I’ve described the significant progress Kazakhstan made in improving its international standing for economic attractiveness and the recognition that it received from the U.S. government for its reform.
For much of the past 15 years, Kazakhstan was deemed by many as having the best investment climate in the post-Soviet Commonwealth of Independence States (the CIS), being second only to Russia in its ability to attract foreign investment. That doesn’t sound like much these days, given the severe recession in the Russian economy. But only a few years ago Kazakhstan was a dynamic economy aiming to join the OECD and become a top 30 economy by 2050.
I’ve also discussed a recent U.S. State Department report highlighting the significant obstacles investors face in Kazakhstan. This includes a barrage of legislative changes, non-transparent and arbitrary application of laws, harassment by various authorities through unscheduled audits and inspections, the government’s tendency to challenge contractual rights, and the tendency of courts to favor the government.
According to the U.S. State Department, “these negative tendencies feed the perception that Kazakhstan’s investment environment is subpar.”
How do we reconcile these two contradictory reports? First, that given Kazakhstan’s post-Soviet legacy and high levels of corruption, we shouldn’t be surprised at the tensions between progress and corruption.
Kazakhstan ranks 123 on Transparency International’s Corruption Perceptions Index (CPI). High levels of corruption don’t correlate with a rule of law or good investment climate, and a poor investment climate deters foreign investment (at least outside the natural resource sector) and inhibits economic growth. While the Kazakh authorities need to be applauded for the substantial efforts they have already made to improve the country’s economic attractiveness and make the country more competitive, much more work needs to be done. Unless Kazakhstan tackles its corruption problem, meeting its goal to join the OECD and become a top 30 economy by mid-century seems highly unlikely.
Perhaps it’s not fair to look at Kazakhstan the same way one would look at a developed economy, let’s say the United States, Canada, Singapore, or Norway. Kazakhstan is an emerging market, and was a Soviet republic only a generation ago. Instead of expecting Kazakhstan to abide by Western norms, it’s better to compare its performance with that of its peers.
According to TI’s CPI, out of 168 countries and territories, the CIS states rank as follows:
Kazakhstan sits near the middle of the pack. Its CPI performance isn’t terrible — it’s just underwhelming.
The problem for Kazakhstan’s leadership is that it has sold its people on the idea of constant economic progress. However, with the Kazakh tenge becoming the world’s worst performing currency after devaluing by over 80 percent last year as the result of the rout in Kazakhstan’s oil and metal exports, the Kazakh authorities will find it hard to deliver their people’s dreams of prosperity.
With a return to high prices for Kazakhstan’s natural resource bounty uncertain, the Kazakh leadership must undertake fundamental reforms, including tackling the high corruption levels, strengthening the rule of law, and improving the country’s business climate. Only then will Kazakhstan’s government deliver the economic results the people there have come to expect.
How can American companies doing business in Kazakhstan reduce both the FCPA and local law risks from their investments and operations in the country? I’ll look at some potential strategies for mitigating the risks in my next post.
Alex Nisengolts is a Chicago attorney focusing on cross-border M&A, electronic discovery, and investments and operations in Kazakhstan. He first traveled to Kazakhstan in 1994 as a legal advisor on a USAID-sponsored legal reform project and has been involved in Kazakh matters for the past two decades, for U.S. and Kazakh law firms and as a manager and senior manager for a Big Four international accounting firm. He can be reached here.