ayvazyan
Transparency International Anti-Corruption Center
12 Saryan Street
+374 10 569 589 firstname.lastname@example.org
10. Political and Security Environment
Armenia has a history of political demonstrations, some of which have turned into violent confrontations between the police and protesters. The last major violent protest occurred in November 2020 following the release of a tripartite ceasefire statement by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Nagorno-Karabakh conflict. Individuals and groups displeased with the announcement stormed government buildings and destroyed property. Protestors assaulted the speaker of parliament in the streets of Yerevan and broke into the prime minister’s residence. Since the release of the tripartite statement, groups opposed to the government have organized regular marches and rallies in Yerevan that have remained largely peaceful and caused minimal disruption to ordinary business. Pro-government groups have also organized peaceful rallies, although less frequently. Throughout Armenia, protestors use road blockades as a common tactic to register discontent, most often with the government over community-level issues. The disruption created by such road blockades is usually minimal. Protests have not resulted in any damage to projects of installations of international businesses. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.
11. Labor Policies and Practices
Armenia’s human capital is one of its strongest resources. The labor force is generally well educated, particularly in the science, technology, engineering, and mathematics fields. Almost 100 percent of Armenia’s population is literate. According to official information, enrollment in secondary school is over 90 percent, and enrollment in senior school (essentially equivalent to American high school) is about 85 percent. Despite this, official statistics indicate a high rate of unemployment, at around 20 percent. Unemployment is particularly pronounced among women and youth, and significant underemployment is also a problem.
Considerable foreign investment in Armenia has occurred in the high-tech sector. High-tech companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists in electrical and computer engineering, optical engineering, and software design. There is a shortage of workers with vocational training. About 20 percent of the non-agricultural workforce is employed in the informal economy, primarily in the services sector. Armenian law protects the rights of workers to form and to join independent unions, with exceptions for personnel of the armed forces and law enforcement agencies. The law also provides for the right to strike, with the same exceptions, and permits collective bargaining. The law stipulates that workers’ rights cannot be restricted because of membership in a union. It also differentiates between layoffs and firing with severance. According to some reports, labor organizations remain weak because of employer resistance, high unemployment, and unfavorable economic conditions; collective bargaining is not common in Armenia. Experts observe that the right to strike, although enshrined in the constitution, is difficult to realize due to mediation and voting requirements. However, since the 2018 change of government, there have been consistent reports of grassroots movements to create unions in various spheres, including for doctors, teachers, and academics. Still, traditional labor unions are generally inactive with the exception of those connected with the mining and chemical industries. Labor laws cannot be waived to retain or attract investment.
The current Labor Code is considered to be largely consistent with international standards. The law sets a standard 40-hour workweek, with 20 days of mandatory annual paid leave. However, there are consistent reports that many private sector employees, particularly in the service sector, are unable to obtain paid leave and are required to work more than eight hours a day without additional compensation. The treatment of labor in FEZs is no different than elsewhere in the country. Employers are generally able to adjust employment in light of fluctuating market conditions. Severance in general does not exceed 60 working days. Benefits for workers laid off for economic reasons are mostly limited to receiving qualification trainings and job search assistance.
Individual labor disputes can usually be resolved through courts; however, the courts are often overburdened, causing significant delays. Collective labor disputes should be resolved through collective bargaining.
Since 2019, Armenia’s Health and Labor Inspection Body (HLIB) has gradually begun to exercise more robust enforcement of labor legislation and fulfill its oversight function, with its full mandate scheduled to come into force in July 2021. Throughout 2020, the government adopted inspection checklists and risk assessment methodologies to enable HLIB to carry out inspections. HLIB also continued to add new inspectors throughout the year and carried out 27 inspections in the mining sector.
Amendments to the Labor Code that entered into force in 2015 clarified the procedures for making changes in labor contracts and further specified the provisions required in labor contracts, notably those relating to probationary periods, vacation, and wage calculations.
The current legal minimum wage is AMD 68,000 (approximately $130) per month. Most companies pay an unofficial extra-month bonus for the New Year’s holiday. Wages in the public sector are often significantly lower than those in the private sector. 12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Attracting FDI is one of the government’s stated foreign policy priorities; net inflows of FDI have been included in the list of government performance targets since December 2015. The GOB has no specific requirements for foreigners wishing to establish a business in Belarus. Despite this official pro-investment stance, both the central and local governments’ policies reflect a deeply rooted, Soviet-style distrust of private enterprise – whether local or foreign. Technically the legal regime for foreign investments should be no less advantageous than the domestic one, yet FDI in many key sectors is limited, particularly in the petrochemical, agricultural, and alcohol production industries. FDI is prohibited for national security reasons in defense as well as production and distribution of narcotics and dangerous and toxic substances. FDI can also be restricted in activities and operations prohibited by law or in the interests of environmental protection, historical, and cultural values, public order, morality protection, public health, and rights and freedoms of individuals. Investments in businesses that have a dominant position in the commodity markets of Belarus are not allowed without approved by the Ministry of Trade and Antimonopoly Regulation.
Belarusian law officially provides for equal treatment and rights for all investors and foreign investors have the same right as local investors to conduct business operations in Belarus by incorporating separate legal entities. However, selective application of existing laws and practices often discriminate against the private sector, including foreign investors, regardless of the country of their origin. Investments in sectors dominated by SOEs have been known to come under threat from regulatory bodies. Local business owners and independent media observe that selective law enforcement and unwritten practices discriminate against private businesses, including those operated by foreign investors regardless of their country of origin. Serious concerns remain about the independence of the judicial system and its ability to objectively adjudicate cases rather than favor the powerful central government and state companies.
Belarus’ investment promotion agency is the National Agency of Investments and Privatization (NAIP). The NAIP is tasked with representing the interests of Belarus as it seeks to attract FDI into the country. The NAIP is a one-stop shop with services available to all investors, including: organizing fact-finding missions to Belarus; assisting with visa formalities; providing information on investment opportunities, special regimes and benefits, and procedures necessary for making investment decisions; selecting investment projects; and providing solutions and post-project support. https://investinbelarus.by/en/naip-and-what-we-do/
To maintain an ongoing dialogue with investors, Belarus has established the Foreign Investment Advisory Council (FIAC) chaired by the Prime Minister. FIAC activities include: developing proposals to improve investment legislation; participating in examining corresponding regulatory and legal acts; and approaching government agencies for the purpose of adopting, repealing or modifying the regulatory and legal acts that restrict the rights of investors. The FIAC includes the heads of government agencies and other state organizations subordinate to the GOB, as well as heads of international organizations and foreign companies and corporations.
Limits on Foreign Control and Right to Private Ownership and Establishment
While the GOB claims foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity, in reality the GOB imposes limits on a case-by-case basis. The limits on foreign equity participation in Belarus are above the average for the 20 countries covered by the World Bank Group’s Investing Across Borders indicators for Eastern Europe and the Central Asia region. Belarus limits foreign equity ownership in service industries in particular. Sectors such as fixed-line telecommunications services, electricity transmission and distribution, and railway freight transportation are closed to foreign equity ownership. In addition, a comparatively large number of sectors are dominated by government monopolies, including, but not limited to, those mentioned above. Those monopolies make it difficult for foreign companies to invest in Belarus. Finally, the government may restrict investments in the interests of national security (including environmental protection, historical and cultural values), public order, morality protection, and public health, as well as rights and freedoms of people.
While Belarus has no formal national security investment screening mechanism, it retains significant elements of a Soviet-style command economy and screens investments through an informal and hierarchical process that escalates through the bureaucracy depending on the size of the investment or the size of incentives an investor seeks from the GOB. The President and his administration prescreen and approve even multi-million-dollar foreign investments.
Additionally, Belarus’ Ministry of Antimonopoly Regulation and Trade is responsible for reviewing transactions for competition-related concerns (whether domestic or international).
According to the GOB’s Strategy for Attracting FDI, priority sectors include pharmaceuticals, biotechnology, medical equipment, nanotechnologies and nanomaterials, optics and electronics, electric transport vehicles, 5G communications networks, and the information technology and telecommunications sector generally. The NAIP maintains a database of investment proposals at: https://map.investinbelarus.by/en/investbase/offers/ .
The GOB offers various incentives and programs for FDI depending on the sector and industry. GOB enters into specific investment agreements with other governments and may accord preferential incentives and benefits including but not limited to:
Allocation of a land plot without auctioning the right to lease it
Removal of vegetation without compensation during construction
Full VAT deduction for the purchase of goods, services (works) or property rights
Exemption from import tariffs and VAT on the imports of production equipment
Exemption from fees for the right to conclude a land lease
Exemption from duties for employing foreign nationals
Exemption from compensation for losses sustained by the agriculture and/or forestry industries due to the use of a land plot under the investment agreement
Exemption from land tax on land plots in government or private ownership, and from rent on land plots in government ownership, for a period starting from the first day of the month in which the investment agreement came into effect until December 31 of the year following the year in which the last of the facilities scheduled under the investment agreement started operations.
Investment agreements concluded under the decision of the Belarusian Council of Ministers and with the permission of the President of Belarus may offer additional incentives and benefits not expressly provided for in legislation. Such incentives are provided on a case-by-case basis.
Foreign Trade Zones/Free Ports/Trade Facilitation
Each of Belarus’ six regions has its own free economic zone (FEZ): Minsk, Brest, Gomel-Raton, Mogilev, Grodno Invest, and Vitebsk. The tax and regulatory pattern applicable to businesses in these zones is simpler and lower than elsewhere in Belarus. To become a FEZ resident, an investor needs to make a minimal investment of EUR 1 million, or at least EUR 500,000 provided the entire sum is invested during a three-year period, as well as engage in the production of import-substituting products or goods for export.
In 2005, the President of Belarus signed the edict that established uniform rules for all FEZs. The list of main tax benefits for FEZ residents was revised in 2016 to include certain exemptions from the corporate profit tax (CPT), real estate tax, land tax, and rent on government-owned land plots located within the boundaries of the FEZ, among others. As of 2017, FEZ residents benefit from a simplified procedure of export-import operations. Resident enterprises are exempt from customs duties and taxes on facilities, construction materials, other equipment used in implementation of their investment projects. They are also exempt from customs duties and taxes on raw materials and materials used in the process of manufacture of the products sold outside the territory of the Eurasian Economic Union. Otherwise, FEZ residents pay VAT, excise duties, ecological tax, natural resource extraction tax, state duty, patent duties, offshore duty, stamp duty, customs duties and fees, local taxes and duties, and contributions to the Social Security Fund according to the general guidelines. For more details please visit:
Created in 2005 to foster development of the IT and software industry, the High Technology Park (Hi-Tech Park or HTP) is a “virtual” legal regime that extends over the entire territory of Belarus. A physical campus of the HTP is found in the eastern part of Minsk and a satellite campus is located in Hrodna. The legislation behind the HTP was updated in 2017 with the signing of Presidential Decree No. 8 “On the Development of the Digital Economy.” The decree extended the HTP preferences from 2022 until 2049 and expanded the list of business activities in which HTP residents may engage, including but not limited to: software development; data processing; cryptocurrency and token-related activity; data center services; development and deployment of Internet-of-Things technologies; ICT education; and cybersports.
The HTP provides residents with beneficial tax preferences, including but not limited to: exemptions from VAT and CPT on sale of goods or services; exemptions from customs duty and VAT on certain kinds of equipment imported into Belarus for use in investment projects; immovable property tax and land tax benefits with regard to buildings and land within the boundaries of the HTP campuses; and caps on personal income tax at five percent for foreign entities. However, a cap on personal income tax at nine percent for employees was removed in late 2020 and the HTP’s employees must pay a regular income tax of 13 percent. Some analysts said that the tax increase was a politically motivated decision taken in response to IT workers taking part in pro-democracy demonstrations. Shortly after the fraudulent August 2020, hundreds of IT executives signed an open letter calling for the release of all political prisoners and for free and fair elections, arguing that the authorities’ violent response to peaceful protestors was damaging Belarus’s business climate and would prompt IT professionals and companies to consider leaving Belarus.
Foreign nationals who are hired on contract by an HTP resident company, or who are founders of a HTP resident company, or who are employed by such founders, are eligible for visa-free entry into Belarus for a stay of up to 180 days a year. Foreigners employed by HTP residents are not required to have working permit in Belarus and are entitled to apply for a temporary residence permit for the duration of their contract.
Government agencies are not allowed to inspect the operations of HTP residents without prior consent of the HTP Administration.
The Great Stone Industrial Park is a special economic zone of approximately 112.5 square kilometers located adjacent to the Minsk National Airport and Belarusian highway M1, which connects Moscow to Berlin. Great Stone resident companies also have access to Lithuania’s Klaipeda seaport on the Baltic Sea. According to a master plan approved in 2013, Great Stone will eventually include production facilities, dormitories and residential areas for workers, offices and shopping malls, and financial and research centers. Great Stone is primarily a Belarus-China joint venture but any company – regardless of its country of origin – can apply to join the industrial park. Interested companies must submit either a business project worth at least USD 500,000, to be invested within three years from the moment of the business’ registration; or submit a business project worth at least USD 5 million without any time limit for investment; or submit a business project worth at least USD 500,000 tied to research and development.
As of 2020, Great Stone residents receive, among other preferences, certain exemptions on income tax, real estate and land taxes, and dividend income; the right to import goods, including raw materials, under a preferential customs regime; full VAT repayment on goods used for the design, building, and equipment of facilities in Great Stone; exemptions from environmental compensatory payments; and a preferential entry/exit program allowing Great Stone residents and their employees to stay in Belarus without a visa for up to 180 days. Great Stone residents are also exempt from any new taxes or fees through 2027 should the government make adverse changes to the tax code. Great Stone residents are also permitted to purchase land in the zone; foreign land ownership in the rest of Belarus is highly restricted. The special preferential legal regime of Great Stone will be valid until 2062. The list of priorities planned for implementation in the park include projects in electronics, biomedicine, chemistry, and mechanical engineering.
Small and medium-sized cities and rural areas in Belarus are defined by a 2012 presidential decree as settlements with populations under 60,000. Individual entrepreneurs and legal entities working in rural settlements of less than 2,000 receive additional tax benefits and exemptions.
Since 2012, companies and individual entrepreneurs operating in all rural areas and towns enjoy the following benefits in the first seven years after registration: exemption from profit tax on the sale of goods, work, and services of a company’s own production; exemption from other taxes and duties, except for VAT, excise tax, offshore duty, land tax, ecological tax, natural resources tax, customs duties and fees, state duties, patent duties, and stamp duty; exemption from mandatory sale of foreign currency received from sale of goods, work, and services of a company’s own production, and from leasing property; no restrictions on insuring risks with foreign insurers; exemption from import tariffs on certain goods brought into Belarus that contribute to the charter fund of a newly established business. The special legal regime does not apply to banks, insurance companies, investment funds, professional participants in the securities market, businesses operating under other preferential legal regimes (e.g. FEZ or HTP), and certain other businesses.
Performance and Data Localization Requirements
The GOB does not mandate local employment. Foreign investors have the right to invite foreign citizens and stateless persons, including those without permanent residence permits, to work in Belarus provided their labor contracts comply with Belarusian law. The GOB often imposes various conditions on permission to invest and pursues localization policies. Other performance requirements are often applied uniformly to both domestic and foreign investors.
According to official Belarusian sources, licenses are not required for data storage. Law enforcement regulations governing electronic communications do not include any requirements specifically for foreign internet service providers. Beginning in 2016, internet service providers are required, by law, to maintain all electronic communications for a one-year period. IT companies operating in Belarus were not aware of any requirements for IT providers to turn over source code and/or provide access to encryption.
According to the 2020 Human Rights Report, the government monitored internet communications without appropriate legal authority and filtered and blocked internet traffic. For several days following the August 9 election, internet access and mobile communications were severely restricted. While authorities blamed foreign cyberattacks for the disruptions, independent experts attributed the disruptions to the government. Since August 2020, there have been repeated internet and mobile communications disruptions, usually coinciding with major protests and police actions to disperse them. Private internet service providers notified customers that the shutdowns were requested by the government on national security grounds. Telecommunications companies reported that authorities ordered them to restrict mobile internet data severely on the days when large-scale demonstrations occurred.
5. Protection of Property Rights
Property rights are enforced by the Civil Code. Mortgages and liens are available, and the property registry system is reliable. Investors and/or duly established commercial organizations with the participation of a foreign investor (investors) have the right to rent plots of land for up to 99 years. According to the Belarusian Land Code, foreign legal persons and individuals are denied land ownership except for land in the Great Stone Industrial Park, which foreign persons can acquire. The 2020 World Bank Doing Business Report ranked Belarus 14th on ease of property registration ( http://www.doingbusiness.org/en/data/exploreeconomies/belarus ).
Intellectual Property Rights
Belarus has made progress improving legislation to protect intellectual property rights (IPR) and prosecute violators. However, challenges for effective enforcement include a lack of sufficiently qualified officers. The United States expects Belarus to continue improving its IPR regime as part of its WTO accession negotiations and will continue to assist Belarus with technical consultations to that end. According to information provided by Belarus’ National Center of Intellectual Property, Belarus adopted a law upon Belarus’s accession to the World Intellectual Property Organization (WIPO) Marrakesh Treaty on facilitating access for the blind and visually impaired persons or people with other disabilities to printed information. Belarus received the status of a full member under this agreement in October 2020. In 2018, the government amended Article 4.5 of the Administrative Code to allow greater prosecution of industrial property and IPR violations, but authorities reported no criminal cases were pursued in 2020. In 2020, the National Center of Intellectual Property registered no complaints from U.S. companies or their representatives regarding violations of intellectual property rights.
Belarus was removed from USTR’s Special 301 Report in 2016 and is not included in the Notorious Markets List.
Belarus is a member of the World Intellectual Property Organization (WIPO) and party to the Berne Convention, the Paris Convention, the Patent Cooperation Treaty (PCT), the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty, among others. For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
6. Financial Sector
Capital Markets and Portfolio Investment
The Belarusian government officially claims to welcome portfolio investment. There have been no reports in 2020 on any impediments regarding such investment or a free flow of any financial instruments. The Belarusian Currency and Stock Exchange is open to foreign investors, but it is still largely undeveloped because the government only allows companies to trade stocks if they meet certain but often burdensome criteria. Private companies must be profitable and have net assets of at least EUR 1 million. In addition, any income from resulting operations is taxed at 24 percent. Finally, the state owns more than 70 percent of all stocks in the country, and the government appears hesitant and unwilling to trade in them freely. Bonds are the predominant financial instrument on Belarus’ corporate securities market.
In 2001, Belarus joined Article VIII of the IMF’s Articles of Agreement, undertaking to refrain from restrictions on payments and transfers under current international transactions. Loans are allocated on market terms and foreign investors are able to get them. However, the discount rate of 7.75 percent (as of March 2020) makes credit too expensive for many private businesses, which, unlike many SOEs, do not receive subsidized or reduced-interest loans.
Businesses buy and sell foreign exchange at the Belarusian Currency and Stock Exchange through their banks. Belarus used to require businesses to sell 10-20 percent of foreign currency revenues through the Belarusian Currency and Stock Exchange, however in late 2018 the National Bank abolished the mandatory sale rule.
Belarus has a central banking system led by the National Bank of the Republic of Belarus, which represents the interest of the state and is the main regulator of the country’s banking system. The President of Belarus appoints the Chair and Members of the Board of the National Bank, designates auditing organizations to examine its activities, and approves its annual report. Although the National Bank officially operates independently from the government, there is a history of government interference in monetary and exchange rate policies.
As of March 2021, the banking system of Belarus included 24 commercial banks and three non-banking credit and finance organizations. According to the National Bank, the share of non-performing loans in the banking sector was 4.8 percent as of January 1, 2021. The country’s seven largest commercial banks of systemic importance, all of which have some government share, accounted for 85 percent of the approximately USD 90.5 billion in total assets across the country’s banking sector. There are five representative offices of foreign banks in Belarus, with China’s Development Bank opening most recently in 2018. Regular banking services are widely available to customers regardless of national origin.
Belarusian law does not allow foreign banks to establish operations of their branches in Belarus. The subsidiaries of foreign banks are allowed to operate in Belarus and are subject to prudential measures and other regulations like any Belarusian bank. The U.S. Embassy is not aware of Belarus losing any correspondent banking relationships in the past three years. Foreign nationals are allowed to establish a bank account in Belarus without establishing residency status.
According to the IMF, Belarus’s state-dominated financial sector faces deep domestic structural problems and external sector challenges. Domestic structural problems include heavy state involvement in the banking and corporate sector, the lack of hard budget constraints for SOEs given state support, and high dollarization. Externally, Belarus’s economy remains exposed to spillovers from the Russian economy and Belarus’s foreign currency reserves offer a limited buffer to potential external shocks. The banking sector remains vulnerable to external shocks, given the high level of dollarization and the exposure to government and SOE debt. The political unrest following the August 2020 election led to deposit outflows from the banks, exacerbating risks to the banks’ financial portfolios. In September 2020, S&P Global Ratings downgraded Belarus’s long-term sovereign rating from stable to negative, citing the growing risks for the financial stability of Belarus’s banking system.
Foreign Exchange and Remittances
According to the GOB, Belarus’ foreign exchange regulations do not include any restrictions or limitations regarding converting, transferring, or repatriating funds associated with investment. Foreign exchange transactions related to FDI, portfolio investments, real estate purchasing, and opening bank accounts are carried out without any restrictions. Foreign exchange is freely traded in the domestic foreign exchange market. Foreign investors can purchase foreign exchange from their Belarusian accounts in Belarusian banks for repaying investments and transferring it outside Belarus without any restrictions.
Since 2015, the Belarusian Currency and Stock Exchange has traded the U.S. dollar, the euro, and the Russian ruble in a continuous double auction regime. Local banks submit bids for buying and selling foreign currency into the trading system during the entire trading session. The bids are honored if and when the specified exchange rates are met. The National Bank uses the average weighted exchange rate of the U.S. dollar, the euro, and the Russian ruble set during the trading session to set official exchange rates from the day on which the trades are made. The cross rates versus other foreign currencies are calculated based on the data provided by other countries’ central banks or information from Reuters and Bloomberg. The stated quote becomes effective on the next calendar day and is valid until the new official exchange rate come into force. The IMF lists Belarus’ exchange rate regime in the floating exchange rate category.
There were no reports of problems exchanging currency or remitting revenues earned abroad.
Sovereign Wealth Funds
Belarus does not have a Sovereign Wealth Fund. The GOB manages the State Budget Fund of National Development, which supports major economic and social projects in the country.
8. Responsible Business Conduct
Belarusian laws and policy include no notion or definition of responsible business conduct and consequently take no measures to encourage it. Independent trade unions and business associations promote the concept of responsible business conduct.
In the aftermath of the fraudulent 2020 presidential elections, civil society organizations and opposition political figures sought to draw the attention of multinational companies and foreign investors to the human rights situation in Belarus. For example, the Belarusian Congress of Democratic Trade Unions worked with a Norwegian fertilizer company that was one of the main customers of state-owned potash producer Belaruskali to improve respect for worker rights at Belaruskali. Belaruskali workers had gone on strike to protest the 2020 election and the authorities’ violent crackdown on protestors, resulting in the dismissal and criminal prosecution of workers. Civil society will likely continue to engage foreign investors and companies on political considerations in Belarus.
Belarus does not allow private military or security companies.
Official sources claim that most corruption cases involve soliciting and accepting bribes, fraud, and abuse of power, although anecdotal evidence indicates such corruption usually does not occur as part of day-to-day interaction between citizens and minor state officials. In Belarus, bribery is considered a form of corruption and is punishable with a maximum punishment of 10 years in jail and confiscation of property. The most corrupt sectors are considered to be state administration and procurement, the industrial sector, the construction industry, health care, and education. In 2020, Belarusian courts convicted 684 individuals “on corruption-related charges.” However, corruption and financial crimes charges are often used by the government for political purposes. Furthermore, the absence of independent judicial and law enforcement systems, the lack of separation of powers, and a harried independent press largely barred from interaction with a nontransparent state bureaucracy make it difficult to gauge the true scale of corruption.
Belarus has anti-corruption legislation consisting of certain provisions of the Criminal Code and Administrative Code as well as the Law on Public Service and the Law on Combating Corruption. The latter is the country’s main anti-corruption document and was adopted in 2015. Belarusian anti-corruption law covers family members of government officials and political figures. The country’s regulations require addressing any potential conflict of interests of parties seeking to win a government procurement contract. The list of such regulations include the July 13, 2012, law “On public procurement of goods (works, services),” the December 31, 2013, presidential decree “On conducting procurement procedures,” and the March 15, 2012, Council of Ministers resolution on the procurement of goods (works, services). Government organizations directly engaged in anti-corruption efforts are prosecutors’ offices, internal affairs, state security and state control agencies.
Belarus is a party to several international anti-corruption conventions and agreements. The Republic of Belarus has ratified major international anti-corruption treaties, such as the Convention of the Council of Europe 173 On criminal liability for corruption (S 173) (concluded in Strasbourg on 27 January, 1999); the United Nations Convention Against Transnational Organized Crime, signed by Belarus in Palermo on 24 December, 2000, and the United Nations Convention Against Corruption (concluded in New York on 31 October, 2003); and the Civil Law Convention on Corruption (concluded in Strasbourg on 4 November, 1999) (ratified in 2005). Belarus also signed several the intergovernmental agreements to address corruption. Belarus is currently considering joining the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
In 2019, the Council of Europe’s (COE) Group of States against Corruption (GRECO) publicly declared Belarus non-compliant with GRECO’s anti-corruption standards. This was GRECO’s first ever declaration of non-compliance. According to the COE, Belarus failed to address 20 out of 24 recommendations made in 2012; had not authorized the publication of the 2012 report or related compliance reports; and was non-responsive since 2017 to requests from GRECO to organize a high-level mission to Belarus. The majority of GRECO’s recommendations related to fundamental anti-corruption requirements, such as strengthening the independence of the judiciary and of the prosecution office, as well as increasing the operational autonomy of the law enforcement and limiting immunity protection of certain categories of persons. However, the COE contends that limited reporting indicates that corruption is particularly alarming higher up in the government hierarchy and in procurement for state-run enterprises.
According to Transparency International’s 2020 Corruption Perception Index, Belarus climbed from 66 to 63 out of 180 countries in the rankings. In Belarus’ region, Poland ranked 45, Lithuania 35, Latvia 42, Ukraine 117, and Russia 129.
Ms. Oksana Drebezova
Belarus National Contact
Levkova Street 15-113
+375 29 619 71 25
email@example.com 10. Political and Security Environment
10. Political and Security Environment
In 2020, Belarus experienced widespread peaceful protests in the leadup to and after the fraudulent August 2020 election that were met with violence by state security services. However, in the Embassy’s estimation, the potential is low for widespread, politically-inspired violence that would adversely affect foreign property interests.
11. Labor Policies and Practices
Belarus has a highly skilled, well-educated workforce, due to its advanced system of higher and specialized education. Wages are lower than in Western Europe, the United States, and Russia.
Belarus has been a member of the International Labor Organization (ILO) since 1954 and is a party to almost 50 ILO conventions. In 2004, the ILO made several recommendations regarding workers’ rights to organize and freedom of association. However, Belarus has not adequately responded to the 2004 ILO Commission of Inquiry.
The Constitution, the Labor Code, and presidential decrees are the main documents regulating the Labor Market in Belarus. Prior to the 1999 Presidential Decree No. 29, most labor contracts in the country were open-ended work agreements. Decree No. 29 established a new option to employ workers on 1-5 year-long term contracts and to transfer current employees to these new type contracts. In 2019, more than 90 percent of employees in Belarus were working on term contracts. The term contract system generally favors the employer. The employer can choose not to renew a contract upon its expiration without giving the employee a cause for dismissal. Technically, the employer can also refuse an employee’s proposed resignation before the contract term is up, which would then require the employee to argue their case in court. The employer, on the other hand, can terminate the contract at will. There are several protected employee groups that are exempt from early termination: pregnant women, women with children of up to 3 years old, and single parents with children under 14 years old. Additionally, the employer is obligated to renew contracts with women on maternity leave and with those employees who are approaching retirement age at the end of their prior contract. Retirement age in 2021 was 57.2 years for women and 62.5 years for men.
Severance pay in the case of reduction in force is 13 weeks of salary, and eight weeks’ notice is required for dismissal. However, severance pay only applies to workers on open-ended work agreements, less than 10 percent of all labor contracts in 2020. The law provides a standard workweek of 40 hours and at least one 24-hour rest period per week. Under the law, Belarusians receive mandatory overtime and nine days of holiday pay. Overtime is limited to 10 hours a week, with a maximum of 180 hours of overtime per year. A non-standard work regime is allowed provided that the employee is provided with up to seven days of additional annual leave. In general, employees must be granted at least 24 calendar days of paid leave a year.
There are special provisions on employing foreign citizens who have no permanent residence permit. Such citizens must secure a work permit, which can be usually granted only if an unemployed Belarusian citizen cannot perform the required work. To date, the Embassy has not heard of discriminatory or excessively onerous visa, residence or work permit requirements inhibiting foreign investors, nor of restrictions placed on the numbers or duration of employment of foreign managers brought in to supervise foreign investment projects. In practice, however, few firms, excluding Belarus’ IT sector, employ significant numbers of foreigners. Those that do, tend to hire Russian citizens, who benefit from Russia’s and Belarus’ common employment regulations streamlined thanks to their membership in the EAEU.
Although the law provides for the rights of workers, except state security and military personnel, to form and join independent unions and to strike, it places serious restrictions on the exercise of these rights. The government severely restricted independent unions. The law provides for the right to organize and bargain collectively but does not protect against anti-union discrimination and the government did not respect freedom of association or collective bargaining. The Department of State’s Report on Human Rights Practices for 2020 provides more information: https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/belarus/
The official unemployment rate in Belarus has been steady at or just below one percent. According to ILO methodology, unemployment in Belarus was approximately four percent. 12. U.S. International Development Finance Corporation (DFC), and Other Investment Insurance or Development Finance Programs
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward FDI
Kazakhstan has attracted significant foreign investment since independence. As of January 1, 2021, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 166.4 billion, primarily in the oil and gas sector. International financial institutions consider Kazakhstan to be a relatively attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.
In 2017, Kazakhstan adhered to the OECD Declaration on International Investment and Multinational Enterprises, meaning it committed to certain investment standards, including the promotion of responsible business conduct..
In its Strategic Plan of Development to 2025, the government stated that bringing up the living standards of Kazakhstan’s citizens to the level of OECD countries is one of its strategic goals.
In addition to earlier approved program documents, the President adopted a National Development Plan to 2025 in February 2021. The Plan outlines objectives and parameters of a New Economic Course announced by President Tokayev in September 2020. The Course included seven priorities: a fair distribution of benefits and responsibilities, the leading role of private entrepreneurship, fair competition, productivity growth and the development of a more technologically advanced economy, human capital development, development of a green economy, and state accountability to the society. A favorable investment climate is a part of this course. To implement his program, the President established the Supreme Council for Reforms and the Agency for Strategic Planning and Reforms. The President chairs the Supreme Council for Reforms, while Sir Suma Chakrabarti, a former President of the European Bank for Reconstruction and Development will serve as Deputy Chairman.
In January 2021, the Prime Minister announced the government’s commitment to increase the share of annual FDI in GDP from 13.2 percent of GDP in 2018 to 19 percent of GDP in 2022.
The government of Kazakhstan has incrementally improved the business climate for foreign investors. Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.
Over the last few years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment. In April 2019, the Prime Minister created the Coordination Council for Attracting Foreign Investment. The Prime Minister acts as the Chair and Investment Ombudsman. In December 2018, the Investment Committee was transferred to the supervision of the Ministry of Foreign Affairs, which took charge of attracting and facilitating the activities of foreign investors. In January 2021, the Minister of Foreign Affairs received an additional title of Deputy Prime Minister due to the expanded portfolio of the Ministry. The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy and the Ministry of Trade and Integration interact on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD). Each regional municipality designates a representative to work with investors. Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment. In addition, the Astana International Financial Center (AIFC, ) operates as a regional investment hub regarding tax, legal, and other benefits. In 2019, the government founded Kazakhstan’s Direct Investment Fund which became resident at the AIFC and aims to attract private investments for diversifying Kazakhstan’s economy. The state company KazakhInvest, located in this hub, offers investors a single window for government services.
In 2020-2021, the government attempted to improve the regulatory and institutional environment for investors. However, these changes have sometimes been associated with an over-structured system of preferences and an enhanced government role. For example, in January 2021 the Foreign Minister suggested for consideration establishment of an additional group, the Investment Command Staff (ICS) that would make decisions on granting special conditions and extending preferences for investors signing investment agreements. This Investment Command Staff is expected to consider project proposals after their verification by KazakhInvest and the Astana International Financial Center. The government maintains its dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister.
The COVID-19 pandemic and unprecedented low oil prices caused the government to amend the country’s mid-term economic development plans. In March 2020, the government approved a stimulus package of $13.7 billion, mostly oriented at maintaining the income of the population, supporting local businesses, and implementing an import-substitution policy.
Limits on Foreign Control and Right to Private Ownership and Establishment
By law, foreign and domestic private firms may establish and own certain business enterprises. While no sectors of the economy are completely closed to foreign investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services. Article 16 in the December 2017 Code on Subsoil and Subsoil Use (the Code) mandates that share of the national company KazAtomProm be no less than 50% in new uranium producing joint ventures.
As a result of its WTO accession, Kazakhstan formally removed the limits on foreign ownership for telecommunication companies, except for the country’s main telecommunications operator, KazakhTeleCom. Still, to acquire more than 49 percent of shares in a telecommunication company, foreign investors must obtain a government waiver. No constraints limit the participation of foreign capital in the banking and insurance sectors. Starting in December 2020, the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s OECD commitments. However, the law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land. In addition, foreign citizens and companies are restricted from participating in private security businesses.
Foreign investors have complained about the irregular application of laws and regulations and interpret such behavior as efforts to extract bribes. The enforcement process, widely viewed as opaque and arbitrary, is not publicly transparent. Some investors report harassment by the tax authorities via unannounced audits, inspections, and other methods. The authorities have used criminal charges in civil litigation as pressure tactics.
Foreign Investment in the Energy & Mining Industries
Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions. In 2020, developments ranged from a major reduction to a full annulment of work permits for some categories of foreign workforce (see Performance and Data Localization Requirements.) During a March 2021 virtual meeting with international oil companies, Kazakhstan’s President urged the government to ensure legal protection and stability of investments and investment preferences. He also tasked the recently established Front Office for Investors to address investor challenges and bring them to the attention of the Prime Minister’s Council. Moreover, Kazakhstan supported the request of oil companies to remove a discriminatory approach to fines imposed on them for gas flaring. Under the current legislation, oil companies pay gas flaring fines several times higher than those paid by other non-oil companies.
In April 2008, Kazakhstan introduced a customs duty on crude oil and gas condensate exports, this revenue goes to the government’s budget and does not reach the National Fund. The National Fund is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets, and from disposal of agricultural land. The customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget. Companies that pay taxes on mineral and crude oil exports are exempt from that export duty. The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – if the global oil price drops below $25 per barrel, the duty zeros.
The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects. The government approves and publishes the list of strategic deposits on its website. The latest approved list is dated June 28, 2018: https://www.primeminister.kz/ru/decisions/28062018-389.
The Code entitles the government to terminate a contract unilaterally “if actions of a subsoil user with a strategic deposit result in changes to Kazakhstan’s economic interests in a manner that threatens national security.” The Article does not define “economic interests.” The Code, if properly implemented, appears to streamline procedures to obtain exploration licenses and to convert exploration licenses into production licenses. The Code, however, appears to retain burdensome government oversight over mining companies’ operations.
Kazakhstan is committed under the Paris Climate Agreement to reduce GHG emissions 15 percent from the level of base year 1990 down to 328.3 million metric tons (mmt) by 2030. In the meantime, Kazakhstan increased emissions 27.8 percent to 401.9 mmt in the five years from 2013 to 2018. The energy sector accounted for 82.4 percent of GHG emissions, agriculture for 9 percent, and others for 5.6 percent. The successor of the Energy Ministry for environmental issues, Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019. The Concept is scheduled for submission to the government in June 2021.
In November 2020, the government adopted a National Plan for Allocation of Quotas for Greenhouse Gas (GHG) Emissions for 2021. The emissions cap (a total number of emissions allowed) is set for 159.9 million. The power sector received the highest number of allowances, or 91.4 million, for 90 power plants. The cap for the oil and gas sector is 22.2 million for 61 installations, while 24 mining installations get 7.3 million allowances, and 21 metallurgical facilities have 29.6 million. The combined caps for the chemical and processing sectors are 9.3 million. In February 2018, the Ministry of Energy announced the creation of an online GHG emissions reporting and monitoring system. The system is not operational, and it is likely to be launched after the Environmental Code comes into effect in July 2021. Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase.
The OECD review recommended Kazakhstan undertake corporate governance reforms at state-owned enterprises (SOEs), implement a more efficient tax system, further liberalize its trade policy, and introduce responsible business conduct principles and standards. The OECD Investment Committee is monitoring the country’s privatization program, that aims to decrease the SOE share in the economy to 15 percent of GDP by 2020.
In 2019, the OECD and the government launched a two-year project on improving the legal environment for business in Kazakhstan.
The 2020 World Bank’s Doing Business Index ranked Kazakhstan 25 out of 190 countries in the “Ease of Doing Business” category, and 22 out of 190 in the “Starting a Business” category. The report noted Kazakhstan made starting a business easier by registering companies for value added tax at the time of incorporation. The report noted Kazakhstan’s progress in the categories of dealing with construction permits, registering property, getting credit, and resolving insolvency. Online registration of any business is possible through the website https://egov.kz/cms/en.
In addition to a standard package of documents required for local businesses, non-residents must have Kazakhstan’s visa for a business immigrant and submit electronic copies of their IDs, as well as any certification of their companies from their country of origin. Documents should be translated and notarized. Foreign investors also have access to a “single window” service, which simplifies many business procedures. Investors may learn more about these services here: https://invest.gov.kz/invest-guide/business-starting/registration/.
According to the ‘Doing Business’ Index, it takes 4 procedures and 5 days to establish a foreign-owned limited liability company (LLC) in Kazakhstan. This is faster than the average for Eastern Europe and Central Asia and OECD high-income countries. A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes. Under the law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions.
The COVID-19 pandemic triggered new measures for easing the doing business process. In 2021, the government introduced a special three-percent retail tax for 114 types of small and medium-sized businesses. Companies can switch to the new regime voluntarily. The government also introduced an investment tax credit allowing entrepreneurs to receive tax deferrals for up to three years. As a part of his new economic policy, President Tokayev stated that prosecution or tax audits against entrepreneurs should be possible only after a respective tax court ruling.
In 2020, the government approved new measures aimed to facilitate the business operations of investors and to help Kazakhstan attract up to $30 billion in additional FDI by 2025. For example, the government introduced a new notional an investment agreement (see details in Section 4) and removed a solicitation of local regional authorities for obtaining a visa for a business-immigrant.
In order to facilitate the work of foreign investors, the government has recommended to use the law of the Astana International Financial Center (AIFC) as applicable law for investment contracts with Kazakhstan and has planned some steps, including a harmonization of tax preferences of the AIFC, the International IT park Astana Hub, Astana Expo 2017 company and Nazarbayev University. Plans on the further liberalization of a visa and migration regime, and the development of international air communication with international financial centers were suspended due to the COVID-19 pandemic.
Utilizing the advantages of the Astana International Financial Center may bring positive results in attracting foreign investments. Nonetheless, there is still room for improvement in business facilitation in the rest of Kazakhstan’s territory. For example, foreign investors often complain about problems finalizing contracts, delays, and burdensome practices in licensing. The problems associated with the decriminalization of tax errors still await full resolution, despite an order to this effect issued by the General Prosecutor’s Office in January 2020. The controversial taxation of dividends of non-residents that came into force in January 2021, has additionally raised concerns of foreign investors.
The government neither incentivizes nor restricts outward investment.
4. Industrial Policies
The government’s primary industrial development strategies, such as the Concept for Industrial and Innovative Development 2020-2025 and the National Development Plan for 2025 aim to diversify the economy from its current dependence on extractive resources. The Entrepreneurial Code and Tax Code provide incentives for foreign and domestic investment in priority sectors, which include agriculture, metallurgy, extraction of metallic ore, chemical and petrochemical industries, textile and pharmaceutical industries, food production, machine manufacturing, waste recycling, and renewable energy. The approach helps the government to take decisions on projects on a case-by-case basis. After signing investment contracts with the government, firms in priority sectors receive tax and customs duty waivers, in-kind grants, investment credits, and simplified procedures for work permits. The government’s preference system applies to new and existing enterprises. The duration and scope of preferences depends on the priority sector, the size of investment and type of the investment project.
The government has outlined different categories of investment projects. Each category corresponds with a particular type of contract between an investor and the government, and a particular set of incentives. For example, model investment contracts are prepared and signed for investment priority projects by the Investment Committee at the Ministry of Foreign Affairs and KazakhInvest. Details on their requirements are available here: https://invest.gov.kz/ and at https://invest.gov.kz/doing-business-here/regulated-sectors/.
Special investment projects and projects on industrial assembly of vehicles and agricultural equipment are in the competence of the Ministry of Industry and Infrastructural Development. Volume of preferences in such agreements depends on the level of localization.
In 2020, the government modified this system slightly. The government introduced model contract clauses on guaranteeing the stability of laws and lowered the threshold for the cost of projects in textile and light industries to USD 7 million in order to make them eligible for preferences. In addition, investors received the right to adjust model contracts twice a year with the consent of the government.
In January 2021, the government introduced to the Entrepreneurial Code one more type of contract– an investment agreement. Such agreements will be applied to investment projects exceeding USD 50 million in industries selected by the government. Only Kazakhstan’s companies or residents of the Astana International Financial Center will be eligible to sign such agreements with the government. Under this agreement, the government provides an investor with an individual scope of incentives and a stability of legal regime for 25 years. In turn, the investor undertakes commitments on project implementation. Some obligations on supporting a certain level of localization may be a part of the agreement. Unlike model contracts, investment agreements are subject to negotiations between an investor and the government.
A U.S. investor signed the first investment agreement early in January 2021. The Prime Minister enacted this agreement by issuing a special decree. Per the agreement, the government will establish a special economic zone at the location of the project with all implied tax and customs preferences. Potential investors can apply for preferences through the government’s single window portal; which are special offices for serving investors located in the capital and at district service centers in every region of Kazakhstan. Submission for investment preferences requires a collection of documents, including a comprehensive government’s expertise on the proposed investment project. The law also allows the government to rescind incentives, collect back payments, and revoke an investor’s operating license if an investor fails to fulfill contractual obligations. More information is available here: https://invest.gov.kz/invest-guide/ and at https://irm.invest.gov.kz/en/support/.
Prior to the pandemic the government substantially liberalized the visa regime for foreign investors, especially for non-extractive industries. In particular, the government approved visa-free travel for citizens of 73 countries, including the United States, Germany, Japan, United Arab Emirates, France, Italy, and Spain. Residents of these countries could stay in Kazakhstan without visas for up to 30 days. However, the COVID-19 pandemic prompted the government to suspend this regime temporarily. Through December 31, 2021, any visit of a foreigner, with some exceptions, must be approved by a special intra-agency government commission.
In 2020, the government also introduced a more liberal regime for violation of visa rules of stay. Foreign visitors are permitted to pay administrative fines only in the case of infringing rules for the first and the second time.
Foreign Trade Zones/Free Ports/Trade Facilitation
The Law on Special Economic Zones allows foreign companies to establish enterprises in special economic zones (SEZs), simplifies permit procedures for foreign labor, and establishes a special customs zone regime not governed by Eurasian Economic Union rules. A system of tax preferences exists for foreign and domestic enterprises engaged in prescribed economic activities in Kazakhstan’s thirteen SEZs. In April 2019, President Tokayev signed amendments which extend the rights of SEZ managing companies. As of the beginning of 2021, twelve managing companies control the SEZ activity. The Ministry of Industry and Infrastructural Development is in charge of monitoring SEZ activity and developing new policies and rules in this area.
Performance and Data Localization Requirements
The government requires local employment and content, although the country’s WTO accession commitments provide for abolition of most local content requirements over time. In 2015, Kazakhstan adopted legislative amendments to alter existing local content requirements to meet WTO accession requirements. Pursuant to these amendments, subsoil use contracts concluded after January 1, 2015, no longer contain local content requirements, and any local content requirements in contracts signed before 2015 phased out on January 1, 2021.
Kazakhstan’s WTO accession terms require that Kazakhstan relax limits on foreign nationals by increasing the quota for foreign nationals to 50 percent (from 30 percent for company executives and from 10 percent for engineering and technical personnel) by January 1, 2021.
Despite these commitments, the government, particularly at the regional level, continues to advocate for international businesses to increase their use of local content. In October 2020, Tengizchevroil, North Caspian Operating Company, and Karachaganak Operating Consortium, which have stabilized contracts, committed to maintaining local content requirements after January 1, 2021. The government has been signing voluntary agreements with other oil companies to support local businesses. In November 2020, the government announced the establishment of a fund for the development of local content. The new fund will invest in technology, IT, assembly of oil and gas equipment, and environmental projects.. The Ministry of Energy announced in March 2017 that foreign companies providing services for the oil and gas sector would need to create joint ventures with local companies to continue to receive contracts at the country’s largest oilfields. Although these recommendations are not legally binding, companies have generally elected to abide by them. The Ministry of Energy, Ministry of Industry and Infrastructure Development, the National Welfare Fund Samruk-Kazyna, and the National Chamber of Entrepreneurs Atameken monitor local content compliance.
The government regulates foreign labor at the macro and micro levels. Foreign workers must obtain work permits. Amendments to the Expatriate Workforce Quota and Work Permit Rules: (a) eliminate special conditions for obtaining a work permit for foreign labor (e.g. requirements to train local personnel or create additional vacancies); (b) eliminate the requirement that companies conduct a search for candidates on the internal market prior to applying for a work permit; (c) reduce the timeframe for issuance or denial of a work permit from 15 to 7 days; (d) eliminate the required permission of local authorities for the appointment of CEOs and deputies of Kazakhstani legal entities that are 100 percent owned by foreign companies; and (e) expand the list of individuals requiring no permission from local authorities (including non-Kazakhstani citizens working in national holding companies as heads of structural divisions and non-Kazakhstani citizens who are members of the board of directors of national holding companies). Kazakhstan offered a few extensions on work permits and visas due to pandemic- related restrictions on movement. The latest resolution allows foreign citizens with work permits or certificates of self-employment to stay in the country until June 5, 2021.
Following the June 2019 brawl at Chevron-operated Tengiz oilfield that reportedly resulted from discontent with wage discrepancies between local and foreign workers with similar qualifications, the Ministry of Labor and Social Protection has sought to revisit the definition of administrative liability and administrative violation to make state control over employers with foreign workers more effective.
The government approved a foreign labor quota for 2020 at 0.32 percent of the country’s total labor force. The number of work permits had been reduced by 37% for employees of category 3 (specialists) and by 23% for category 4 (qualified workers). The largest decreases were in administrative; real estate; wholesale and retail; construction; professional scientific and technological activities; and accommodation and catering. To replace the gap in the foreign workforce, the government introduced an obligation to replace foreign workers with skilled Kazakhstani labor. The foreign workforce annual quota for 2021 is 0.31 percent or 29.3 thousand units.
In 2021, Kazakhstan introduced a so-called scoring system of localization assessment. This system is aimed at stimulating local assembly of vehicles and agricultural equipment. The volume of incentives in agreements on industrial assembly will depend on the number of scores received for localization. The more scores the enterprise obtains, the more preferences the government extends to this enterprise.
Foreign investors may, in theory, participate in government and quasi-government procurement tenders, however, they should have established production facilities in Kazakhstan and should go through a process of being recognized as a pre-qualified bidder. In 2019, the government enacted new procurement rules, according to which, only pre-qualified suppliers will be allowed to bid for government contracts. A key requirement for being recognized as a pre-qualified bidder is that your product should be made in Kazakhstan and be added to a register of trusted products. While this requirement is applied to some selected sectors of government procurement (e.g. construction, IT, textile), it has been practiced since 2016 at procurement of quasi-sovereign companies under the National Welfare Fund Samruk-Kazyna. The pandemic has amplified the import substitution trend. In the course of 2020 and 2021 President Tokayev several times highlighted the importance of support to local producers and the increase of local content share at procurement processes and implementation of infrastructural projects.
The National Chamber of Entrepreneurs Atameken introduced in 2018 an industrial certificate that serves as an extra (and costly) tool to prove the financial and production abilities of the company to participate in tenders. The industrial certificate is also an indirect confirmation of status as a local producer. Thus, a foreign investor who plans to bid for government and quasi-government contracts can benefit from such an industrial certificate.
In 2019, the government introduced significant recycling fees on imported combines and tractors. Although major popular Western brands initially received waivers on recycling fees, the government revisited the exception and imposed recycling fees in 2020. The government suggested foreign producers start local production and hence, become eligible for preferential treatment. Foreign companies consider this measure to be a case of coercion to localize production.
Per Kazakhstan’s legislation, cross-border transmission of data would be possible if countries, receiving this data, provide due data protection. Otherwise, the data transmission should be regulated by respective bilateral agreements or allowed by the data subject. Kazakhstan reserves its right to restrict or to ban data transmission by enacting separate regulation. The National Security Committee and the Ministry of Digital Development, Innovations and Aerospace Industry supervise data protection and date storage in Kazakhstan.
5. Protection of Property Rights
With certain sectoral exceptions, private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and engage in all forms of commercial activity.
Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the Land Code. All property and lease rights for real estate must be registered with the Ministry of Justice through its local service centers. According to the World Bank’s Doing Business Report, Kazakhstan ranks 24 out of 190 countries in ease of registering property.
Under Kazakhstan’s constitution, agricultural land and certain other natural resources may be owned or leased only by Kazakhstani citizens. The Land Code: (a) allows citizens and Kazakhstani companies to own agricultural and urban land, including commercial and non-commercial buildings, complexes, and dwellings; (b) permits foreigners to own land to build industrial and non-industrial facilities, including dwellings, with the exception of agricultural lands and land located in border zones; (c) authorizes the government to monitor proper use of leased agricultural lands, the results of which may affect the status of land-lease contracts; (d) forbids private ownership of: land used for national defense and national security purposes, specially protected nature reserves, forests, reservoirs, glaciers, swamps, designated public areas within urban or rural settlements, except land plots occupied by private building and premises, main railways and public roads, land reserved for future national parks, subsoil use and power facilities, and social infrastructure. The government maintains the land inventory and constantly updates its electronic data base, though the inventory data is not exhaustive. The government has also set up rules for withdrawing land plots that have been improperly or never used.
In 2015, the government proposed Land Code amendments that would allow foreigners to rent agricultural lands for up to 25 years. Mass protests in the spring of 2016 led the government to introduce a moratorium on these provisions until December 31, 2021. The moratorium is also effective on other related articles of the Land Code that regulate private ownership rights on agricultural lands. In March 2021, President Tokayev initiated changes in the legislation to ban both the sale and lease of agricultural lands to foreigners. On March 17, the Mazhilis, the lower Chamber of the Parliament, started to consider the amended legislation, according to which, foreigners, persons without citizenship, foreign legal entities and legal entities with foreign participation, international organizations, scientific centers with foreign participation, and repatriated Kazakhs cannot own and take in temporary use agricultural lands. The amendments are expected to be adopted in the first half of 2021.
Intellectual Property Rights
The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement. Kazakhstan is not currently included in the United States Trade Representative (USTR) Special 301 Report. To facilitate its accession to the World Trade Organization (WTO) and attract foreign investment, Kazakhstan continues to improve its legal regime for protecting IPR. The Civil Code and various laws protect U.S. IPR. Kazakhstan has ratified 18 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO): https://wipolex.wipo.int/en/treaties/ShowResults?country_id=97C.
Kazakhstan’s IPR legislation has improved. The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, selected inventions, and integrated circuit topographies. The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that the rights holders had registered their copyrighted material with Kazakhstan’s IPR Committee. Despite these efforts, U.S. companies and associated business groups have alleged that 73 percent of software used in Kazakhstan is pirated, including in government agencies, and have criticized the government’s enforcement efforts.
To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation. The law set up a more convenient, one-tier system of IPR registration and provided rights holders the opportunity for pre-trial dispute settlement through the Appeals Council at the Ministry of Justice. In addition, the law included IPR protection as one of the government procurement principles that should be strictly followed by government organizations. Currently, the Parliament is considering a new bill on IPR issues. The bill introduces a notion of geographical indication, a short-term (up to three years) protection of unregistered industrial designs, an “opposition” system for challenging requests for registration of trademarks, geographical indications, and appellation of origin of goods. Also, the bill is expected to make copyright collective organizations more transparent and effective and to improve regulation of patent attorneys’ activity. In 2020, Kazakhstan ratified the Protocol on Protection of Industrial Designs of the Eurasian Patent Convention from September 1994 and signed the Agreement of the Eurasian Economic Union on trademarks, service marks, and appellation of origin of goods.
Kazakhstan’s authorities conduct nationwide campaigns called “Counterfeit”, “Hi-Tech” and “Anti-Fraud” that are aimed at detecting and ceasing IPR infringements and increasing public awareness about IP issues. In 2020, these campaigns resulted in the seizing of 4.8 thousand units of counterfeit goods. The Ministry of Justice and law enforcement agencies regularly report the results of their inspections. However, the moratorium on inspections of small and medium-sized businesses that came into force in December 2019 reduced significantly the number of IPR-related inspections in 2020.
In 2020, the Ministry of Internal Affairs initiated 14 criminal cases for copyright violations and seven administrative cases, imposing penalties of USD 5,300. In addition, regional authorities reportedly seized 3,800 units of counterfeit goods worth around USD 4,000 and identified 24 foreign websites, selling pirated software. On the border, customs officials suspended the release of counterfeited goods in the amount of USD 20.1 million.
In 2020, the government agency on investigation of economic crimes identified and closed one illegal plant that produced counterfeited pharmaceuticals. Criminals fabricated packages using known trademarks and altered the expiry dates of the drugs. Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain of inadequate IPR protection. Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement.
Kazakhstan maintains a stable macroeconomic framework, although weak banks inhibit the financial sector’s development , valuation and accounting practices are inconsistent, and large state-owned enterprises (SOEs) that dominate the economy face challenges in preparing complete financial reporting. Capital markets remain underdeveloped and illiquid, with small equity and debt markets dominated by SOEs and lacking in retail investors. Most domestic borrowers obtain credit from Kazakhstani banks, although foreign investors often find margins and collateral requirements onerous, and it is often cheaper and easier for foreign investors to use retained earnings or borrow from their home country. The government actively seeks to attract FDI, including portfolio investment. Foreign clients may only trade via local brokerage companies or after registering at Kazakhstan’s Stock Exchange (KASE) or at the AIFC.
KASE, in operation since 1993 and with 189 listed companies, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, international development institutions debt, foreign currencies, repurchase agreements (REPO) and derivatives. Most of KASE’s trading is comprised of money market (84 percent) and foreign exchange (10 percent). As of January1, 2021, stock market capitalization was USD 45.3 billion, while the corporate bond market was around USD 35.2 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity accumulated USD 30.7 billion as of January1, 2021.
In 2018, the government launched the Astana International Financial Center (AIFC), a regional financial hub modeled after the Dubai International Financial Center. The AIFC has its own stock exchange (AIX), regulator, and court (see Part 4). The AIFC has partnered with the Shanghai Stock Exchange, NASDAQ, Goldman Sachs International, the Silk Road Fund, and others. AIX currently has 88 listings in its Official List, including 30 traded on its platform.
Kazakhstan is bound by Article VIII of the International Monetary Fund’s Articles of Agreement, adopted in 1996, which prohibits government restrictions on currency conversions or the repatriation of investment profits. Money transfers associated with foreign investments, whether inside or outside of the country, are unrestricted; however, Kazakhstan’s currency legislation requires that a currency contract must be presented to the servicing bank if the transfer exceeds USD 10,000. Money transfers over USD 50,000 require the servicing bank to notify the transaction to the authorities, so the transferring bank may require the transferring parties, whether resident or non-resident, to provide information for that notification.
Money and Banking System
As of January 1, 2021, Kazakhstan had 26 commercial banks. The five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 47.4 billion, accounting for 64.0 percent of the total banking sector.
Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices, and significant related-party exposures. In recent years, the government has undertaken measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities. In 2019, the National Bank of Kazakhstan (NBK) initiated an asset quality review (AQR) of 14 major banks, which combined held 87 percent of banking assets as of April 1, 2019. According to NBK officials, the AQR showed sufficient capitalization on average across the 14 banks and set out individual corrective measure plans for each of the banks to improve risk management. As of January 2021, the ratio of non-performing loans to banking assets was 6.8 percent, down from 31.2 percent in January 2014. The COVID-19 pandemic and the fall in global oil prices may pose additional risks to Kazakhstan’s banking sector.
Kazakhstan has a central bank system led by the NBK. In January 2020, parliament established the Agency for Regulation and Development of the Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, the stock market, microcredit organizations, debt collection agencies, and credit bureaus. The NBK retains its core central bank functions as well as management of the country’s sovereign wealth fund and pension system assets. The NBK, and ARDFM as its successor, is committed to the incremental introduction of the Basel III regulatory standard. As of January 2021, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard. Starting December 16, 2020, as a part of WTO commitments, Kazakhstan allowed foreign banks to operate in the country via branches (previously only local subsidiaries were allowed). To open a branch, foreign banks must have international credit ratings of BBB or higher, a minimum of $20 billion in global assets, and comply with other NBK and ARDFM norms and requirements. Foreigners may open bank accounts in local banks as long as they have a local tax registration number.
There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment (e.g. remittances of investment capital, earnings, loan or lease payments, or royalties). Funds associated with any form of investment may be freely converted into any world currency, though local markets may be limited to major world currencies.
Foreign company branches are treated as residents, except for non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan. With some exceptions, foreign currency transactions between residents are forbidden. There are no restrictions on foreign currency operations between residents and non-residents, unless specified otherwise by local foreign currency legislation. Companies registered with AIFC are not subject to currency and settlement restrictions.
Kazakhstan abandoned its currency peg in favor of a free-floating exchange rate and inflation-targeting monetary regime in August 2015, although the NBK has intervened in foreign exchange markets to combat excess volatility. Kazakhstan maintains sufficient international reserves according to the IMF. As of January 1, 2021, international reserves at the NBK, including foreign currency, gold, and National Fund assets, totaled USD 94.4 billion.
The U.S. Mission in Kazakhstan is not aware of any concerns about remittance policies or the availability of foreign exchange conversion for the remittance of profits. Local currency legislation permits non-residents to freely receive and transfer dividends, interest and other income on deposits, securities, loans, and other currency transactions with residents. However, such remittances are subject to reporting requirements. There are no time limitations on remittances; and timelines to remit investment returns depend on the internal procedures of the servicing bank. Residents seeking to transfer property or money to a non-resident in excess of USD 500,000 are required to register the contract with the NBK.
Sovereign Wealth Funds
The National Fund of the Republic of Kazakhstan was established to support the country’s social and economic development via accumulation of financial and other assets, as well as to reduce the country’s dependence on the oil sector and external shocks. The National Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farmlands, and investment income. The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as the National Fund’s trustee and asset manager. The NBK selects external asset managers from internationally recognized investment companies or banks to oversee a part of the National Fund’s assets. Information about external asset managers and assets they manage is confidential. As of January 1, 2021, the National Fund’s assets were USD 58.7 billion or around 34 percent of GDP.
The government receives regular transfers from the National Fund for general state budget support, as well as special purpose transfers ordered by the President. The National Fund is required to retain a minimum balance of no less than 30 percent of GDP.
Kazakhstan is not a member of the IMF-hosted International Working Group of Sovereign Wealth Funds.
8. Responsible Business Conduct
Entrepreneurs, the government, and non-governmental organizations are aware of the expectations of responsible business conduct (RBC). Kazakhstan continues to make steady progress toward meeting the OECD Guidelines for Multinational Enterprises, and the government promotes the concept of RBC. The OECD National Contact Point is the Ministry of National Economy.
A legal framework for RBC was introduced in 2015. The Entrepreneurial Code has a special section on social responsibility, which is defined as a voluntary contribution for the development of social, environmental, and other spheres. The Code says that the state creates conditions for RBC but specifies that it cannot force entrepreneurs to take a due diligence approach to ensuring socially responsible actions. The Code considers donations to charity one of the forms of social responsibility and envisions a tax deduction for charitable giving, though no such rule currently exists.
In April 2015, the National Tripartite Commission on Social Partnership and Regulation of Social and Labor Relations adopted the National Concept on Social Corporate Responsibility, developed by the Atameken National Chamber of Entrepreneurs and the corporate fund Eurasia-Central Asia. The non-binding document covers human rights, environmental protection, consumer interests, RBC, corporate governance, and community development.
First President Nazarbayev has repeatedly asked foreign investors and local businesses to implement RBC, including to provide occupational safety, pay salaries on time, and invest in human capital. The President presents annual awards for achievements in corporate social responsibility (CSR). Foreign investors report that local government officials regularly pressure them to provide donations to achieve local political objectives. Local officials attempt to exert as much control as possible over the selection and allocation of funding for such projects.
The government has signed on to the Extractive Industries Transparency Initiative (EITI). Kazakhstan produces EITI reports that disclose revenues from the extraction of its natural resources. Companies disclose what they have paid in taxes and other payments, and the government discloses what it has received; these two sets of figures are then compared and reconciled. The EITI Board started a second certification process on August 13, 2019, to review whether Kazakhstan has achieved meaningful progress and found that it had made considerable improvements since its first validation in 2017 by providing additional information on local content, social investment, and transportation of oil, gas, and minerals. The Board gave Kazakhstan 18 months before a third validation, i.e. until October 14, 2021, to carry out corrective actions regarding multi-stakeholder group oversight, license allocations, state participation, production data, barter arrangements, transport revenues, social expenditures, and quasi-fiscal expenditures.
Starting 2019, members of EITI, including Kazakhstan, are required to disclose subsoil use contracts signed after January 1, 2021. In June 2019 the Ministry of Industry and Infrastructure Development disclosed for the first time beneficial ownership data on its website. The data included names of beneficial owners and their level of ownership under new licenses only.
Kazakhstan’s rating in Transparency International’s (TI) 2020 Corruption Perceptions Index (CPI) is 38/100, ranking Kazakhstan 94 out of 180 countries rated – a relatively weak score, but the best in Central Asia. According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy. Improvement of Kazakhstan’s CPI under the conditions of the COVID-19 emergency indicates that the country took persistent efforts to combat corruption. The world community assessed positively measures taken by the government of Kazakhstan to support people and businesses during the pandemic, as well as legislative amendments to tighten up liability for corruption, and to further digitalize government services. However, the authorities violated democratic standards related to transparency and access to financial information on healthcare spending, and imposed excessive restrictions on media, human rights, and civil society activities.
The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption rather than fighting the consequences of corruption. The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifelong ban on employment in the civil service with mandatory forfeiture of title, rank, grade, and state awards. The law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures. The law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders. The law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries. The law on Public Service sets adherence to the rule of law principles including anti-corruption and professionalism of civil service as the main duty of public servants. In 2020, Kazakhstan made amendments to anti-corruption legislation to tighten up liability for corruption crimes (below please see detailed descriptions of those amendments).
The country took actions to tighten up control of corruption. In October and December 2020, it passed two sets of anti-corruption legislative amendments which: – tightened up liability for accepting gifts by officials and their family members (Counter-corruption law and the Civil Code);
– tightened up liability for accepting gifts by officials and their family members (Counter-corruption law and the Civil Code); – added quasi-government organizations’ procurement officers to the list of officials who can be held accountable for corruption (Counter-corruption law article 1.4);
– added quasi-government organizations’ procurement officers to the list of officials who can be held accountable for corruption (Counter-corruption law article 1.4); – mandated establishment of counter-corruption compliance units in the quasi-government sector; other business companies have the right to establish such units (Counter-corruption law articles 16 and 16.3);
– mandated establishment of counter-corruption compliance units in the quasi-government sector; other business companies have the right to establish such units (Counter-corruption law articles 16 and 16.3); – banned high-level officials from taking a job which would put them in direct subordination to a close family member (Counter-corruption law article 14);
– banned high-level officials from taking a job which would put them in direct subordination to a close family member (Counter-corruption law article 14); – prohibited early release from prison of individuals convicted of grave and particularly grave corruption crimes, with a few exceptions (Criminal Code article 72.8);
– prohibited early release from prison of individuals convicted of grave and particularly grave corruption crimes, with a few exceptions (Criminal Code article 72.8); – strengthened punishment of law enforcement employees and judges for commitment of corruption crimes (several articles in the Criminal Code);
– strengthened punishment of law enforcement employees and judges for commitment of corruption crimes (several articles in the Criminal Code); – banned government officials from opening and owning accounts in foreign banks (Counter-corruption law, article 12 subparagraph 1.5 and article 14-1).
– banned government officials from opening and owning accounts in foreign banks (Counter-corruption law, article 12 subparagraph 1.5 and article 14-1).
The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008. It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013. Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020. The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.
Despite legal provisions, however, corruption allegations have been noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector. The International Finance Corporation’s Enterprise Survey, which gathers responses from thousand of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan. For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption.
Transparency Kazakhstan conducted a survey in 2020 to assess corruption perception. 9,000 respondents were interviewed and 1347 written complaints were analyzed in all regions of the country, applying the methodology of Transparency International’s Global Corruption Barometer and the Corruption Perception Index. 37.4 percent of common citizens and 45.9 percent of entrepreneurs indicated a decrease of corruption in their regions. 11.3 percent of respondents faced petty corruption (a decrease compared to 13.4 percent in 2019), 8.2 percent of entrepreneurs had to resort to illegitimate ways in resolving issues with government (9.2 percent in 2019). More than 80 percent of the interviewed entrepreneurs stated that business could be developed without giving bribes. The survey showed that the most trusted officials and offices were the President (70 percent), the Anti-corruption Agency (65 percent), the Cabinet (62 percent), the Civil Service Agency (59 percent) and the Nur Otan party (55 percent); the most corrupt state institutions were viewed to be healthcare, police, tax, fire services, land relations and urban planning authorities, public service centers, and education institutions: http://tikazakhstan.org/transparency-kazakhstan-prezentoval-rezultaty-monitoringa-sostoyaniya-korruptsii-v-strane-za-2020-god/.
The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search, or interrogation. Journalists and advocates for fiscal transparency are reported to have faced frequent harassment and administrative pressure.
Resources to Report Corruption
Under the Law on Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption. Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.
TI maintains a national chapter in Kazakhstan.
Contact at the government agency responsible for combating corruption:
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Nur-Sultan
+7 (7172) 909002 firstname.lastname@example.org
Contact at a “watchdog” organization:
Civic Foundation “Transparency Kazakhstan”
89 Dosmuhamedov Street,
Business Center Caspi
Almaty 050012 +7 (727) 292 0970; +7 771 589 4507 email@example.com
10. Political and Security Environment
There have been no reported incidents of politically motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent. No major terrorist attacks took place in Kazakhstan in 2020. In June 2016, individuals described by the government as Salafist militants attacked a gun shop and a military unit, killing 8 and injuring 37 people in the Aktobe region of northwestern Kazakhstan.
Kazakhstan generally enjoys good relations with its neighbors. Although the presidential transition in neighboring Uzbekistan has opened the door to greater regional cooperation, including on border issues, Kazakhstan continues to exercise vigilance against possible penetration of its borders by extremist groups. The government also remains concerned about the potential return of foreign terrorist fighters from Syria and Iraq.
After close to three decades as President, Nursultan Nazarbayev resigned March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession. On June 9, 2019, Kazakhstan held an early presidential election, and Tokayev was elected to a full term with 71 percent of the vote. The Organization for Security and Cooperation in Europe (OSCE) noted in its final report that the election “was tarnished by clear violations of fundamental freedoms as well as pressure on critical voices;…significant irregularities were observed on election day”; “the election took place within a political environment dominated by the ruling Nur Otan party and with confined space for civil society and opposition views.” In the January 10, 2021 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 71 percent of the vote, while the business-friendly Ak Zhol party received 11 and the People’s party 9 percent. The OSCE similarly criticized the January 10 elections for their lack of adherence to OSCE standards for democratic elections.
11. Labor Policies and Practices
The July 2017 EBRD Kazakhstan Diagnostic Paper (the latest available) singles out skill mismatches across sectors as the fifth constraint that is holding back private sector growth in Kazakhstan. The gaps create real operational challenges such as high recruitment and training costs, lower productivity and constraints on innovation and new product development, according to the EBRD. The existing skill mismatches are not a result of lack of access to education, but rather failure to acquire job-relevant skills and competencies, the EBRD report reads. The 2019 OECD report on Monitoring Skills Development through Occupational Standards in Kazakhstan echoes the EBRD findings – despite improvements in educational attainment and labor market participation, Kazakhstan faces challenges with respect to skill relevance and availability, especially among large and middle-sized companies. Strengthening vocational education and training is critical because skilled manual workers, with medium and high qualifications, represent 40% of the total workforce need, according to the OECD. Many large investors rely on foreign workers and engineers to fill the void. Kazakhstan has approved a foreign workforce quota of 29.3 thousand for 2021. As of December 29, 2020, the Labor Ministry reported about 14,600 valid work permits. Chinese workers received the largest number of permits, with the rest going to foreign workers from Uzbekistan, Turkey, India, the UK, and others.
The Kazakhstani government has made it a priority to ensure that Kazakhstani citizens are well represented in foreign enterprise workforces. In 2009, the government instituted a comprehensive policy for local employment, particularly for companies in extractive industries. The government is particularly keen to see Kazakhstanis hired into the managerial and executive ranks of foreign enterprises. In January 2021, Energy Minister Nurlan Nogayev welcoming the new Director General of Tengizchevroil noted that a Kazakhstani citizen can become a future head of the company, according to the company’s charter documents. In November 2015, the government amended legislation on migration and employment that resulted in new rules for foreign labor starting January 2017 (please see details in Performance and Data Localization Requirements). U.S. companies are advised to contact Kazakhstan-based law and accounting firms and the U.S. Commercial Service in Almaty for current information on work permits. AIFC-registered entities may obtain and employ foreign workers without any work permit.
Kazakhstan joined the International Labor Organization (ILO) in 1993, and has ratified 24 out of 189 ILO conventions, including eight fundamental conventions pertaining to minimum employment age, prohibition on the use of forced labor and the worst forms of child labor, and prohibition on discrimination in employment, as well as conventions on equal pay and collective bargaining. In March 2019, Kazakhstan’s Federation of Trade Unions proposed that the Kazakhstani government join five more ILO technical conventions on social security (minimum standards), minimum wage fixing, collective bargaining, part-time work, and safety and health in agriculture.
The Constitution and National Labor Code guarantee basic workers’ rights, including occupational safety and health, the right to organize, and the right to strike. In September 2017, the ILO expressed concern over Kazakhstan’s compliance with the Freedom of Association and Protection of the Right to Organize Convention and the Right to Organize and Collective Bargaining Convention by calling on the government to amend the relevant legislation in order to: (1) enable workers to form and join trade unions of their own choosing, (2) allow labor unions to benefit from joint projects with international organizations, and (3) allow financial assistance to labor unions from international organizations.
On May 4, 2020, the government enacted amendments to labor-related laws, including the trade union law, to bring them closer to compliance with ILO standards, in particular, the convention on freedom of association. The amendments removed the requirement that lower-level unions affiliate with higher-level sectoral, territorial, and national-level federations. The amendments also lowered membership requirements and simplified other registration requirements. Kazakhstan’s three independent labor unions – the Federation of Trade Unions of the Republic of Kazakhstan (FTUK), Commonwealth of Trade Unions of Kazakhstan Amanat, and Kazakhstan Confederation of Labor (KCL) – had over three million members, or 40 percent of the workforce, as of March 1, 2020. Another trade union, Yntymak, with more than 57,000 members, was established in 2018 to represent small and medium enterprises. According to the FTUK, as of January 2020, ninety-eight percent of large and medium enterprises had collective agreements. Overall, 41.2 percent of all working enterprises had collective agreements.
Article 46 of the Labor Code gives the employer the right to change work due to fluctuating market conditions with proper and timely notifications to employees. Article 52 of the Labor Code gives the employer the right to cancel an employment contract in case of a decline in production that may lead to the deterioration of economic and financial conditions of the company. Article 131 of the Labor Code allows for severance payment of average monthly wages for two months in case of layoffs for economic reasons. The Ministry of Labor and Social Protection is responsible for offering alternative job openings with state programs of the so-called Employment Road Map, alternative professional training, or temporary jobs to workers laid off for economic reasons. The 2017-2021 Productive Employment and Mass Entrepreneurship National Program, run by the Ministry of Labor and Social Protection, aims at connecting workers with permanent jobs. The program provides micro-loans, grants, and equips workers with basic entrepreneurial skills.
Chapter 15 of the Labor Code describes a mechanism for resolution of individual labor disputes via direct negotiations with an employer, mediation commission, and court. Chapter 16 of the Labor Code identifies a mechanism for resolution of collective labor disputes via direct negotiations with an employer, mediation commission, labor arbitration, and the court.
Labor unrest presents a risk where unemployment is high and where the bargaining power of limited skilled labor is relatively high, but authorities have been quick to intervene with controls and mitigating measures. On March 1, 2021, FTUK reported on 22 labor conflicts since January 1, 2021. The conflicts that resulted in strikes were mostly observed in Chinese oil companies.
On January 31, 2021, the workers of KMK Munay, affiliated with China National Petroleum Corporation, resumed their work, following a seven-day strike to demand a 100-percent wage increase they had been seeking since March 2020. The workers of another Chinese company AMK Munay did not agree with the management offer to increase wages by seven percent. Following a joint meeting at the local municipality, AMK Munay agreed to increase wages and pay a bonus equal to 50-percent of the workers monthly wage. On January 6, 2021, three hundred workers of Bonatti, a contractor of Karachaganak Petroleum Operating B.V., declared a hunger strike, demanding a 50-percent wage increase. Local authorities reported that the company’s management and workers subsequently reached an agreement.
In August 2020, FTUK reported that over 4,000 employees appealed to FTUK during the pandemic, seeking clarifications on their rights. Each trade union established a call center to respond to inquiries from the employees. FTUK negotiated with M-TechService a payment of 50-percent wages to workers who could not come to work due to movement restrictions and the payment of double wages to workers who worked on rotational shifts longer than usual.
Other employers agreed to provide workers interest-free loans or cut working hours by two hours without withholding wages.
Tengizchevroil provided unprecedented support to its contractors during the pandemic. From March 23, 2020 to July 1, 2020, Tengizchevroil paid 100 percent of the average wage to all contract employees in Tengiz during the downtime due to the pandemic. These payments helped to save jobs and stabilize the social situation. From July 1, 2020 to October 1, 2020, Tengizchevroil lowered this compensation to 50-percent of the employee’s salary to contractors.
Workers’ right to strike are limited by several conditions. It may take over 40 days to initiate a strike in accordance with the law, representatives of labor unions report. Workers can strike if all arbitration measures defined by law have been exhausted. Strike votes must be taken in a meeting where at least half of workers are present, and strikers are required to give five days’ notice to their employer, include a list of complaints, and tell the employer the proposed date, time, and place of the strike. Courts have the power to declare a strike illegal at the request of an employer or the Prosecutor General’s Office. Employers may fire striking workers after a court declares a strike illegal. The 2014 Criminal Code enabled the government to target labor organizers by imposing criminal charges and up to three years in prison for calls to participate in strikes declared illegal by the court. The 2020 amendments to the Code reduced the penalty for such calls. If the calls for strikes did not result in a material violation of rights and interests of other individuals, they would be classified as minor criminal offenses, and the penalty would be limited to a fine or community service.
The Labor Union Law enacted in 2014 restricted workers’ freedom of association. Under the law, any local (and potentially independent) labor union had to be affiliated with larger unions, and the right to freely establish and join independent organizations without prior authorization had been restricted. On the basis of this law, in 2016 authorities did not allow the registration of one independent labor union and ordered its liquidation. In 2018, the U.S. government initiated a review of Kazakhstan’s compliance with the Generalized System of Preferences following a petition by the AFL-CIO, based on the country’s alleged failure to afford internationally recognized workers’ rights. The AFL-CIO petition highlighted the Law on Unions and also raised concerns about the use of Article 404 of the Criminal Code, which appeared to prohibit unregistered organizations. In May 2020, Kazakhstan signed into law amendments to labor-related laws. The amendments removed the requirement of affiliation with a large labor union for local labor unions and simplified procedures for registration of labor unions. The law no longer requires an industrial labor union to have no less than 50 percent of industry workers as its members. The time to register labor unions was extended from six months to one year. Other changes included reducing restrictions on strikes. Workers employed in the railway, transport and communications, civil aviation, healthcare, and public utilities sectors may strike if they maintain minimum services for the population, that is, provided there is no harm caused to other people. The amendments also reduced penalties for calls to continue strikes declared illegal by a court. Please see details at the Human Rights Report at: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/.
The official unemployment rate in Kazakhstan has regularly been near five percent in recent years. The unemployment rate in the fourth quarter of 2020 dropped to 4.9 percent, while it was 5 percent from April to September 2020. Youth unemployment rate was 3.6 percent.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Kyrgyz Republic is actively seeking foreign direct investment, and the government publicly recognizes that foreign direct investment is an important component to economic development. While the government has implemented laws to attract foreign investment, inconsistent application, onerous bureaucracy as well as inability to protect investors’ assets in the field continue to deter foreign investors. In particular, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, pose significant impediments to attracting foreign investment. Pandemic uncertainty coupled with political tumult has had an outsized negative impact in the country and net FDI inflows in 2020 collapsed by over 50 percent relative to 2019. This includes a notable reduction in FDI inflows from all main investment partners, Canada, China, Russia, and the United Kingdom.
Since 1993, the United States has had a Bilateral Investment Treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment. The newly restructured Investment Promotion and Protection Agency (IPPA) of the Kyrgyz Republic (as of February 2021), under the Ministry of Economy and Finance, serves as a vehicle for maintaining an ongoing dialogue with foreign investors and advocates for investing in the Kyrgyz Republic. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment and support investors in the Kyrgyz Republic, including private investment and public-private partnerships, as well as assist local exporters to promote Kyrgyz goods to external markets, and develop Free Economic Zones (FEZ). The IPPA has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The IPPA often coordinates with international donor organizations on hosting round- tables discussions, exchanges, and capacity building workshops in the field of economic development.
The Institute of the Business Ombudsman was created in January 2019 as an independent non-state body, funded by external donor sources, to protect the rights, freedoms, and legitimate interests of business entities, both local and foreign. In August 2019, the Supervisory Board of the Institute of the Business Ombudsman appointed former UK Ambassador to the Kyrgyz Republic, Robin Ord-Smith, as Business Ombudsman. The Institute of Business Ombudsman has concluded memorandums of cooperation with leading international business associations, including the American Chamber of Commerce in the Kyrgyz Republic (Amcham), International Business Council (IBC), and the Chamber of Commerce of Industry of the Kyrgyz Republic (CCI). In 2020, the Business Ombudsman recommended that business reform, protection and support of local entrepreneurs and protecting private property rights are key conditions for attracting direct investment.
The government has established several committees and councils to coordinate cooperation between the business associations and government bodies. Since 2017, the Business and Entrepreneurship Development Council under the Speaker of the Parliament regularly convenes MPs, business community representatives from various sectors of the economy to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic. The Committee on Development of Industry and Entrepreneurship under the President of the Kyrgyz Republic serves as a platform for entrepreneurs to turn to in case if their grievances are not addressed by the government. The presidential decree to establish the Committee under the National Council on Sustainable Development of the Kyrgyz Republic was signed on December 24, 2019 with the amendment to designate to the Vice-Prime-Minister for economic development, the Business Ombudsman and heads of business associations. The committee includes platforms to raise investment climate and other business concerns to the offices of the President, Parliament, and Prime Minister. The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including Amcham, IBC, and the National Alliance of Business Associations of the Kyrgyz Republic (http://caa.kg/ru/ru-naba/). The Ministry of Economy and Finance, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy.
Limits on Foreign Control and Right to Private Ownership and Establishment
While there are still no official limits on foreign control, a large investor in a politically sensitive industry may find that the government imposes investor-specific requirements such as a high percentage of local workforce employment or a minimum number of local seats on a board of directors. Foreigners have the right to establish and own businesses, and there have been no allegations of market access restrictions from U.S. investors since 2016.
By law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control. In the last two years, there were no known cases of sector-specific restrictions, limitations, or requirements applied to foreign ownership and control. In April 2017, amendments to the “Law on Mass Media” to limit foreign ownership of television (excluding radio and print media) broadcasters to 35 percent, was signed by the President and entered into force in June 2017.
Post is unaware of any formal investment screening processes in the Kyrgyz Republic.
Starting a business in the Kyrgyz Republic has become easier following the elimination of the minimum capital requirement for business registration, abolition of certain registration fees, and decreases in registration times. The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The Kyrgyz Republic ranked in the top quintile of the World Bank’s 2020 Doing Business report (42nd out of 190 countries surveyed) in “Starting a Business.” In 2018-2019, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business ( https://www.doingbusiness.org/en/reforms/top-reformers-2020).
Post is not aware of host government efforts to promote outward investment from the Kyrgyz Republic, nor of any instances in which the government sought to restrict domestic investors from investing abroad.
4. Industrial Policies
The Kyrgyz Government has reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors. The Ministry of Economy and IPPA often express the government’s willingness to discuss potential incentives, including access to land, with specific foreign investors. To attract investment in the IT sector, the Kyrgyz government has created a “zero-tax zone” at the High Technology Park of the Kyrgyz Republic, which waives tax burden for companies in which 80 percent of total products and services are exported.
Foreign Trade Zones/Free Ports/Trade Facilitation
There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek, Naryn, Karakol (Issyk-Kul province), Leylek (Batken province) and Maimak (Talas province). Each is situated to make use of transportation infrastructure and/or customs posts along the Kyrgyz borders. Government incentives for investment in the zones include exemption from several taxes, duties and payments, simplified customs procedures, and direct access to utility suppliers. The production and sale of petroleum, liquor, and tobacco products in FEZs are banned. Additional information on FEZs can be found at https://invest.gov.kg/free-economic-zones/.
Performance and Data Localization Requirements
While there are no formal legal requirements for local employment, most major international investors are subject to tremendous public pressure to support threshold local employment, particularly in the mining and construction sectors. New investors may find local employment quotas included in potential investment agreements, mandating numbers for boards of directors, senior management, and/or other employees. The Kyrgyz Government does not enforce any “forced localization” policies. There are no known government/authority-imposed conditions on permission to invest. The U.S.-Kyrgyz Bilateral Investment Treaty ensures that investments are guaranteed freedom from performance requirements, including requirements to use local products or to exports local goods. Foreign investors may freely transmit customer or other business-related data outside the country’s territory upon their own need as long as it does not contradict with local law on investments.
There are no known instances of requiring foreign IT providers to turn over source code and/or provide access to encryption. There is no legislation on maintaining data storage within the country.
5. Protection of Property Rights
Inviolability of property rights is written in the Kyrgyz Constitution and the Civil Code. In the National Development Strategy for 2018-2040, the Kyrgyz Government identified property rights as one of the priority areas for strengthening investment climate in the Kyrgyz Republic. The Kyrgyz Republic was first among its neighboring Central Asian states to introduce private property rights for land ownership. The Kyrgyz Republic is among the easiest countries in which to register property, ranking 7th out of 190 countries (ranked 8th in 2017, 2018 and 2019) in the World Bank’s 2020 Doing Business report.
Mortgages and liens are common in the Kyrgyz Republic and operate according to relevant legislation. The State Registration Service is the major operator of a recording system (database) on property under mortgage/lien commitments. When providing mortgages, local banks must request a reference from the State Registration Service that confirms the property is not under lien. However, several have questioned the reliability of the recording system, and the Service itself is frequently subject to allegations of corruption.
There are a number of legal restrictions on the right of foreign persons to own land in the Kyrgyz Republic. The land rights of foreign persons are limited to the following:
Foreign persons may not own or use agricultural land.
Foreign persons may not own or use any land except residential land, which has been foreclosed under a mortgage loan agreement in accordance with Kyrgyz Pledge Law. Foreclosed agricultural land may belong to foreign banks and specialized financial institutions but only for the period of two years (http://cbd.minjust.gov.kg/act/view/ru-ru/386).
Foreign persons may use non-residential land transferred thereto by way of universal succession, except agricultural and mining use land, subject to permission of the Kyrgyz Government, for the period of up to 50 years.
Foreign persons who have acquired ownership of land by way of universal succession (inheritance, reorganization) must transfer such land to a Kyrgyz national or legal entity within one year from the date of acquiring such ownership.
Intellectual Property Rights
The Kyrgyz Republic has robust legislation protecting intellectual property (IP) and the country is a signatory to several IP related international treaties; enforcement remains problematic. The State Service for Intellectual Property and Innovation under the Government of the Kyrgyz Republic (“Kyrgyzpatent”) is the authorized body of the Executive Branch that issues documents to certify intellectual property. Kyrgyzpatent establishes the Appeal Council that is the primary body to hear intellectual property related disputes. The judicial system remains underdeveloped and lacks independence and the appeals process can be lengthy.
The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. The Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. The Kyrgyz Republic was not included in the 2019 Special 301 report but was listed on the 2019 U.S. Trade Representative’s Notorious Markets report, due to the availability of counterfeit goods sold at the massive Dordoi bazaar – Central Asia’s largest market. Counterfeit goods imported from China are also re-exported to Russia and Kazakhstan. No specific action has been taken against Dordoi market. The Kyrgyz Republic did not pass any new IPR related laws or regulations in 2020.
IPR-related codes, laws and regulations of the Kyrgyz Republic are listed on Kyrgyzpatent’s website. The few pending IPR bills listed on the Parliament’s website are mainly aimed to make minor changes into the existing governmental IPR-related decrees ( http://patent.kg/ru/sample-page-5-4/sample-page-2-2-3/). Criminal liability for violation of IPR is listed in the Criminal Code. Unfortunately, enforcement is lax and according to sources, there have been no successful prosecution for IPR violations in the history of the Kyrgyz Republic. The Kyrgyz Republic is not known as a major producer of counterfeit goods but sale/re-export of imported counterfeit goods remains prevalent. The State Customs Service regularly publishes alerts and notifications on the recent seizure of counterfeit goods on its official website. There is no central database of official statistics on the seizure of counterfeit goods to date. IPPA has a whole chapter on its website dedicated to IPR.
The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have quadrupled. The number of bank payment cards in use increased by 2.5 times and e-wallets 10 times in the last five years. The Kyrgyz Republic maintained its B2 sovereign credit rating with Moody’s, which downgraded its outlook in November 2020 from stable to negative due to political instability. The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic. There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange of the Kyrgyz Republic), but all transactions are conducted through the Kyrgyz Stock Exchange. In 2020, the total value of transactions amounted to 11.83 billion Kyrgyz soms (approximately USD 140 million). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations. Foreign investors are able to acquire loans on the local market if the business is operating on the territory of the Kyrgyz Republic and collateral meets the requirements of local banks. The average interest rate for loans in USD is between 10-15 percent.
Money and Banking System
The National Bank of the Kyrgyz Republic (NBKR) is a nominally independent body whose mandate is to achieve and maintain price stability through monetary policy. The Bank is also tasked with maintaining the safety and reliability of the banking and payment systems. The NBKR licenses, regulates, and supervises credit institutions. The penetration level of the banking sector is 48.4 percent.
According to the IMF, the Kyrgyz banking system at present remains well capitalized with still sizeable, non-performing loans (NPLs). NPLs increased from 8.0 percent to 10.5 percent in 2020, with restructured loans of about 25 percent. Net capital adequacy ratio increased from 24.1 percent to 24.9 percent in 2020. Total assets in the Kyrgyz banking system in 2020 equaled approximately USD 3.4 billion. As of June 2020, the Kyrgyz Republic’s three largest banks by total assets were Optima Bank (approximately USD 430 million), Aiyl Bank (approximately USD 353 million), and Kyrgyz Investment and Credit Bank (KICB; approximately USD 328 million).
There are currently 23 commercial banks in the Kyrgyz Republic, with 312 operating branches throughout the country; the five largest banks comprise more than 50 percent of the total market. No U.S. bank operates in the Kyrgyz Republic and Kyrgyz banks do not maintain correspondent accounts from U.S. financial institutions, following widespread de-risking in 2018. There are ten foreign banks operating in the Kyrgyz Republic: Demir Bank, National Bank of Pakistan, Halyk Bank, Optima Bank, Finca Bank, Bai-Tushum Bank, Amanbank, Kyrgyz-Swiss Bank, Chang An Bank,and Kompanion Bank are entirely foreign held. Other banks are partially foreign held, including KICB and BTA Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development (EBRD), Economic Finance Corporation, the Aga Khan Fund for Economic Development and others.
The micro-finance sector in the Kyrgyz Republic is robust, representing nearly 10 percent the market size of the banking sector. Trade accounted for 37.5 percent of the total loan portfolio of the banking sector, followed by agriculture (29 percent) and consumer loans (12.5 percent). The microfinance sector in the Kyrgyz Republic is rapidly growing. In 2020, around 140 microfinance companies, 92 credit unions, 220 pawnshops and 421 currency exchange offices operated in the Kyrgyz Republic. Over the last five years, the three largest microfinance companies (Bai-Tushum, FINCA, and Kompanion) transformed into banks with full banking licenses.
Foreign Exchange and Remittances
Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. While the som is a floating currency, the NBKR periodically intervenes in the market to mitigate the risk of exchange rate shocks. Given significant currency fluctuations among Post-Soviet countries in 2020, the Kyrgyz som was one of the most stable currencies, with the dollar exchange rate rising 18.9 percent over the year. In 2020, the NBKR conducted 29 foreign exchange interventions and in total, sold USD 265.9 million. The NBKR conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day. Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out.
Remittances typically account for 25-30 percent of GDP. In 2020 net remittances reached $2.37 billion, a 1,25 percent reduction from 2019. In January 2020, the Central Bank of Russia increased the cap on monthly money transfers to the Kyrgyz Republic to 150,000 rubles. (Note: In July 2019, the Central Bank of Russia had lowered the cap on money transfers per month to the Kyrgyz Republic to 100,000 ruble.)
In May 2019, the follow up assessment by the Financial Action Task Force (FATF) concluded that the Kyrgyz Republic demonstrated political commitment in improving its anti-money laundering and countering financing of terrorism, and in addressing technical compliance deficiencies identified in the 2018 Mutual Evaluation Report (MER) assessment. However, the country still lacks a comprehensive national risk assessment and underlying risk-based approach for monitoring and identifying suspicious activities.
Sovereign Wealth Funds
The Kyrgyz Republic’s Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77.4 million shares of the company, which are currently valued at USD 836 million.
8. Responsible Business Conduct
The Kyrgyz Government does not factor responsibility business conduct (RBC) policies or practices into its procurement decisions. Historically, the mining sector has been a lightning rod for public controversy concerning RBC violations. From 2017-2019, local residents staged rallies to protest against small gold mining operations owned and operated by Chinese and other foreign-owned mining companies based on claims of their detrimental impact on the environment.
Corporate social responsibility (CSR) is not a fully developed concept or practice. Most companies have not yet developed the capacity to coordinate with civil society on this level. The companies that generally demonstrate CSR are large, foreign-owned companies that participate in or lead industry-strengthening training sessions, work with local universities to develop internship programs and donate to national development projects. Many new large investors, particularly in natural resource extraction, find that there is a requirement to establish a sizeable “social development fund” as a prerequisite for doing business in the Kyrgyz Republic. Charitable donations are not tax deductible.
The Kyrgyz Republic is a member of the Extractive Industries Transparency Initiative (EITI). According to the online license register of the State Committee on Industry, Energy, and Subsoil Use, the Kyrgyz Republic currently has 2413 active extractive licenses, and EITI covers more than 95 percent of mining revenues in the Kyrgyz Republic. The EITI Board in September 2020 decided that Kyrgyz Republic has made meaningful progress with considerable improvements in implementing the 2016 Standard.
Child labor is still used in the country especially in the country’s sizeable shadow economy which includes agriculture, bazaars (transportation of goods, shoes cleaning, sales of beverages and food etc), service sector and construction. In 2019, the Kyrgyz Republic made minimal advancement in efforts to eliminate the worst forms of child labor, though a regressive moratorium on business inspections severely limits the labor inspectorate’s capacity to investigate child labor violations. The government passed a policy package that established a National Referral Mechanism for victims of human trafficking, and drafted a new National Action Plan for 2020–2024 on the Prevention and Eradication of Child Labor.
There are a number of private security companies in Kyrgyz Republic, including around 50 private security companies. The Kyrgyz Republic is not currently a member of the Montreux Document on Private Military and Security Companies, and is not a supporter of the International Code of Conduct or Private Security Service Providers, nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).
Corruption remains a serious problem at all levels of Kyrgyz society and in all sectors of the economy. All companies are recommended to establish internal codes of conduct, above all, to prohibit the bribery of public officials. There are laws criminalizing the giving and accepting of bribes, establishing penalties ranging from a small administrative fine to a prison sentence. However, the government’s enforcement of anti-corruption legislation has been notoriously uneven and often politically motivated.
According to Transparency International’s 2020 Corruption Perception Index, the Kyrgyz Republic ranked 124 out of 176 countries rated, climbing from its position of 132 in 2016. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem has been difficult to fight. Moreover, many in the Kyrgyz Republic view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices. The Kyrgyz Republic is a signatory of the UN Anticorruption Convention but is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The anticorruption service within the State Committee for National Security has taken action against a limited number of ministers and parliamentarians. Over the past year, instances of corruption-related arrests against public figures from the political opposition have increased, and since October 2020 state law enforcement agencies detained nearly 60 people on corruption charges.
In recent years, anti-corruption campaigners and Kyrgyz journalists involved in investigating corruption have been subject to intimidation and physical assault, as well as detention on unrelated charges. Such incidents are rarely investigated thoroughly by law enforcement.
In October 2020, the government instituted a policy of “economic amnesty” for corruption, if the perpetrator returns stolen assets. The legality of such amnesty has been disputed by international experts, and a number of high-profile arrests have resulted in swift release following payment of fines.
U.S. companies seeking to do business in the Kyrgyz Republic, regardless of their size, should assess the business climate in the relevant sector in which they will be operating or investing, and conduct due diligence to ensure full compliance with measures to prevent and detect corruption, including bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the Kyrgyz Republic and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
The Kyrgyz Republic ratified the UN Anticorruption Convention in September 2005. The Kyrgyz Republic is not a party to the OECD Convention on Combatting Bribery.
Hotline of the Anti-corruption Service of the State Committee for National Security:
+996 (312) 660020
Contact at “watchdog” organization:
Mukanova N.A., General Secretary
Anticorruption Business Council of the Kyrgyz Republic
Ministry of Economy
114 Chui Avenue, Bishkek
+996 312 895 496
10. Political and Security Environment
The Kyrgyz Republic has a history of political upheaval, most recently in October 2020 when violent election protests ultimately resulted in the annulment of the election results and removal of former President Jeenbekov, who was replaced on an interim basis by current President Sadyr Japarov, who was elected in January 2021. Since independence, the Kyrgyz Republic has had 30 different prime ministers, often necessitating a change in cabinet members with the introduction of each new head of government. In 2005, 2010, and 2020 mass protests against government corruption precipitated the ouster of the country’s elected president. From 2010, the country experienced a period of relative political stability, and in October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. Another Constitutional Referendum is scheduled for April 2021.
In the days following the October 2020 toppling of the government and installation of the interim government led by Sadyr Japarov, political instability spilled over into the commercial sector; following the election protests, local marauders looted and raided the offices and facilities of multiple foreign-joint venture mining enterprises. In the recent past, the extractive resources companies have been the target of localized instability in 2018 and 2019, after relative calm in 2015 and 2016.
The Kyrgyz government has used aggressive tactics for political or economic leverage in negotiations with international companies. In May 2021, the Kyrgyz government assumed full control of the Kumtor Gold Company, a wholly owned subsidiary of the Canadian gold mining company Centerra Gold Inc, following a local court ruling that fined the Canadian company $3 billion for environmental damages. Foreign-affiliated companies have been subjected to local protests, at times resulting in vandalism and violence. In 2019, the majority Chinese company Zhong Ji Mining suspended operations at the Solton-Sary gold mine following violent clashes with hundreds of local residents who blamed the company for environmental degradation. In December 2019, hundreds of protestors demanded local authorities of the Naryn Free Economic Trade Zone to cancel the land lease of a Chinese-Kyrgyz enterprise, resulting in the suspension of a major customs and trade logistics complex. Chinese investment projects continue to be treated with more significant scrutiny and pushback by local residents, relative to Russian, Korean, Japanese, and Western investment initiatives. Since the October incidents, local and foreign businesses show increasing concern about the government’s commitment to ensure the protection of private property and assets.
Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated organizations and business interests. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to return Kyrgyz citizens from conflicts in Iraq and Syria are ongoing. Interethnic tensions persist in the southern part of the country but remain relatively contained from the rest of the country. In the Batken region, demarcation along portions of the Kyrgyz-Uzbek and Kyrgyz-Tajik borders are in dispute. These disputed areas occasionally experience skirmishes between border guards that have resulted in crossfire violence, sometimes involving civilians.
The political and security climate in the Kyrgyz Republic remains fraught with uncertainty as the Japarov administration pursues sweeping constitutional changes to strengthen the powers of the presidency. A resurgence of COVID-19 could not only damage the country’s fragile economy, it may also be the catalyst for further political instability.
11. Labor Policies and Practices
There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens find more lucrative job opportunities abroad, and the nation’s education system has largely failed to keep pace with advancing educational needs within many sectors. International organizations are generally able to employ competent staff, often bilingual in English or other languages. However, a shortage of highly qualified local candidates in IT, mining, energy, and manufacturing, forces international organizations to rely on expatriates for these skills. The official unemployment rate is approximately seven percent, though experts estimate the number of actual unemployed individuals exceeds this figure. Approximately one million Kyrgyz citizens work abroad because of limited opportunities in the Kyrgyz Republic.
There are no government policies that require hiring Kyrgyz nationals, though it is often added as a condition for investment, particularly in the mining sector. There are no restrictions on employers adjusting to fluctuating market, including hiring and firing workers at will. Many private companies use temporary or contract workers. The Labor Code does not provide any special conditions in order to attract investment. Labor unions are independent and are not subject to state bodies, employers, political parties, or other unions. In practice, labor unions have been inactive on advocating and enforcing the protection of workers’ rights.
Workers have the right to form and join trade unions. The law allows unions to conduct their activities without interference, organize, and bargain collectively. Workers may strike, but the requirement to receive formal approval has made striking difficult and complicated. The law prohibits government employees from striking, but the prohibition does not apply to teachers or medical professionals. The law does not prohibit retaliation against striking workers. Labor disputes are settled by Commission for Labor Disputes (established within all organizations with 10 or more employees), by the authorized state body, or by courts of the Kyrgyz Republic. The employee has the right to choose one of these bodies to settle the dispute. However, in March 2021, the Parliament hastily approved a controversial bill that will require all trade unions to be affiliated with the government sanctioned Federation of Trade Union. If signed by the President, the bill would violate the principle “freedom of association” enshrined in international labor rights, and the principle of independence of trade union organizations.
Safety and health conditions in factories are generally poor and weakly enforced by the government. Workers in the informal economy, which makes up 25-35 percent of the economy have neither legal protection nor mandated safety standards. The law establishes occupational health and safety standards, and the State Labor Inspectorate is responsible for protecting workers and carrying out inspections in the event that worker safety and well-being is compromised. Limited staffing and the temporary moratorium on all business inspections from January 1, 2019 until January 1, 2022, inhibits unannounced workplace site-visits. See more at: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper
The Labor Code of the country complies with all required international laws and treaties, but gaps remain in protecting the rights of individuals employed by private companies. Many employees are hired based on basic or even oral agreements and lack knowledge of their rights.
In January 2017, amendments to the Labor Code of the Kyrgyz Republic entered into force that strengthened labor rights and protections for people under the age of 18. The law now prohibits people under the age of 18 from being sent on business trips, engaging in overtime work, night shifts, and working on days off or official holidays. However, child labor laws are not uniformly enforced.
The U.S. Embassy is unaware of the Kyrgyz government’s efforts to implement OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas or OECD or UN Guiding Principles on Business and Human Rights.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Russian Direct Investment Fund (RDIF) was established in 2011 to facilitate direct investment in Russia and has already attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. In 2013, Russia’s Agency for Strategic Initiatives (ASI) launched an “Invest in Russian Regions” project to promote FDI in Russian regions. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates and provides potential investors with information about regions most open to foreign investment. In 2021, 40 Russian regions improved their Regional Investment Climate Index scores (https://asi.ru/investclimate/rating). The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the Prime Minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia and advises the government on regulatory rulemaking.
Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation;” 2) Law No. 39-FZ, February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment;” 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense (Strategic Sectors Law, SSL);” and 4) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR),” and (5) Law No. 69-FZ. April 1, 2020, “On Investment Protection and Promotion Agreements in the Russian Federation.” This framework of laws nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, or national security or defense, and to promote its socioeconomic development. Foreign investors may freely use the profits obtained from Russia-based investments for any purpose, provided they do not violate Russian law.
The new 2020 Federal Law on Protection and Promotion of Investments applies to investments made under agreements on protection and promotion of investments (“APPI”) providing for implementation of a new investment project. APPI may be concluded between a Russian legal entity (the organization implementing the project established by a Russian or a foreign company) and a regional and/or the federal government. APPI is a private law agreement coming under the Russian civil legislation (with exclusions provided for by the law). Support measures include reimbursement of (1) the costs of creating or reconstructing the infrastructure and (2) interest on loans needed for implementing the project. The maximum reimbursable costs may not exceed 50 percent of the costs actually incurred for supporting infrastructure facilities and 100 percent of the costs actually incurred for associated infrastructure facilities. The time limit for cost recovery is five years for the supporting infrastructure and ten years for the associated infrastructure.
Limits on Foreign Control and Right to Private Ownership and Establishment
Russian law places two primary restrictions on land ownership by foreigners. The first is on the foreign ownership of land located in border areas or other “sensitive territories.” The second restricts foreign ownership of agricultural land, including restricting foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned from owning land. These entities may hold agricultural land through leasehold rights. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.
In October 2014, President Vladimir Putin signed the law “On Mass Media,” which took effect on January 1, 2015. The law restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit to Russia’s broadcast sector). U.S. stakeholders have raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors and describe the licensing regime as non-transparent and unpredictable. In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership interest in Russian news aggregator websites. The second, final hearing was planned for February 2019, but was postponed. To date, this proposed law has not been passed.
Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2019, the Commission received 621 applications for foreign investment, 282 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 282, the Commission granted preliminary approval for 259 (92 percent approval rate), rejected 23, and found that 265 did not require approval (https://fas.gov.ru/news/29330). International organizations, foreign states, and the companies they control are treated as single entities under the Commission, and with their participation in a strategic business, are subject to restrictions applicable to a single foreign entity. There have been no updates regarding the number of applications received by the Commission since 2019. Due to COVID-19, the Commission met only twice since then, in December 2020 and February 2021.
Pursuant to legal amendments to the SSL that entered into force August 11, 2020, a foreign investor is deemed to exercise control over a Russia’s strategic entity even if voting rights in shares belonging to the investor have been temporarily transferred to other entities under the pledge or trust management agreement, or repo contract or a similar arrangement. According to the FAS, the amendments were aimed to exclude possible ways of circumventing the existing foreign investments control rules by way of temporary transfer of voting rights in the strategic entity’s shares.
In an effort to reduce bureaucratic procedures and address deficiencies in the SSL, on May 11, President Putin signed into law a draft bill introducing specific rules lifting restrictions and allowing expedited procedures for foreign investments into certain strategic companies for which strategic activity is not a core business.
Since January 1, 2019, foreign providers of electronic services to business customers in Russia (B2B e-services) have new Russian value-added tax (VAT) obligations. These obligations include VAT registration with the Russian tax authorities (even for VAT exempt e-services), invoice requirements, reporting to the Russian tax authorities, and adhering to VAT remittance rules.
Other Investment Policy Reviews
The WTO conducted the first Trade Policy Review (TPR) of the Russian Federation in September 2016. The next TPR of Russia will take place in October 2021, with reports published in September. (Related reports are available at https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm).
The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru. Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office, and the registration process should not take more than three days. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must register with FTS and pay a registration fee of RUB 4,000. As of January 1, 2019, the registration fee has been waived for online submission of incorporation documents directly to the Federal Tax Service (FTS).
The publication of the Doing Business report was paused in 2020, as the World Bank is assessing its data collection process and data integrity preservation methodology.
The 2019 ranking acknowledged several reforms that helped Russia improve its position. Russia made getting electricity faster by setting new deadlines and establishing specialized departments for connection. Russia also strengthened minority investor protections by requiring greater corporate transparency and made paying taxes easier by reducing the tax authority review period of applications for VAT cash refunds. Russia also further enhanced the software used for tax and payroll preparation.
The Russian government does not restrict Russian investors from investing abroad. Since 2015, Russia’s “De-offshorization Law” (376-FZ) requires that Russian tax residents notify the government about their overseas assets, potentially subjecting these assets to Russian taxes.
While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals), and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when funds are moved in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts. On January 1, 2020, Russia abolished all currency control restrictions on payments of funds by non-residents to bank accounts of Russian residents opened with banks in OECD or FATF member states. This is provided that such states participate in the automatic exchange of financial account information with Russia. As a result, from 2020 onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in wide range of financial products.
4. Industrial Policies
Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures (TRIMS) Agreement by July 2018. The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements), or measures that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements). Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018. In 2019, the Ministry of Industry and Trade introduced a new points-based system to estimate vehicle localization levels to determine Original Equipment Manufacturer (OEM)’s eligibility for Russian state support. The government provides state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures. Points will be awarded for localizing the supply of certain components. Localized engines or transmissions used in vehicle assembly, for instance, are worth 40 points. OEMs running a research and development business in Russia score an additional 20 points; and a further 20 points are granted to those using localized aluminum or electronic systems in their vehicles. In May 2021, the government introduced a points-based system to assess localization levels in the shipbuilding industry to determine Original Equipment Manufacturer (OEM)’s eligibility for Russian state support in a move to facilitate the development of shipbuilding industry and import substitution.
The government also introduced Special Investment Contracts (SPICs) as an alternative incentive program in 2015. On December 18, 2017, the government changed the rules for concluding SPICs to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts allow foreign companies in Russia access to import substitution programs, including certain subsidies, if they establish local production. In principle, these contracts may aid in expediting customs procedures, however, in practice, reports suggest companies that sign such contracts find their business hampered by policies biased in favor of local producers.
In August 2019, the Government created “SPIC-2,” which aimed to increase long-term private investment in high-technology projects and introduce advanced technology for local content in manufacturing products. The Ministry of Industry and Trade also extended the maximum SPIC term to 20 years, depending on the amount of investment. The key criteria for evaluating bids are speed of introducing technology, the volume of manufacturing, and the level of technology in local manufacturing processes.
The Russian Direct Investment Fund (RDIF) was established in 2011 as a sovereign wealth fund to operate with long-term and strategic investors and by offering co-financing for foreign investments directed at the modernization of the Russian economy. To date, foreign partners of the RDIF have invested RUB 1.9 trillion ($26 billion) in Russia, with the RDIF having co-invested RUB 200 billion ($2.7 billion). The RDIF has also attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. The RDIF, in conjunction with the Gamaleya National Center for Microbiology and Epidemiology, financed the development and marketing of Russia’s Sputnik V and Sputnik Light vaccines.
Foreign Trade Zones/Free Ports/Trade Facilitation
Russia continues to promote the use of high-tech parks, special economic zones (SEZs), and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, import duties, and partial exemption from social fund payments. Russia currently has 27 SEZs (http://www.russez.ru/oez/). A Russian Accounts Chamber (RAC) investigation of SEZs in February 2020 found they have had no measurable impact on the Russian economy, despite RUB 136 billion ($1.7 billion) investment from the federal government from 2006-2018. In 2015, the Russian government created a separate but similar program – “Territories of Advanced Development” – with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East.
Performance and Localization Requirements
Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia. Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets.
In certain sectors, the Russian government has pressed for localization and increased local content. For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content. Russia is currently considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.
Russia’s data storage law (the “Yarovaya law”) took effect on July 1, 2018, requiring providers to store data in “full volume” beginning October 1, 2018. The law requires domestic telecoms and ISPs to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month. The Yarovaya law initially required longer retention with a shorter implementation window, which companies criticized as costly and unworkable. Until recently there were no special liabilities for violations of the data localization requirement. In December, President Putin signed into law legislative amendments establishing significant fines ranging from RUB 1 million ($15,600) to RUB 18 million ($282,000) for legal entities and from RUB 100,000 ($1,560) to RUB 800,000 ($12,500) for company CEOs. Amendments to the “Plan for Achieving Russia’s National Development Goals until 2024 and for the Planning Period until 2030 call for a one-year postponement of some implementation timelines set in Russia’s data storage law (the “Yarovaya law”) that took effect on July 1, 2018. Specifically, the requirement to move Russian citizens’ data onto servers located in Russia was pushed back from October 31, 2021 to October 30, 2022.
On November 21, 2019, Russia adopted the law on mandatory preinstallation of Russian-produced software for smartphones, computers, and other electronic devices, in the sale of certain types of technically complex goods. Starting from July 31, 2021, the regulators will apply fines for the sale of any electronics without preinstalled Russian software.
On September 16, 2020, the Federal Service for Technical and Export Control (FSTEC) published the order on the amendments to the Requirements for ensuring the security of significant objects of the Russian critical information infrastructure (CII). The changes require using predominantly domestic software and equipment for Russian CII to ensure its technological independence and safety, and create the conditions for promotion of the Russian-made products abroad.
The Central Bank of Russia (CBR) has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries. The ratio of Russian employees in a subsidiary of a foreign bank is set at less than 75 percent. If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.
5. Protection of Property Rights
Russia placed 12th overall in the 2020 World Bank Doing Business Report for “registering property,” which analyzes the “steps, time and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute,” as well as the “the quality of the land administration system.”
The Russian Constitution, along with a 1993 Presidential Decree, gives Russian citizens the right to own, inherit, lease, mortgage, and sell real property. The state owns the majority of Russian land, although the structures on the land are typically privately owned. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments.
Intellectual Property Rights
Russia remained on the U.S. Trade Representative (USTR) Special 301 Priority Watch List in 2020 and had several illicit streaming websites and online markets reported in the 2019 Notorious Markets List. Particular areas of concern include copyright infringement, trademark counterfeiting/hard goods piracy, and non-transparent royalty collection procedures. Stakeholders continue to report significant piracy of video games, music, movies, books, journal articles, and television programming. Mirror sites related to infringing websites and smartphone applications that facilitate illicit trade are also a concern. Russia needs to direct more action to rogue online platforms targeting audiences outside the country. In December 2019, for the first time in Russia, the owner of several illegal streaming sites received a two-year suspended criminal sentence for violating Russia’s IP protection legislation. This case has set an important precedent for enforcing IPR laws in Russia.
Online piracy continues to pose a significant problem in Russia. Russia has not upheld its commitments to protect IPR, including commitments made to the United States as part of its WTO accession. Nevertheless, there are indications that the Russian internet piracy market is declining. According to Group-IB, a global cyber threat intelligence company, total revenue of the Russian video piracy market in 2020 reached $59 million. The market has been shrinking for several years in a row. In 2020, the market declined by 7 percent, compared to a 27 percent drop registered in 2019.
Despite Russia’s 2018 ban on virtual private networks (VPNs), the ban has not been fully enforced. Since 2017, search engines, including Google and Yandex, have been required to block IPR-infringing websites and “mirror” sites, as determined by federal communications watchdog Roskomnadzor. As a result of increased scrutiny, internet companies Yandex, Mail.Ru Group, Rambler, and Rutube signed an anti-piracy memorandum with several domestic right holders, which is valid through the end of 2021. From January to November 2020, Roskomnadzor blocked over 10,000 piracy websites and “mirror sites,” compared to over 6,000 in 2019.
Modest progress has been made in the area of customs IPR protection since the Federal Customs Service (FTS) can now confiscate imported goods that violate IPR. From January to November 2020, the FTS seized 12.8 million counterfeited goods, compared with 11 million in 2019. Over the same time period, the FTS prevented the infringement and damages to copyright holders amounting to RUB 4.6 billion ($64 million), and identified 11.8 million units of counterfeit industrial products in Russia, almost double compared to 2019. The turnover of counterfeit non-food consumer goods in Russia is estimated at around RUB 5.2 trillion ($70 billion), or 4.5 percent of Russia’s GDP.
In May 2020, the State Duma approved amendments to the Federal Law “On Information, Information Technologies and the Protection of Information” to allow blocking mobile applications with illegal content. The Law enables the Russian regulator (“Roskomnadzor”) to mandate app owners and app platforms such as AppStore, Google Play and Huawei AppGallery to delete the IP infringing content.
6. Financial Sector
Capital Markets and Portfolio Investment
Russia is open to portfolio investment and has no restrictions on foreign investments. Russia’s two main stock exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) – merged in December 2011. The MICEX-RTS bourse conducted an initial public offering on February 15, 2013, auctioning an 11.82 percent share.
The Russian Law on the Securities Market includes definitions of corporate bonds, mutual funds, options, futures, and forwards. Companies offering public shares are required to disclose specific information during the placement process as well as on a quarterly basis. In addition, the law defines the responsibilities of financial consultants assisting companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders. In general, the Russian government respects IMF Article VIII, which it accepted in 1996. Credit in Russia is allocated generally on market terms, and the private sector has access to a variety of credit instruments. Foreign investors can get credit on the Russian market, but interest rate differentials tend to prompt investors from developed economies to borrow on their own domestic markets when investing in Russia.
Money and Banking System
Banks make up a large share of Russia’s financial system. Although Russia had 396 licensed banks as of March 1, 2020, state-owned banks, particularly Sberbank and VTB Group, dominate the sector. The top three largest banks are state-controlled (with private Alfa Bank ranked fourth). The top three banks held 51.4 percent of all bank assets in Russia as of March 1, 2020. The role of the state in the banking sector continues to distort the competitive environment, impeding Russia’s financial sector development. At the beginning of 2019, the aggregate assets of the banking sector amounted to 91.4 percent of GDP, and aggregate capital was 9.9 percent of GDP. By January 2020 and 2021, the aggregate assets of Russian banks reached 92.2 and 97.2 percent, respectively. Russian banks reportedly operate on short time horizons, limiting capital available for long-term investments. Overall, the share of retail non-performing loans (NPLs) to total gross loans slightly increased from 4.4 percent of total gross retail loans in January 2020 to 4.5 percent in April 2021, while corporate NPLs declined from 7.5 percent to 6.5 percent in the same period, according to the Central Bank of Russia. ACRA-Rating analytical agency expects an increase in retail NPLs to 6.0 percent and corporate NPL – to 8.8 percent by the end of 2021.
Foreign banks are allowed to establish subsidiaries, but not branches within Russia and must register as a business entity in Russia.
Foreign Exchange and Remittances
While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign currency from authorized banks. The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines.
Currency controls also exist on all transactions that require customs clearance, which, in Russia, applies to both import and export transactions, and certain loans. As of March 1, 2018, the CBR no longer requires a “transaction passport” (i.e., a document with the authorized bank through which a business receives and services a transaction) when concluding import and export contracts. The CBR also simplified the procedure to record import and export contracts, reducing the number of documents required for bank authorization. The government has also lifted the requirement to repatriate export revenues if settlements under a foreign trade contract are set in Russian rubles effective January 1, 2020.
The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. To navigate these requirements, investors should seek legal expert advice at the time of making an investment. Banking contacts confirm that investors have not had issues with remittances and in particular with repatriation of dividends.
Sovereign Wealth Funds
In 2018, Russia combined its two sovereign wealth funds to form the National Welfare Fund (NWF). The fund’s holdings amounted to $165.4 billion, or 12.0 percent of GDP as of April 1, 2020 and grew to $185.9 billion, or 12.0 percent of GDP as of May 1, 2021. The Ministry of Finance oversees the fund’s assets, while the CBR acts as the operational manager. Russia’s Accounts Chamber regularly audits the NWF, and the results are reported to the State Duma. The NWF is maintained in foreign currencies, and is included in Russia’s foreign currency reserves, which amounted to $563.4 billion as of March 31, 2020. In June 2021, Russia’s Ministry of Finance announced plans to completely divest the $41 billion worth of NWF U.S. dollar holdings within a month, replacing them with RMB (Chinese Yuan), Euros and gold by July 2021.
8. Responsible Business Conduct
While not standard practice, Russian companies are beginning to show an increased level of interest in their reputation as good corporate citizens. When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and scrutiny, including with respect to corporate social responsibility (CSR) standards. As a result, most large Russian companies currently have a CSR policy in place, or are developing one, despite the lack of pressure from Russian consumers and shareholders to do so. CSR policies of Russian firms are usually published on corporate websites and detailed in annual reports, but do not involve a comprehensive “due diligence” approach of risk mitigation that the OECD Guidelines for Multinational Enterprises promotes. Most companies choose to create their own non-government organization (NGO) or advocacy outreach rather than contribute to an already existing organization. The Russian government is a powerful stakeholder in the development of certain companies’ CSR agendas. Some companies view CSR as merely financial support of social causes and choose to support local health, educational, and social welfare organizations favored by the government. One association, the Russian Union of Industrialists and Entrepreneurs (RSPP), developed a Social Charter of Russian Business in 2004 in which 269 Russian companies and organizations have since joined, as of April 1, 2020.
According to a joint study conducted by Skolkovo Business School and UBS Bank, in 2017 corporate contributions to charitable causes in Russia reached an estimated RUB 220 billion (USD 3.8 billion). RSPP reported that as many as 185 major Russian companies published 1,038 corporate non-financial reports between 2000 and 2019, including on social responsibility initiatives.
Despite some government efforts to combat it, the level of corruption in Russia remains high. Transparency International’s 2020 Corruption Perception Index (CPI) puts Russia at 129th place among 180 countries – eight notches up from the rank assigned in 2019.
Roughly 24 percent of entrepreneurs surveyed by the Russian Chamber of Commerce in October and November 2019 said they constantly faced corruption. Businesses mainly experienced corruption during applications for permits (35.3 percent), during inspections (22.1 percent), and in the procurement processes (38.7 percent). The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.
In March 2020, Russia’s new Prosecutor General, Igor Krasnov, reported RUB 21 billion ($324 million) were recovered in the course of anticorruption investigations in 2019. In December 2019, Procurator General’s Office Spokesperson Svetlana Petrenko reported approximately over 7,000 corruption convictions in 2019, including of 752 law enforcement officers, 181 Federal Penitentiary Service (FPS) officers, 81 federal bailiffs and 476 municipal officials.
Until recently, one of the peculiarities of Russian enforcement practices was that companies were prosecuted almost exclusively for small and mid-scale bribery. Several 2019 cases indicate that Russian enforcement actions may expand to include more severe offenses as well. To date, ten convictions of companies for large-scale or extra large-scale bribery with penalty payments of RUB 20 million ($320,000) or more have been disclosed in 2019 – compared to only four cases in the whole of 2018. In July 2019, Russian Standard Bank, which is among Russia’s 200 largest companies according to Forbes Russia, had to pay a penalty of RUB 26.5 million ($420,000) for bribing bailiffs in Crimea in order to speed up enforcement proceedings against defaulted debtors.
Still, there is no efficient protection for whistleblowers in Russia. In June 2019, the legislative initiative aimed at the protection of whistleblowers in corruption cases ultimately failed. The draft law, which had been adopted at the first reading in December 2017, provided for comprehensive rights of whistleblowers, and responsibilities of employers and law enforcement authorities. Since August 2018, Russian authorities have been authorized to pay whistleblowers rewards which may exceed RUB 3 million ($50,000). However, rewards alone will hardly suffice to incentivize whistleblowing.
Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles. The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions.
In July 2018, President Putin signed a two-year plan to combat corruption. The plan required public discussion for federal procurement worth more than RUB 50 million ($660,000) and municipal procurement worth more than RUB 5 million ($66,000). The government also expanded the list of property that can be confiscated if the owners fail to prove it was acquired using lawful income. The government maintains an online registry of officials charged with corruption-related offences, with individuals being listed for a period of five years. The Constitutional Court gave clear guidance to law enforcement on asset confiscation due to the illicit enrichment of officials. Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment. The Council of Europe’s Group of States against Corruption reported in 2019 that Russia had implemented 18 out of 22 recommendations of the Council of Europe Group of States against Corruption (GRECO) (nine fully implemented, nine partially implemented, and four recommendations have not been implemented), according to a Compliance Report released by GRECO in August 2020. GRECO made 22 recommendations to Russia on further combatting corruption developments: eight concern members of the parliament, nine concern judges, and five concern prosecutors.
In 2020, overall damage from the corruption crimes entailing criminal cases in Russia exceeded RUB 63 billion ($ 836.7 million). The number of detected corruption-related crimes in January-February 2021 increased by 11.8 percent to 7,100 up from 6,300 in the same period of 2020, according to the Prosecutor General’s Office. The number of bribery cases increased by 21 percent year-on-year in the same period to reach 3,500. The damage caused by corruption increased from RUB 7.2 billion ($ 98.2 million) in January-February 2020 to RUB 13 billion ($ 177.4 million) in the same period of 2021.
U.S. companies, regardless of size, are encouraged to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should become familiar with the relevant anticorruption laws of both Russia and the United States to comply fully with them. They should also seek the advice of legal counsel when appropriate.
Resources to Report Corruption
Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia +7 499 244-16-06
+7 499 244-16-06
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow
Individuals and companies that wish to report instances of bribery or corruption that impact, or potentially impact their operations, and to request the assistance of the United States Government with respect to issues relating to issues of corruption may call the Department of Commerce’s Russia Corruption Reporting hotline at (202) 482-7945, or submit the form provided at http://tcc.export.gov/Report_a_Barrier/reportatradebarrier_russia.asp.
10. Political and Security Environment
Political freedom continues to be limited by restrictions on the fundamental freedoms of expression, assembly, and association and crackdowns on political opposition, independent media, and civil society. Since July 2012, Russia has passed a series of laws giving the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. To date, more than 77 NGOs have been labelled foreign agents. A May 2015 law authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. As of June, 2021, 34 foreign organizations were included on this list. (https://minjust.ru/ru/activity/nko/unwanted)
According to the Russian Supreme Court, 7,763 individuals were convicted of economic crimes in 2019; the Russian business community alleges many of these cases were the result of commercial disputes. Potential investors should be aware of the risk of commercial disputes being criminalized. Chechnya, Ingushetia, Dagestan and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.
Public protests continue to occur intermittently in Moscow and other cities. Russians protested in support of opposition leader Alexey Navalny after his return from Germany and detention in Moscow in January 2021. Rallies were held in almost 200 cities, the largest taking place in the capital. During these protests, authorities detained thousands and initiated several criminal cases against the participants; the number of detainees was record setting. Moscow saw the largest protests since 2011 in the summer of 2019 as many Muscovites were unhappy that opposition candidates had been banned from running in the September municipal elections.
11. Labor Policies and Practices
The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions. Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped. Employers regularly complain about shortages of qualified skilled labor. This phenomenon is due, in part, to weak linkages between the education system and the labor market and a shortage of highly skilled labor. In 2019, the minimum wage in Russia was linked to the official “subsistence” level, which as of June 2021, was RUB 12,792 ($178).
The 2002 Labor Code governs labor standards in Russia. Normal labor inspections identify labor abuses and health and safety standards in Russia. The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as the Russian government employs a limited number of labor inspectors. Employers are required to make severance payments when laying off employees in light of worsening market conditions. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs