The purpose of this Report is to advise of key developments in the investment consultative process in Kazakhstan and to indicate opportunities for ITIC Sponsors to participate in this process. The Report supplements recent reports on the activities of the KMTC specifically in relation to tax and investment issues in the minerals resources sector.

Economic Policy Context

Sponsors will be aware of the cautiously-favourable IMF ‘health check’ of the Kazakhstan economy following their Article IV consultations on 24 June 1998. While noting the very good macro-economic performance with eg inflation down to 11 per cent, growth at two per cent, a favourable balance-of-payments situation and the authorities’ continued attachment to reform, the Fund nonetheless warned of the need for flexibility in case ‘Asian contagion’ needed to be warded off and also noted a number of minuses e.g. with the slowing pace of privatisation and of trade liberalisation.

In particular the Fund expressed concern about the budget deficit and emphasised the need to improve revenue collection through full implementation and strengthened administration of the Tax Code which Code, in the opinion of the Fund, could be a ‘---model for transition countries---’. The Fund also urged a liberal approach to the involvement of foreign investors in the development of the oil and gas sector where the financial and technical requirements were simply beyond Kazakhstan's indigenous capacity. The Fund further called for measures to improve the investment climate through e.g. better governance and increased transparency, noted the importance---not least for providing investment opportunities for the new private pensions system---of accelerating the ‘Blue Chip’ privatisation program and regretted slippage in trade liberalisation, arguing that further tariff reductions should precede rather than await the outcome of the current negotiation of their common external tariff by the ‘Four Countries Plus’ Group ( Kazakhstan, Kyrgyzstan, Tajikistan, Russia, Belarus).

Background on Investment Consultative Process

In his March 1998 Mailing Dan Witt outlined development of official thinking in Kazakhstan on the Government’s approach to investment attraction and on the role that ITIC could play in developing that approach. Subsequently I had discussions with a number of sponsors who had indicated an interest in closer participation with the host authorities in their investment attraction and promotion efforts. In the light of those discussions and with their approval, a number of sponsors’ names was

submitted to the RK/State Committee on Investments (SCI) who had requested ITIC assistance in identifying foreign investors interested to assist in an advisory capacity. I understand, from oral advice last month from the SCI, that these names could have been forwarded to the President’s Office.

Recent Relevant Developments

Sponsors will recall our advice of the significant senior personnel changes in the RK Government in early Spring including in the positions of First Deputy PM (Mr. Jandosov succeeding Mr. Esimov), Finance Minister (Mr. Mynbaev succeeding Mr. Pavlov) and the SCI leadership (Messes Jandosov and Saidenov replacing Messrs. Esimov and Kanapianov as respectively Chairman and Executive Director). Some changes in the approach to investment policy followed this re-shuffle. A number of the relevant developments, many of which were outlined at either the Kazakhstan Oil & Gas Conference in London 29-30 April and/or at the Kazakhstan Investment Summit in Almaty 4-5 June, are summarized in the following sections of this Report.

• Privatization would be completed this year and remaining State property consolidated. The ‘Blue Chips’ Companies Investment Program would continue in modified form, with some ten per cent of Halyk Bank the next offering ( ITIC members will be aware of the negative impact on the prospects for the program arising out of the continuing crisis in Emerging Markets generally).

investment sectors of infrastructure, processing, housing, tourism, agriculture and new capital Astana---were scheduled to be published end-June. The incentives’ threshold is reportedly an investment of USD30mn.

• The President’s Investors Advisory Board has been decreed. It should meet twice annually in Almaty. The first meeting is planned for September 1998. Membership tba.

• SCI Sectoral Investors Consultative Councils are to be established. The first such CC, for the minerals resources and related sectors, was convened on 4 July in Almaty by the SCI with the assistance and coordination of ITIC . Some twenty-five companies participated with the SCI leadership. ITIC Sponsors and particularly the KMTC Members provide the ‘core’ of this CC which will meet regularly, including once more during the Summer. This activity is particularly relevant to the SCI’s current review of minerals development policy, the results of which are scheduled to be presented to the Government at the beginning of September 1998.

• MinFin’s fundamental review of the Tax and Customs Codes and their administration would continue and further legislation could be expected in the autumn (ITIC has been invited by the Kazakhstani authorities to participate in the review Working Group). Some priorities in this review, apart from minerals resources taxation per se, include transfer pricing, excise and zoning and taxing of land. ( ITIC has been advising the Kazakhstani authorities on transfer pricing. In the context of the President’s public health and fitness campaign launched in October 1997, excise and perhaps special taxes on tobacco and alcohol could be in prospect, while the ITIC project for ISC/CAU indirect tax harmonization also could be relevant. Land tax review could relate also to the foreshadowed legislation on real estate, the avoidance of ‘land banking’ and the zoning/taxation of industrial activities in residential areas).
• Association of Entrepreneurs’ President and Presidential Adviser (and ex-PM) Kazhegeldin initiated last week consultations with Ambassadors of investing countries, advising them that the Association stood ready to assist their investors. ( ITIC has maintained contact with Mr. Kazhegeldin after his return to business life. The Association is also a member of the Tax Code review WG).

Some Other Intergovernmental Aspects

• The current review by the CIS Member States of all aspects of CIS cooperation would continue, with the majority favouring retention of links although on the basis of a multi-speed (re)integration. The CIS Customs Committee has been re-located to Kazakhstan. (ITIC plans some work on CIS indirect taxes harmonization with key Sponsors).
• Kazakhstan continues to try to work slowly towards WTO membership, having regard to the continuing protectionist elements of its economic policy. While always comparing notes with other CIS countries which are also WTO membership aspirants, Kazakhstan would not ‘synchronize’ the necessary steps with the others but move at its own pace. Kazakhstan would like to see some movement in its favour on EU market access issues.

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