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HomeReportsInvestment Climate Statements...Custom Report - e9f410d901
Azerbaijan, Kazakhstan, Uzbekistan
The overall investment climate in Azerbaijan continues to improve, although significant challenges remain. Azerbaijan's government has sought to attract foreign investment, undertake reforms to diversify its economy, and stimulate private sector-led growth. The Azerbaijani economy, however, remains heavily dependent on oil and gas output, which account for roughly 86 percent of export revenue and over half of the state budget. Real GDP contracted 4.3 percent in 2020 for the first time since 2016 due to pandemic-related lockdown measures and a decrease in global crude oil prices. While the oil and gas sector has historically attracted the largest share of foreign investment, the Azerbaijani government has targeted four non-oil sectors to diversify the economy: agriculture, tourism, information and communications technology (ICT), and transportation/logistics. Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular "Azerbaijan Service and Assessment Network (ASAN)" government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime.
Azerbaijan was in 28th place out of 191 countries on the World Bank's "Doing Business 2020" report with a score of 78.5. Despite substantial efforts to open the business environment, progress remains slow on structural reforms required to create a diversified and competitive private sector, corruption remains a major challenge for firms operating in Azerbaijan. A small group of government-connected holding companies dominate the economy, intellectual property rights enforcement is improving but remains insufficient, and judicial transparency is lacking.
Under Azerbaijani law, foreign investments enjoy complete and unreserved legal protection and may not be nationalized or appropriated, except under specific circumstances. Private entities may freely establish, acquire, and dispose of interests in business enterprises. Foreign citizens, organizations, and enterprises may lease, but not own, land. Azerbaijan's government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan provides U.S. investors with recourse to settle investment disputes using the International Center for the Settlement of Investment Disputes (ICSID). The average time needed to resolve international business disputes through domestic courts or alternative dispute resolution varies widely.
Following the release in November of a tripartite ceasefire declaration by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Nagorno-Karabakh conflict, the Azerbaijani government is seeking new investments in the territories around Nagorno-Karabakh that were previously under the control of Armenian-backed separatists. Azerbaijan's 2021 budget includes an allocation of AZN 2.2 billion (USD 1.3 billion) for the restoration and reconstruction of these territories. These funds will be reportedly used to restore road infrastructure, electricity, gas, water, communications infrastructure, and the education and healthcare sectors, along with the restoration of cultural and historical monuments. Reconstruction is expected to continue over the coming years, along with continued special budget allocations provided for rebuilding and resettling these territories. Demining these territories as part of reconstruction efforts remains a priority of the Azerbaijani government.
Table 1: Key Metrics and Rankings
Index/Rank
TI Corruption Perceptions Index 2020 129 of 180 http://www.transparency.org/research/cpi/overview
World Bank's Doing Business Report 2020 28 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 82 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2020 N/A http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 $4,480 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD
Policies towards Foreign Direct Investment
The Azerbaijani government actively seeks foreign direct investment. Flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector. Foreign investment in the government's priority sectors for economic diversification (agriculture, transportation, tourism, and ICT) has thus far been limited.
Foreign investments enjoy complete and unreserved legal protection under the Law on the Protection of Foreign Investment, the Law on Investment Activity, and guarantees contained within international agreements and treaties. In accordance with these laws, Azerbaijan will treat foreign investors, including foreign partners in joint ventures, in a manner no less favorable than the treatment accorded to national investors. Azerbaijan's Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under specific circumstances. The Azerbaijani government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.
Azerbaijan's primary body responsible for investment promotion is the Azerbaijan Export and Investment Promotion Agency (AzPromo). AzPromo is a joint public-private initiative, established by the Ministry of Economy and Industry in 2003 to foster the country's economic development and diversification by attracting foreign investment into the non-oil sector and stimulating non-oil exports. A January 2018 decree called for new legislation, which has not yet been introduced, to ensure Azerbaijan conforms to international standards to protect foreign investor rights. The Azerbaijani government meets regularly with the American Chamber of Commerce (AmCham) to solicit the input from the business community, particularly as part of AmCham's biennial white paper process. In 2018, AmCham reported the government accepted around 50 percent of the proposals put forth in their white paper. The next white paper, planned for 2020, was postponed due to the COVID-19 pandemic.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners are allowed to register business entities by opening a fully owned subsidiary, acquiring shares of an existing company, or by creating a joint venture with a local partner. Foreign companies are also permitted to operate in Azerbaijan without creating a local legal entity by registering a representative or branch office with the tax authorities.
Foreigners are not permitted to own land in Azerbaijan but are permitted to lease land and own real estate. Under Azerbaijani laws, the state must retain a controlling stake in companies operating in the mining, oil and gas, satellite communication, and military arms sectors, limiting foreign or domestic private ownership to a 49 percent share of companies in these industries. Foreign ownership in the media sector is also strictly limited. Furthermore, a special license to conduct business is required for foreign or domestic companies operating in telecommunications, sea and air transportation, insurance, and other regulated industries. Azerbaijan does not screen inbound foreign investment, and U.S. investors are not specifically disadvantaged by any existing control mechanisms.
Other Investment Policy Reviews
Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review, a United Nations Conference on Trade and Development (UNCTAD) investment policy review, or a WTO Trade Policy Review.
Business Facilitation
Azerbaijani law requires all companies operating in the country to register. Without formal registration, a company may not maintain a bank account or clear goods through customs. As part of the ongoing business law reforms, a "Single Window" principle was introduced January 1, 2008, significantly streamlining the registration process. Businesses must now only register with the tax authorities, which takes approximately three days for commercial organizations. Since 2011, companies have also been able to e-register at http://taxes.gov.az .
In the World Bank's "Doing Business 2020" report, Azerbaijan's final published score was 78.5, ranking 28 out of 190 countries worldwide. This rank placed Azerbaijan as a "top ten reformer" country per the report.
Azerbaijan does not actively promote or incentivize outward investment, though Azerbaijani entities, particularly the State Oil Company of Azerbaijan (SOCAR) and the State Oil Fund of Azerbaijan (SOFAZ), have invested in various countries, including the United States. SOFAZ investment is typically limited to real estate, precious metals, and low-yield government securities. SOCAR has invested heavily in oil and gas infrastructure and petrochemicals processing in Turkey and Georgia, as well as gas pipeline networks in Greece, Albania, and Italy as part of the Southern Gas Corridor that transports Azerbaijani gas to European markets. The government does not restrict domestic investors from investing overseas.
Transparency of the Regulatory System
Azerbaijan's central government is the primary source of regulations relevant to foreign businesses. Azerbaijan's regulatory system has improved in recent years, although enforcement is inconsistent, and decision-making remains opaque. Private sector associations do not play a significant role in regulatory processes. Draft legislation is neither routinely made available for public comment nor usually involves a public consultation process. The government has more regularly engaged business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham), and consulting firms on various draft laws. The website of Azerbaijan's National Parliament, http://meclis.gov.az/ lists all the country's laws, but only in the Azerbaijani language.
Legal entities in Azerbaijan must adhere to the International Financial Reporting Standards (IFRS). These are only obligatory for large companies. Medium-sized companies can choose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises. Small and micro enterprises can choose between reporting based on IFRS, IFRS-SME, or simplified accounting procedures established by the Finance Ministry.
Several U.S. companies with operations and investments in Azerbaijan previously reported they had been subjected to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code. These allegations have markedly decreased since 2017.
On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years, but inspections still may occur if a complaint is lodged. This suspension was subsequently extended through January 1, 2022. Food and pharmaceutical products are not subject to this suspension order and are inspected for quality and safety.
The government has also simplified its licensing regime. All licenses are now issued with indefinite validity through ASAN service centers and must be issued within 10 days of application. The Economy Ministry also reduced the number of activities requiring a license from 60 to 32. Over the 2020 calendar year, the Economy Ministry continued work to improve the operation of the "Licenses and Permits" portal and the integration of information systems into ASAN systems. In 2020, 358 electronic licenses were issued to entrepreneurs through the portal. 1,790 electronic licenses have been issued from the launch of the portal on March 1, 2018 to January 1, 2021.
International Regulatory Considerations
Azerbaijan has held observer status at the World Trade Organization (WTO) since 1997 but has not made significant progress toward joining the WTO for the past several years. A working party on Azerbaijan's succession to the WTO was established on July 16, 1997 and Azerbaijan began negotiations with WTO members in 2004. The WTO Secretariat reports Azerbaijan is less than a quarter of the way to full membership. In 2016, Azerbaijan imposed higher tariffs on a number of imported goods, including agricultural products, to promote domestic production and reduce imports. In February 2020, Azerbaijani President Ilham Aliyev made public remarks outlining Azerbaijan's "cautious" approach to the WTO, saying that "the time [had] not come" for Azerbaijan's membership. Currently, Azerbaijan is negotiating bilateral market access with 19 economies.
Legal System and Judicial Independence
Azerbaijan's legal system is based on civil law. Disputes or disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the Azerbaijani court system or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies. The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized courts. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts can be appealed in the Supreme Court. The Supreme Court is the highest court in the country. Under the Civil Procedure Code of Azerbaijan, appellate court judgments are published within three days of issuance or within ten days in exceptional circumstances. The Constitutional Court has the authority to review laws and court judgments for compliance with the constitution.
Businesses report problems with the reliability and independence of judicial processes in Azerbaijan. While the government promotes foreign investment and the law guarantees national treatment, in practice investment disputes can arise when a foreign investor or trader's success threatens well-connected or favored local interests. According to Freedom House's 2020 flagship report, Azerbaijan's court system is "subservient to the executive." The U.S. business community has complained about inconsistent application of regulations and non-transparent decision-making.
Laws and Regulations on Foreign Direct Investment
Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as domestic legislation. These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, the Azerbaijan-European Commission Cooperation Agreement, the Law on Protection of Foreign Investment, the Law on Investment Activity, the Law on Investment Funds, the Law on Privatization of State Property, the Second Program for Privatization of State Property, and sector-specific legislation. Azerbaijani law permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited (see "Limits on Foreign Control and Right to Private Ownership and Establishment" for further information).
A January 2018 Presidential decree called for drafting a new law on investment activities to conform to international standards. The decree also established mechanisms to protect investor rights and regulate damages, including lost profit caused to investors. The details of the proposed new law have not been publicized as of April 2021.
Competition and Anti-Trust Laws
The State Service for Antimonopoly Policy and Consumer Protection under the Economy Ministry is responsible for implementing competition-related policy. The law on Antimonopoly Activity was amended in April 2016 to introduce regulations on price fixing and other anti-competitive behavior. Parliament began revising a new version of the Competition Code in late 2014, but it has not yet been adopted. Azerbaijan's antimonopoly legislation does not constrain the size or scope of the handful of large holding companies that dominate the non-oil economy.
Expropriation and Compensation
The Law on the Protection of Foreign Investments forbids nationalization and requisition of foreign investment, except under certain circumstances. Nationalization of property can occur when authorized by parliamentary resolution, although there have been no known cases of official nationalization or requisition against foreign firms in Azerbaijan. By a decision of the Cabinet of Ministers, requisition is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are legally entitled to prompt, effective, and adequate compensation. Amendments made to Azerbaijan's Constitution in September 2016 enabled authorities to expropriate private property when necessary for social justice and effective use of land. According to Freedom House's 2020 report, "[property] rights and free choice of residence are affected by government-backed development projects that often entail forced evictions, unlawful expropriations, and demolitions with little or no notice." The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.
ICSID Convention and New York Convention
Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention) as well as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Supreme Court of Azerbaijan is responsible for recognizing and enforcing arbitral awards rendered pursuant to the Conventions. For the time being, as a method of resolving disputes in Azerbaijan, international arbitration is unpopular and underdeveloped. Domestic parties still prefer litigation as the main method of dispute settlement. Arbitration practice in Azerbaijan is limited to the recognition of foreign arbitral awards by the Supreme Court and their enforcement by the Ministry of Justice. Although there is an Azerbaijan International Commercial Arbitration Court, at present its activity is limited. Azerbaijan adopted a Law on Mediation on March 29, 2019 which requires attendance at an initial mediation session before bringing an action concerning family, labor, and business disputes. New laws amending the Civil Procedural Code and the Law on Courts and Judges were published in July 2019. Per the amendments, administrative-economic courts charged with administrative and economic disputes are divided into administrative courts and commercial courts. The newly established commercial courts are authorized to hear all commercial disputes and some other disputes affecting entrepreneurial activities. Legal experts anticipate commercial courts and administrative courts will grow to specialize respectively in commercial matters and administrative disputes, with such specialization increasing the quality of justice.
Investor-State Dispute Settlement
Azerbaijan is party to the European Convention on Foreign Commercial Arbitration dated April 21, 1961. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which went into force in 2001, provides U.S. investors recourse to settle any investment dispute using the ICSID convention. Azerbaijan has been a party to three ICSID cases, two of which (Barmek v. Azerbaijan and Fondel Metal Participations and B.V. v. Azerbaijan) were settled and one of which (Azpetrol v. Azerbaijan) was decided in favor of the State. Thus far, the ICSID has not issued arbitral awards against the government of Azerbaijan. Over the past 10 years, the U.S. Embassy in Baku has been notified of three investment dispute cases regarding U.S. citizens. None of these cases, however, have been resolved.
International Commercial Arbitration and Foreign Courts
International arbitration in Azerbaijan is regulated by the Law on International Commercial Arbitration, based on the UNCITRAL model law. Parties may select arbitrators of any nationality, the language of the proceedings, the national law to be applied, and the arbitration procedure to be used. In cases in which parties did not stipulate the terms of the proceedings, the Supreme Court of the Republic of Azerbaijan will resolve the omission. In 1999 Azerbaijan acceded to the New York Convention on the enforcement of foreign arbitral awards. Azerbaijan also passed a Law "On International Arbitration." Accession to the New York Convention has greatly increased the utility of overseas arbitrations, while the Law "On International Arbitration" provides for international arbitrations with the place of arbitration in Baku. This law aimed to resolve difficulties in instances where it is impractical or inadvisable to arbitrate abroad (for example, for reasons of cost, language, or law). However, as no procedural mechanism has been established in Azerbaijan for the enforcement of a local arbitral award, arbitration proceedings inside Azerbaijan are fraught with difficulties. Though both the Law "On International Arbitration" and the New York Convention have been in force in Azerbaijan for several years, foreign arbitration is not necessarily effective and attempts to enforce foreign arbitral awards have been largely untested.
Bankruptcy Regulations
Azerbaijan's Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals. Either a debtor facing insolvency or any creditor may initiate bankruptcy proceedings. In general, the legislation focuses on liquidation procedures. The bankruptcy law in Azerbaijan is underdeveloped, which restricts private sector economic development by deterring entrepreneurship. Amendments to Azerbaijan's bankruptcy law adopted in 2017 extended the obligations of bankruptcy administrators and defined new rights for creditors. In the World Bank's "Doing Business" report's section on resolving insolvency, Azerbaijan's ranking decreased from 45 in 2019 to 47 in 2020 out of 190 countries.
Capital Markets and Portfolio Investment
Access to capital is a critical impediment to business development in Azerbaijan. An effective regulatory system that encourages and facilitates portfolio investment, foreign or domestic, is not fully in place. Though the Baku Stock Exchange opened in 2000, there is insufficient liquidity in the market to enter or exit sizeable positions. The Central Bank assumed control over all financial regulation in January 2020, following disbandment of a formerly independent regulator. Non-bank financial sector staples such as capital markets, insurance, and private equity are in the early stages of development. The Capital Market Modernization Project is an attempt by the government to build the foundation for a modern financial capital market, including developing market infrastructure and automation systems, and strengthening the legal and market frameworks for capital transactions. One major hindrance to the stock market's growth is the difficulty in encouraging established Azerbaijani businesses to adapt to standard investor-friendly disclosure practices, which are generally required for publicly listed companies.
Azerbaijan's government and Central Bank do not restrict payments and transfers for international transactions. Foreign investors are permitted to obtain credit on the local market, but smaller companies and firms without an established credit history often struggle to obtain loans on reasonable commercial terms. Limited access to capital remains a barrier to development, particularly for small and medium enterprises.
Money and Banking System
The country's financial services sector – of which banking comprises more than 90 percent – is underdeveloped, which constrains economic growth and diversification. The drop in world oil prices in 2014/2015 and the resulting strain on Azerbaijan's foreign currency earnings and the state budget exacerbated existing problems in the country's banking sector and led to rising non-performing loans (NPLs) and high dollarization. Subsequent reforms have improved overall sector stability. President Aliyev signed a decree in February 2019 to provide partial relief to retail borrowers on foreign-currency denominated loans that meet certain criteria.
As of January 1, 2021, 26 banks were registered in Azerbaijan, including 12 banks with foreign capital and two state-owned banks. These banks employ 18,708 people and have a combined 455 branches and 2,715 ATMs nationwide. Total banking sector assets stood at approximately USD 18.5 billion as of January 2021, with the top five banks holding almost 60 percent of this amount.
In December 2019, Azerbaijan carried out a banking management reform that gave the Central Bank of Azerbaijan control over banks and credit institutions, closing the Chamber for Control over Financial Markets, which had held regulatory powers following Azerbaijan's 2014/2015 economic crisis and resulting currency devaluations. Concurrently, the Central Bank announced "recovery of the banking sector" would be one of the main challenges it would tackle in 2020. The Central Bank closed four insolvent banks (Attabank, AGBank, NBCBank, and Amrah Bank) in April/May 2020, bringing the number of banks in the country down from 30 to 26. Only a limited number of banks are able to conduct correspondent banking transactions with the United States.
Foreign banks are permitted in Azerbaijan and may take the form of representative offices, branches, joint ventures, and wholly owned subsidiaries. These banks are subject to the same regulations as domestic banks, with certain additional restrictions. Foreign individuals and entities are also permitted to open accounts with domestic or foreign banks in Azerbaijan.
Foreign Exchange and Remittances
Azerbaijan's Central Bank officially adopted a floating exchange rate in 2016 but continues to operate under an "interim regime" that effectively pegs the exchange rate at AZN 1.7 per USD. Azerbaijan's foreign currency reserves are based on the reserves of the Central Bank, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency under the Finance Ministry. Foreign currency reserves of the Central Bank increased by 2 percent during 2020 and totaled USD 6.36 billion in January 2021. Between January 2020 and January 2021, SOFAZ assets increased by 0.5 percent to reach USD 43.5 billion.
Foreign exchange transactions are governed by the Law on Currency Regulation. The Central Bank administers the overall enforcement of currency regulation. Currency conversion is carried out through the Baku Interbank Currency Exchange Market and the Organized Interbank Currency Market.
There are no statutory restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate. The average time for remitting investment returns is two to three business days. Some requirements on disclosure of the source of currency transfers have been imposed to reduce illicit transactions.
Remittance Policies
Corporate branches of foreign investors are subject to a remittance tax of 10 percent on all profits derived from its business activities in Azerbaijan. There have not been any recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances. There do not appear to be time limitations on remittances, including dividends, returns on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees. Nor does there appear to be limits on the inflow or outflow of funds for remittances of profits or revenue.
Azerbaijan's sovereign wealth fund is the State Oil Fund of Azerbaijan (SOFAZ). Its mission is to transform hydrocarbon reserves into financial assets generating perpetual income for current and future generations and to finance strategically important infrastructure and social projects of national scale. While its main statutory focus is investing in assets outside of the country, since it was established in 1999 SOFAZ has financed several socially beneficial projects in Azerbaijan related to infrastructure, housing, energy, and education. The government's newly adopted fiscal rule places limits on pro-cyclical spending, with the aim of increasing hydrocarbon revenue savings. SOFAZ publishes an annual report which it submits for independent audit. The fund's assets totaled USD 43.5 billion as of January 1, 2021. More information is available at oilfund.az .
In Azerbaijan, state-owned enterprises (SOEs) are active in the oil and gas, power generation, communications, water supply, railway, and air passenger and cargo sectors, among others. There is no published list of SOEs. While there are no SOEs that officially have been delegated governmental powers, companies such as the State Oil Company of Azerbaijan (SOCAR), Azerenerji (the national electricity utility), and Azersu (the national water utility) – all of which are closed joint-stock companies with majority state ownership and limited private investment – enjoy quasi-governmental or near-monopoly status in their respective sectors.
SOCAR is wholly owned by the government of Azerbaijan and takes part in all oil and gas activities in the country. It publishes regular reports on production volumes, the value of its exports, estimates of investments in exploration and development, production costs, the names of foreign companies operating in the country, production data by company, quasi-fiscal activities, and the government's portion of production-sharing contracts. SOCAR is also responsible for negotiating Production Sharing Agreements (PSAs) with all foreign partners for hydrocarbon development. SOCAR's annual financial reports are audited by an independent external auditor and include the consolidated accounts of all SOCAR's subsidiaries, although revenue data is incomplete.
There have been instances where state-owned enterprises have used their regulatory authority to block new entrants into the market. SOEs are, in principle, subject to the same tax burden and tax rebate policies as their private sector competitors. However, in sectors that are open to both private and foreign competition, SOEs generally receive a larger percentage of government contracts or business than their private sector competitors. While SOEs regularly purchase or supply goods or services from private sector firms, domestic and foreign private enterprises have reported problems competing with SOEs under the same terms and conditions with respect to market share, information, products and services, and incentives. Private enterprises do not have the same access (including terms) to financing as SOEs. SOEs are also afforded material advantages such as preferential access to land and raw materials – advantages that are not available to private enterprises. There is little information available on Azerbaijani SOEs' budget constraints, due to the limited transparency in their financial accounts.
Privatization Program
A renewed privatization process started with the May 2016 presidential decree implementing additional measures to improve the process of state property privatization and the July 2016 decree on measures to accelerate privatization and improve the management efficiency of state property. The State Committee on Property Issues launched a portal to provide privatization information, privatization.az, in July 2016. The portal contains information about the properties, their addresses, location, and initial costs with the aim of facilitating privatization. Azerbaijan's current privatization efforts focus on smaller state-owned properties. While there are no immediate plans to privatize large SOEs, Azerbaijan is moving 21 major government-owned companies to a new state holding company tasked to improve efficiency and corporate governance as well as prepare them for possible privatization. However, the government has no plans to sell stakes in state companies in 2021, including in state oil company SOCAR.
Responsible business conduct (RBC) is a relatively new concept in Azerbaijan. Producers and consumers tend not to prioritize responsible business conduct, including environmental, social, and governance issues. No information is available on legal corporate governance, accounting, and executive compensation standards to protect shareholders in Azerbaijan. Larger foreign entities tend to follow generally accepted RBC principles consistent with parent company guidelines and aim to educate their local partners, who generally consider basic charitable donations and paying taxes as acts of social responsibility.
The American Chamber of Commerce in Azerbaijan (AmCham) established a Corporate Social Responsibility (CSR) Committee in October 2011 to encourage companies to embrace social responsibility through activities and dialogue with relevant stakeholders. AmCham also published a corporate social responsibility guide on CSR for businesses in Azerbaijan. In 2011, the Economy Ministry established standards for corporate governance, which included an evaluation methodology for these standards and a code of ethical behavior. The Economy Ministry has been tasked with explaining the importance of corporate governance standards to entrepreneurs. Some companies report that government restrictions on NGO registration have complicated CSR corporate social responsibility efforts.
Azerbaijan's Extractive Industries Transparency Initiative (EITI) status was downgraded from "compliant" to "candidate" in April 2015, due to concerns about Azerbaijani civil society's ability to engage critically in the EITI process. Following the EITI Secretariat's evaluation in March 2017 that Azerbaijan had not sufficiently implemented required "corrective actions," Azerbaijan withdrew from the EITI and established a domestic Extractive Industries Transparency Commission in April 2017 to ensure transparency and accountability in the extractive industries of the country. The Commission has published two Reports on Transparency in the Extractive Industries but has not met since 2019 and does not conform with EITI standards.
Country Reports on Human Rights Practices;
Trafficking in Persons Report;
Guidance on Implementing the "UN Guiding Principles" for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
North Korea Sanctions & Enforcement Actions Advisory
Findings on the Worst Forms of Child Labor Report;
List of Goods Produced by Child Labor or Forced Labor.
Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
Comply Chain.
Corruption is a major challenge for firms operating in Azerbaijan and is a barrier to foreign investment despite government efforts to reduce low-level corruption. Azerbaijan does not require that private companies establish internal codes of conduct to prohibit bribery of public officials, nor does it provide protections to NGOs involved in investigating corruption. U.S. firms have identified corruption in government procurement, licensing, dispute settlement, regulation, customs, and taxation as significant obstacles to investment.
The Azerbaijani government publicly acknowledges problems with corruption but has neither effectively nor consistently enforced anticorruption laws and regulations. Azerbaijan has made modest progress in implementing a 2005 Anti-corruption Law, which created a commission with the authority to require full financial disclosure from government officials. The government has achieved a degree of success reducing red tape and opportunities for bribery through a focus on e-government and government service delivery through centralized ASAN service centers, which first opened in February 2013. ASAN centers provide more transparent, efficient, and accountable services through a "one window" model that reduces opportunities for rent-seeking and petty government corruption and have become a model for other initiatives aimed at improving government service delivery.
Despite progress in reducing corruption in public services delivery, the civil service, public procurement apparatus, and the judiciary still suffer from corruption. Tax reforms announced in January 2019 were aimed partially at reducing corruption in tax administration and received praise from the local business community.
Azerbaijan signed and ratified the UN Anticorruption Convention and is a signatory to the Council of Europe Criminal and Civil Law Conventions. Azerbaijan is not currently a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Resources to Report Corruption
Kamal Jafarov
Acting Executive Secretary
Commission on Combating Corruption
kamal.jafarov@antikorrupsiya.gov.az
On multiple occasions in 2019 and 2020, authorities selectively blocked mobile and fixed-line internet access, temporarily restricted access to foreign media and social networking sites, and imposed blocks on virtual private network (VPN) services, apparently in response to political protests and as part of national restrictions during and after Azerbaijan's armed conflict with Armenian forces in September-November 2020. Radio Free Europe/Radio Liberty are among the sites permanently blocked in Azerbaijan. The increase in frequency and lack of transparency regarding internet disruptions raise serious concerns about future Azerbaijani government efforts to control access to information in ways that impede foreign business interests.
There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.
During 44 days of intensive fighting from September 27 to November 10 involving Azerbaijan, Armenia, and Armenia-supported separatists, significant casualties and atrocities were reported by all sides. After Azerbaijan, with Turkish support, reestablished control over four surrounding territories controlled by separatists since 1994, a Russian-brokered ceasefire arrangement announced by Azerbaijan and Armenia on November 9 resulted in the peaceful transfer of control over three additional territories to Azerbaijan, as well as the introduction of Russian peacekeepers to the region. The ceasefire has largely held, but tensions remain high, particularly along the international border, which has not been fully demarcated.
Russian forces have played a role in controlling access along highways near the border and into the Nagorno-Karabakh region from Armenia and Azerbaijan. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan whose products or services are provided in the area of Nagorno-Karabakh currently under the administration of the Russian peacekeepers and has banned the entry into Azerbaijan of some persons who have visited Nagorno-Karabakh. The U.S. government is unable to provide emergency services to U.S. citizens in and around Nagorno-Karabakh as access is restricted.
The 1999 Labor Code regulates overall labor relations and recognizes international labor rights. The work week generally is 40 hours. The right to strike exists, though industrial strikes are rare. Azerbaijan is a member of the International Labor Organization (ILO) and has ratified more than 57 ILO Conventions. In practice, labor unions are strongly tied to political interests of the government. Collective bargaining is not practiced. Azerbaijan has regulations to monitor labor abuses, health, and safety standards in low-wage assembly operations, but enforcement is less effective.
Employment relations are established by an employment contract, which, in most cases, does not necessarily indicate a fixed term of employment. While a number of workers still work without contracts in Azerbaijan's informal economy, recent tax and customs reforms have provided incentives for individuals to register their employment to benefit from state financial support. Under national law, an employer must give an employee two months' notice of termination, with certain exceptions. An employee can terminate his/her employment contract at any time but must give one month's notice. Upon termination of formally registered employment, employers must pay departing employees monetary compensation for unused vacation leave. A formally registered employee who becomes unemployed is entitled to 70 percent of his/her average monthly wage, calculated over the past 12 months at the last place of work. An employee must have worked under a valid labor contract in order to obtain unemployment benefits. The law "On Unemployment Insurance" signed in August 2017 allows for payments to unemployed individuals registered with the State Employment Fund.
Azerbaijan has an abundant supply of semi-skilled and unskilled laborers. An estimated 35 percent of the Azerbaijani population works in agriculture, although this sector only contributes around 7 percent of the country's GDP. The construction sector tends to use temporary and contract workers; reportedly many of these workers' agreements are not formally registered with the government. The relatively limited supply of highly skilled labor is one of the biggest challenges in Azerbaijan's labor market. The average monthly wage as of January 2021 was AZN 707 (USD 415), and the official minimum wage increased in 2019 to AZN 250 (USD 147) per month, compared to the previous level of AZN 250 (USD 147) per month. The Ministry of Labor and Social Protection took measures to avoid unjustified dismissals, redundancies of employees in a public sector, as well as to preserve salaries of the employees sent on vacation and ensured expansion of unemployment insurance benefits, and the establishment of a proactive support mechanism in this area. Part of the reform program was to expand services to ensure employment, ensure transparency and prevent corruption. The number of legalized labor contracts in 2020 has increased by 12 percent. Some 600,000 Azerbaijani citizens received monthly benefits in the amount of AZN 190 (USD 111.7) during COVID-19-related lockdowns in 2020.
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $42,607 2019 $48,048 https://data.worldbank.org/country/azerbaijan
U.S. FDI in partner country ($M USD, stock positions) N/A BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
Host country's FDI in the United States ($M USD, stock positions) N/A BEA data available at
Total inbound stock of FDI as % host GDP No reliable data 2017 76.6% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
* Source for Host Country Data: Azerbaijan State Statistical Committee
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment
Outward Direct Investment
Total Inward $29,314 100% Total Outward $20,461 100%
United Kingdom $6,317 22% Turkey $10,761 53%
Turkey $5,797 20% Georgia $2,984 15%
Norway $3,063 10% Switzerland $1,237 6%
Iran $2,523 9% United Kingdom $1,013 5%
Cyprus $1,907 7% United States $594 3%
"0" reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Data not available.
Kyle Rohrich
Economic and Commercial Officer
U.S. Embassy in Baku, Azerbaijan
BakuCommercial@state.gov
Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has attracted significant foreign investment given abundant mineral, petroleum, and natural gas resources. As of January 1, 2021, the stock of foreign direct investment in Kazakhstan totaled USD 166.4 billion, including USD 38 billion from the United States, according to official statistics from the Kazakhstani central bank.
While Kazakhstan's vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward diversification. Kazakhstan's efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank's annual Doing Business Report. The government maintains an active dialogue with foreign investors through the President's Foreign Investors Council and the Prime Minister's Council for Improvement of the Investment Climate. Kazakhstan joined the World Trade Organization (WTO) in 2015. In September 2020, President Tokayev announced a New Economic Course – a reform agenda that, if implemented, aims to improve the investment climate.
Despite institutional and legal reforms, concerns remain about corruption, bureaucracy, arbitrary law enforcement, and limited access to a skilled workforce in certain regions. The government's tendency to increase its regulatory role in relations with investors, to favor an import-substitution policy, to challenge the use of foreign labor, and to intervene in companies' operations, continues to concern foreign investors. Foreign firms cite the need for better rule-of-law, deeper investment in human capital, improved transport and logistics infrastructure, a more open and flexible trade policy, a more favorable work-permit regime, and a more customer-friendly tax administration.
In July 2018, the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency. Since 2019 the government has pursued a policy of using the AIFC as a regional investment hub to attract foreign investment to Kazakhstan. The government has recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan. . In January 2021 the AIFC on behalf of Kazakhstan joined the Central Asia Investment Partnership initiated by the U.S. International Development Finance Corporation (DFC).
TI Corruption Perceptions Index 2020 94 of 179 http://www.transparency.org/research/cpi/overview
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A N/A
World Bank GNI per capita 2019 USD 8,820 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD
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.
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 Investment Committee presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm.
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.
The United States-Kazakhstan Bilateral Investment Treaty came into force in 1994, and the United States-Kazakhstan Treaty on the Avoidance of Double Taxation came into force in 1996.
Since independence, Kazakhstan has signed treaties on the avoidance of double taxation with 55 countries at: http://kgd.gov.kz/ru/content/konvencii-ob-izbezhanii-dvoynogo-nalogooblozheniya-i-predotvrashchenii-ukloneniya-ot, and bilateral investment protection agreements with 51 countries, four of which have not come into force yet and four other have been terminated. The list of investment protection agreements is here: https://investmentpolicy.unctad.org/international-investment-agreements/countries/107/kazakhstan?type=bits.
Some foreign investors allege Kazakhstani tax authorities are reluctant to refer double taxation questions to the appropriate resolution bodies. Among other tax issues that cause concern with U.S. investors are the criminalization of tax errors, VAT refund issues, and a recently introduced taxation of dividends of non-residents.
Eurasian Economic Integration and WTO
Kazakhstan entered into a Customs Union with Russia and Belarus on July 1, 2010 and was a founding member of the Eurasian Economic Union (EAEU) created on May 29, 2014 with Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia. Kazakhstan joined the WTO in November 2015. The EAEU is governed by the Eurasian Economic Commission, a supra-national body headquartered in Moscow, and is expected to integrate further the economies of its member states, and to provide for the free movement of services, capital, and labor within their common territory.
Kazakhstan's trade policy has been heavily influenced by EAEU regulations. While Kazakhstan asserts the EAEU agreements comply with WTO standards, since joining the Customs Union Kazakhstan doubled its average import tariff and introduced annual tariff-rate quotas (TRQs) on poultry, beef, and pork. Per its WTO commitments, Kazakhstan lowered 3,512 import tariff rates to an average of 6.1 percent as of December 2020. As a part of this commitment, Kazakhstan applies a lower-than-EAEU tariff rate on food products, automobiles, airplanes, railway wagons, lumber, alcoholic beverages, pharmaceuticals, freezers, and jewelry. After December 2020, Kazakhstan will have a three-year implementation period prior to starting tariff adjustment negotiations with its EAEU partners.
Furthermore, Kazakhstan is a signatory to the Free Trade Agreement with CIS countries, and as a member of the EAEU, is party to the Free Trade Agreements between the EAEU and Vietnam, between the EAEU and Serbia, and between the EAEU and Singapore. In addition, Kazakhstan is a part of the Interim Agreement on formation of a free trade zone between the EAEU with Iran. Kazakhstan is also party to the Eurasian Economic Union Mutual Investment Protection Agreement, which came into force in 2016.
Kazakhstani law sets out basic principles for fostering competition on a non-discriminatory basis.
Kazakhstan is a unitary state, and national legislation enacted by the Parliament and President are equally effective for all regions of the country. The government, ministries, and local executive administrations in the regions ("Akimats") issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the EAEU, and decrees of the Eurasian Economic Commission have preemptive force over national legislation. Publicly listed companies indicate that they adhere to international financial reporting standards but accounting and valuation practices are not always consistent with international best practices.
The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz under Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications. Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains opaque. All laws and decrees of the President and the government are available in Kazakh and Russian on the websites of the Ministry of Justice: http://adilet.zan.kz/rus and http://zan.gov.kz/en/ .
Implementation and interpretation of commercial legislation is reported to sometimes create confusion among foreign and domestic businesses alike. In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant barriers for foreign investors. After active intervention by the international investment community through the Prime Minister's Council for Improving the Investment Climate, the government canceled the most onerous requirements.
The non-transparent application of laws remains a major obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways with impunity.
Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not "grandfather in" existing investments. Penalties are often assessed for periods prior to the change in policy. One of the recent cases involves a U.S. company that has objected to the retroactive application of a new rule on an exemption on dividend taxes in Kazakhstan's Tax Code. Other examples from the past include foreign companies reporting that local and national authorities arbitrarily imposed high environmental fines, saying the fines were assessed to generate revenue for local and national authorities rather than for environmental protection. Government officials have acknowledged the system of environmental fines required reform and developed the new Environmental Code (Eco Code), compliant with OECD standards, in 2018. The new Eco Code signed into law in January 2021 will come into effect on July 1, 2021. The Eco Code mandates local authorities to have 100 percent of environmental payments spent on environmental remediation. Oil companies have complained that the emission payment rates for pollutants when emitted from gas flaring are at least twenty times higher than when the same pollutants are emitted from other stationary sources. The Parliament is currently reviewing the amendments to the Administrative Code to make gas flaring fines for oil companies equivalent to those imposed on non-oil companies.
In 2015, President Nazarbayev announced five presidential reforms and the implementation of the "100 Steps" Modernization program. The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies.
President Tokayev, who was elected in June 2019, stated his adherence to reforms, initiated by former President Nazarbayev, and called the government to reset approaches to reforms, including robust implementation. The New Economic Course, announced by President Tokayev in 2020, included the streamlining of the taxation system to stimulate inflow of foreign investment and the decriminalization of tax errors. In addition, Tokayev tasked the government to develop in 2021 a new bill guaranteeing the right of citizens to access information on the government's activity. Public financial reporting, including debt obligations, and explicit liabilities, are published by the National Bank of Kazakhstan at https://nationalbank.kz/en/news/vneshniy-dolg and by the Ministry of Finance on their site: https://www.gov.kz/memleket/entities/minfin/press/article/details/17399?directionId=261&lang=ru.
However, contingent liabilities, such as exposures to state-owned enterprises, their crossholdings, and exposures to banks, are not fully captured there.
Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system. In its economic policy Kazakhstan has declared its adherence to the WTO and OECD standards. Kazakhstan became a member of the WTO in 2015. It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted). Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements. Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments. The status of the TFA implementation by Kazakhstan can be found here: https://tfadatabase.org/members/kazakhstan.
Kazakhstan's Civil Code establishes general commercial and contract law principles. Under the constitution, the judicial system is independent of the executive branch, although the government interferes in judiciary matters. According to Freedom House's Nations in Transit report for 2018, the executive branch effectively dominates the judicial branch. Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system. Judicial outcomes are perceived as subject to political influence and interference. Regulations or enforcement actions can be appealed and adjudicated in the national court system. Monetary judgments are assessed in the domestic currency.
Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan's courts or international arbitration, and Kazakhstani courts nominally enforce arbitration clauses in contracts. However, in actual fact the Government has refused to honor at least one fully litigated international arbitral decision. Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.
The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and independent of the Kazakhstani judiciary. The court is now led by former Deputy President of the UK Supreme Court, Lord Mance, and several other Commonwealth judges have been appointed. The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively. Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government. In February 2020, the AIFC reported that both Chevron in Kazakhstan and Tengizchevroil included the AIFC arbitration center as their preferred institution for resolution of commercial disputes in Kazakhstan. Local lawyers have observed a growing positive influence of the high standards of AIFC court and the AIFC arbitration over the entire judicial system of Kazakhstan.
President Tokayev's policy on a new Economic Course anticipates further judiciary reforms aimed to strengthen public trust in courts.
The following legislation affects foreign investment in Kazakhstan: the Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; the Law on Currency Regulation and Currency Control, and the Constitutional Law on the Astana International Financial Center. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. However, inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, have been reported to create significant obstacles to business in Kazakhstan.
The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government's relations with entrepreneurs. The Code reinstates a single investment regime for domestic and foreign investors, and in principal codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in section 4, Industrial Policies.
The Code also provides for dispute settlement through negotiation, use of Kazakhstan's judicial process, and international arbitration. U.S. investors have expressed concern about the Code's narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.
In 2020, Kazakhstan enacted a new provision to the Entrepreneurial Code on investment agreement between strategic investors and the government. According to the law, the investment agreement is expected to provide investors with incentives, preliminarily negotiated with the government. The government guarantees the stability of the legal regime for these investment agreements. The investment agreement is an addition to a system of investment contacts already established in Kazakhstan (see Section 4 for details).
A law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the statistical monitoring of transactions in foreign currency and facilitates the process of de-dollarization. In particular, the law treats branches of foreign companies in Kazakhstan as residents and enables the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK approved a list of companies that keep their non-resident status; the majority of these companies are from extractive industries (see also section 6, Financial Sector).
The legal and regulatory framework offered by AIFC to businesses registering on that territory differs substantially from that of Kazakhstan. The AIFC activity has gained momentum since its establishment in 2018. More detailed information on the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/ and in Section 6, Financial Sector. Additionally, the government's single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/.
Competition and Antitrust Laws
The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. In 2020, in order to enhance an anti-monopoly policy, the President ordered the transfer of the functions on protection of competition to a newly created Agency for Protection and Development of Competition that operates under his direct supervision. The Agency is responsible for reviewing transactions in terms of competition-related concerns. Regulation of natural monopolies remained with the Ministry of National Economy. In order to be responsive to public opinion, the Agency for Protection and Development of Competition has established various consultative bodies, including the Open Space, the Council on Identifying and Removal of Barriers for Entering Markets, the Public Council, and the Exchange Committee. Foreign companies may participate in the Council on Identifying and Removal of barriers for Entering Markets.
The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases but fails to provide clear criteria for expropriation or to require prompt and adequate compensation at fair market value.
The Mission is aware of cases where owners of flourishing and developed businesses have been forced to sell their businesses to companies affiliated with high-ranking and powerful individuals.
Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan. However, the government does not always honor such awards.
The government is a signatory to bilateral investment agreements with 47 countries, the Energy Charter Treaty, and one multilateral investment agreement with EAEU partners. These agreements recognize international arbitration of investment disputes. The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994.
Kazakhstan is legally obligated to recognize arbitral awards, yet does not always honor this fact.
In January 2021, Kazakhstan's Ministry of Justice reported that in 2020, Kazakhstan was involved in 25 arbitration proceedings, including 15 in international arbitration courts. A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.
To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors' grievances by intervening in inter-governmental disagreements that affect investors. However, investors who have entered such settlement discussions in good faith report that the government pursued criminal litigation just as the parties were closing in on a deal (after the investors had devoted significant time and resources toward achieving a settlement).
The Entrepreneurial Code defines an investment dispute as "a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor," and states such disputes may be settled by negotiation, litigation or international arbitration. Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investor are in the exclusive competence of a special investment panel at the Supreme Court of Kazakhstan. Amendments to legislation on the court system the Parliament adopted in March 2021 will change this system once implemented. Starting from July 1, 2021, the Special Economic Court and the Special Administrative Court of Nur-Sultan City will be the courts of first instance for investment disputes between the government and investors. The Nur-Sultan City Court and the Judicial Chamber on administrative cases of the Supreme Court will serve as the first court of appeal.
The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties. The Law on Arbitration defines rules and principles of domestic arbitration. As of April 2020, Kazakhstan had 18 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan. Please see: https://palata.org/about/. The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration. Local courts recognize and enforce court rulings of CIS countries. Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity.
When SOEs are involved in investment disputes, domestic courts usually find in the SOE's favor. By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts. According to the European Bank for Reconstruction and Development's 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than relevant provisions of commercial legislation. President Tokayev has recognized that that the judicial system lacks specialists in taxation, subsoil use, intellectual property rights and corporate law.
Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources. Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.
Kazakhstan's 2014 Bankruptcy and Rehabilitation Law (The Bankruptcy Law) protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions' decisions affecting their rights. Bankruptcy is not criminalized, unless the court determines the bankruptcy was premeditated, or rehabilitation measures are wrongful. The Bankruptcy Law improves the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements. Amendments to the law accepted in 2019-2020 introduced a number of changes. Among them are a more specified definition of premeditated bankruptcy; a requirement to prove a sustained insolvency when filing a claim on bankruptcy; a possibility for the bank-agent to file a request for bankruptcy on behalf of a syndicate of creditors; a possibility for individual entrepreneurs to apply for a rehabilitation procedure to reinstate its solvency, and an option to be liquidated without filing bankruptcy in the absence of income, property, and business operations.
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.
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.
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.
For additional information about national laws and points of contact at local IP offices, please see WIPO's country profiles at https://www.wipo.int/directory/en/details.jsp?country_code=KZ.
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.
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.
Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7).
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.
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.
According to the National Statistical Bureau, as of January 1, 2021, the government owns 25,386 state-owned enterprises (SOEs), including all forms of SOEs, from small veterinary inspection offices, kindergardens, regional departments for the protection of competition, and regional hospitals, to large national companies controlling energy, transport, agricultural finance, and product development.
A list of SOEs is available at: https://gr5.gosreestr.kz/p/ru/gr-search/search-objects.
SOEs plays a leading role in the country's economy. According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; net income was approximately USD 2 billion. In order to stop an expansion of the quasi-sovereign sector, President Tokayev introduced in 2019 a moratorium on establishing new parastatal companies that will be in effect until the end of 2021. A bill on improving the business climate adopted by Parliament in April 2020 disincentivizes the establishment of new parastatal companies.
In pursuance of his New Economic Course, President Tokayev proposed in September 2020 the creation of a unified information portal that would consolidate all information about the activity of quasi-sovereign companies (SOEs), including their financial statements. If this portal is established, it would improve transparency of the quasi-sovereign sector significantly. Portfolio investors are also required to have corporate governance standards and independent boards.
Despite these positive developments, the number of SOEs in the economy remains large. The preferential status of parastatal companies is also unchanged; for example, parastatals enjoy greater access to subsidies and government support.
The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan's largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors. At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people. By some estimates, SK controls around half of Kazakhstan's economy, and is the nation's largest buyer of goods and services. In 2019, SK reported USD 61 billion in assets and USD 3 billion in consolidated net profit. Created in 2008, SK's official purpose is to facilitate economic diversification and to increase effective corporate governance.
In 2018, First President Nazarbayev approved a new SK strategy which declared effective management of its companies, restructuration and diversification of assets and investment projects, and compliance with principles of sustainable development as priority goals. SK stated its adherence to international standards of SOE management and its willingness to separate the role of the state as a main owner from its regulator's role. To follow a new strategy, early in 2020, the SK removed the Prime Minister from the Board and elected four independent directors, one of whom became the Chair of the Board. Thus, the government is now represented by three members on the Board- an Aide to the President, the Minister of National Economy, and the CEO of Samruk-Kazyna. Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .
Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and assets and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ .
In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries and to drive economic diversification. Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank – Otbassy Bank, the National Mortgage Company, KazakhExport, the Entrepreneurship Development Fund Damu and other financial and development institutions. In 2021, following the President's request, Baiterek joined the other quasi-sovereign holding company – KazAgro. Thus, the financing of the agricultural sector will now be in the portfolio of Baiterek. Unlike SK, the Prime Minister remains Chairof the Baiterek Board, assisted by several cabinet ministers and independent directors. As of the end of September 2020, Baiterek had USD 14.3 billion in assets and earned USD 133.5 million in net profit. Please see https://www.baiterek.gov.kz/en .
Another significant SOE is the national holding company Zerde, which is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ).
Officially, private enterprises compete with public enterprises under the same terms and conditions. In some cases, SOEs enjoy better access to natural resources, credit, and licenses than private entities.
In its 2017 Investment Review, the OECD recommended Kazakhstani authorities identify new ways to ensure that all corporate governance standards applicable to private companies apply to SOEs. Samruk-Kazyna adopted a new Corporate Governance Code in 2015. The Code, which applies to all SK subsidiaries, specified the role of the government as ultimate shareholder, underlined the role of the Board of directors and risk management, and called for transparency and accountability.
Kazakhstan has stated the aim to decrease the SOE share in the economy to 15 percent by 2020, in line with OECD averages. The goal has not yet been reached, but the government continues a large-scale privatization campaign. According to a government report, 93 percent of the 2016-2020 plan has been implemented. In 2020, the government enacted a new comprehensive privatization program for 2021-2025. The government's reports on both campaigns are available at: https://privatization.gosreestr.kz/.
As of March 30, 2021, out of 1,748 organizations planned for privatization, 729 had been sold for USD 1.7 billion. The government sells small, state owned and municipal enterprises through electronic auctions. The public bidding process is established by law. By law and in practice, foreign investors may participate in privatization projects. However, foreign investors may experience challenges in navigating the process.
SK has an important role in the privatization campaign and as of March 2021 had sold full or partial stakes in 88 subsidiaries of large national companies operating in the energy, mining, transportation, and service sectors. 53 subsidiaries have been liquidated or reorganized. In June 2020, SK completed the privatization of 25 percent of KazAtomProm by selling the remaining 6.28 percent of common shares via a dual-listed IPO on the London Exchange and the Astana International Stock Exchange. Although the pandemic affected the preliminary privatization timelines, SK plans to offer institutional investors non-controlling shares in eight national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors. These companies are: state oil company KazMunaiGas, Air Astana, national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk and Qazaq Air.
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.
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:
Alik Shpekbayev
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Nur-Sultan
a.shpekbaev@kyzmet.gov.kz
Contact at a "watchdog" organization:
Olga Shiyan
Civic Foundation "Transparency Kazakhstan"
Office 308/2
89 Dosmuhamedov Street,
Business Center Caspi
Almaty 050012 +7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com
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.
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.
Host Country Statistical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $181,666 2019 $181,666 https://data.worldbank.org/
country/kazakhstan?view=chart
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
U.S. FDI in partner country ($M USD, stock positions) Jan 1, 2021 $37,939 N/A N/A
Host country's FDI in the United States ($M USD, stock positions) Jan1, 2021 $193.2 N/A N/A
Total inbound stock of FDI as % host GDP 2019 88.7 % 2019 83.3% UNCTAD data available at https://unctad.org/system/
files/non-official-document/
wir20_fs_kz_en.pdf
* Source for Host Country Data: *The National Statistical Bureau and The National Bank of Kazakhstan.
Direct Investment from/in Counterpart Economy Data (2019)
Inward Direct Investment Outward Direct Investment
Total Inward 149,370 100% Total Outward 15,606 100%
The Netherlands 59,897 40.1% The Netherlands 15,081 96.6%
United States 36,510 24.4% Russia 1,597 10.2%
France 13,321 8.9% Cayman Islands 1,095 7%
China, P.R.: Main land 7,649 5.12% Luxembourg 633 4.1%
Japan 5,909 4% Cyprus 567 3.6%
Portfolio Investment Assets (2019)
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 70,358 100% All Countries Amount14,688 100% All Countries 55,670 100%
United States 36,316 52% United States 8,675 59% United States 27,642 50%
United Kingdom 4,626 7% United Kingdom 1,321 9% International Organizations 3,459 6%
Japan 3,859 5% Japan 1,041 7% United Kingdom 3,305 6%
International Organizations 3,459 5% Switzerland 451 3% Korea, Rep.of 3,095 6%
Korea, Rep.of 3,096 4% France 437 3% Japan 2,817 5%
Economic Section at the U.S. Embassy in Nur-Sultan
3, Qoshkarbayev Str., Nur-Sultan
InvestmentClimateKZ@state.gov
Country/Economy resources: American Chamber of Commerce (AmCham) in Kazakhstan www.amcham.kz
The pandemic and subsequent stagnation of the global economy had an impact on the economy of Uzbekistan and the dynamics of market reforms launched in 2016. Addressing public health and social support issues became a higher priority and required the mobilization of significant resources. Quarantine measures, domestic lockdowns, and travel restrictions led to the bankruptcy of a significant number of private businesses and an increase in unemployment, especially in the first half of the year. Mining, services, transportation, and tourism sectors suffered the most. In the second half of the year, however, business activity began to recover after quarantine restrictions were relaxed. The government has taken measures to mitigate the impact of the pandemic on business, including the introduction of temporary tax holidays, concessional lending, and other incentives.
In general, Uzbekistan's economy demonstrated relative resilience in 2020 with 1.6% GDP growth. Despite 2020's challenges, foreign direct investment (FDI) inflows continued – about $6.6 billion in 2020 compared to $9.3 billion in 2019 – which is undoubtedly the result of pre-pandemic reforms. Over 11,780 companies with foreign capital were operating in Uzbekistan as of January 1, 2021, including 1,399 created in 2020. While the government encouraged investors to develop processing and manufacturing industries in support of its import-substitution and export diversification policy, there was a notable increase of FDI in the service, retail, and banking sectors. In November, Uzbekistan successfully placed $750 million in dual-tranche sovereign international bonds denominated both in U.S. dollars and Uzbekistani so'm on the London Stock Exchange.
In 2020, Uzbekistan's leadership continued to implement reform policies targeted at boosting economic growth and improving public welfare by creating a supportive climate for private and foreign direct investment and reducing the share of the public sector in the economy. To further develop anti-corruption measures, Uzbekistan established an Anti-Corruption Agency to inspect governmental bodies and legal entities, including state-owned banks, and to prevent and combat corruption in public procurement based on the ISO 37001 standard. President Mirziyoyev signed a decree to reduce government involvement in the economy, prohibiting the establishment and operation of state-owned enterprises (SOE) in commodity markets, where SOEs might compete with private firms or have conflicts of interest. The decree also called for compliance with anti-monopoly statutes by nine large SOEs, including the national airline, car producers, and energy companies. In October, Mirziyoyev announced plans to perform internal corporate governance reforms at 39 SOEs and privatize 548 SOEs, including strategic assets in the oil and gas, mining, chemical, transportation, banking, and manufacturing industries which had been considered off-limits in previous rounds of privatization. The pandemic delayed the process of SOE reorganization and privatization, and slowed further liberalization and development of Uzbekistan's capital market.
During the reporting period, foreign businesses continued reporting cases of non-transparent public procurement practices, and cases where government agencies and state-owned enterprises inconsistently complied with official policy guidelines and regulations. Enforcement of legislation on protection of intellectual property rights also remains insufficient. Uzbekistan has the potential to become one of the most successful economies in Central Asia, but to achieve this goal, it needs to ensure that market reforms become entrenched by improving legislation and ensuring laws are then properly enforced.
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $82 million https://apps.bea.gov/international/factsheet/
The Government of Uzbekistan ("the government" or "the GOU") has declared attracting foreign direct investments (FDI) one of its core policy priorities, acknowledging that greater private sector involvement is critical for economic growth and addressing social challenges caused by relatively high unemployment and poverty rates. In 2020, the GOU improved the business environment by creating additional tax incentives for enterprises affected by the pandemic, reducing government involvement in the economy, promoting public-private partnership projects, announcing plans to reorganize and privatize SOEs, and implementing additional anti-corruption measures. The new Tax Code, which became effective on January 1, 2020, lowered corporate and individual income taxes by almost 50% and considerably simplified taxation procedures for private entrepreneurs. President Mirziyoyev challenged all regional governments to improve the attractiveness of their territories to foreign investors and provide FDI progress reports on a quarterly basis. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, guaranteed unrestricted transfer of funds out of Uzbekistan and the protection of investments from nationalization. Established in November 2019, the Presidential Council of Foreign Investors became a new enhanced platform of communication with foreign investors, experts and the business community, though pandemic restrictions forced postponement of its planned plenary session with the president.
The government has yet to address several fundamental problems reported by businesses and investors, such as the lack of transparency in public procurements, its poor record of enforcing public-private contracts, poor protection of private property rights, and insufficient enforcement of intellectual property rights. Uzbekistan is ranked 179 in Transparency International's Corruption Perceptions Index, and ranked 69 in 2020 Ease of Doing Business (DB) with a DB Score indicator of 69.9 (100 is the standard of excellence).
By law, foreign investors are welcome in all sectors of Uzbekistan's economy and the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key sectors, including energy, telecommunications, transportation, and mining has discriminatory effects on foreign investors. The government has demonstrated a continued desire to control capital flows in major industries, encouraging investments in a preapproved list of import-substituting and export-oriented projects, while investments in import-consuming projects can generally expect very little support.
The Ministry of Investments and Foreign Trade (https://mft.uz/en/, http://www.invest.gov.uz/en/) provide foreign investors with consulting services, information and analysis, business registration, and other legal assistance, as does the Chamber of Commerce and Industry of Uzbekistan (http://www.chamber.uz/en/index), on a contractual basis.
The GOU organizes and attends media events and joint government-business forums on a regular basis and at these events officials stress their interest in seeing new companies establish operations in Uzbekistan. To improve direct communication with foreign businesses, international financial institutions, banks, and other structures operating in Uzbekistan, the GOU has established the Council of Foreign Investors, which operates as an institutional advisory body. The GOU established the Institute of the Business Ombudsperson (IBO) in 2017 to protect the rights and legitimate interests of businesses and provide legal support. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, obliges Uzbekistan state bodies, diplomatic missions and consular institutions abroad to provide advisory and informational assistance to investors. The Law also obliges the IBO to assist foreign businesses in resolving emerging disputes through extrajudicial and pre-trial procedures.
During the reporting period, various GOU officials attended dozens of in-person and virtual meetings with representatives of U.S. companies, business facilitation agencies, the U.S. International Development Finance Corporation (DFC), and other American entities. Earlier, in 2019, Uzbekistan hosted the first U.S. Department of Commerce Certified Trade Mission, supported by the American Chamber of Commerce in Uzbekistan. The event provided 35 representatives of 13 U.S. companies with an opportunity to meet senior GOU officials and their Uzbekistani business counterparts.
By law, Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises, and to engage in most forms of remunerative activity. However, due to the prevalence in state-owned monopolies in several sectors, in reality, the right to establish business enterprises is still limited in some sectors. The GOU has started the process of reconsidering the role of large state-owned monopolies, especially in the transportation, banking, energy, and cotton sectors. In 2020, President Mirziyoyev ordered measures to reduce government involvement in the economy, including enforcement of an antimonopoly compliance system in SOE operations, reorganization for optimized corporate governance of 39 SOEs, and privatization of 548 SOEs and state-owned assets. This ambitious SOE reorganization program covers large state-owned monopolies, including the largest mining company, national monopolies in the energy sector, the information, technology and communications sector and postal operators, chemical plants, national air and railway companies, automotive companies, banks, insurance firms, and other formerly off-the-table state assets. President Mirziyoyev formally ended SOE Uzpaxtasanoat's monopoly over the raw cotton trade, giving private investors the right to create integrated value chain systems, called clusters, in the cotton sector. The clusters allow businesses to manage cotton cultivation, harvesting, processing, and exports independently of SOE-run supply chains. The state still reserves the exclusive right to export some commodities, such as nonferrous metals and minerals. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but, in practice, this is difficult to do because Uzbekistan's securities markets are still underdeveloped.
Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (adopted in 1991, last amended in 2020) lists state assets that cannot be sold off or otherwise privatized, including land with mineral and water resources, the air basin (atmospheric resources in the airspace over Uzbekistan), flora and fauna, cultural heritage sites and assets, state budget funds, foreign capital and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearm and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response entities, civil protection and mobilization facilities, public roads, and cemeteries.
Foreign ownership and control for airlines, railways, power generation, long-distance telecommunication networks, and other sectors deemed related to national security requires special GOU permission, but so far foreigners have not been welcomed in these sectors. By law, foreign nationals cannot obtain a license or tax permit for individual entrepreneurship in Uzbekistan. In practice, therefore, they cannot be self-employed, and must be employed by a legally recognized entity.
According to Uzbekistan's law, local companies with at least 15% foreign ownership can qualify as having foreign investment. The minimum fixed charter-funding requirement for a company with foreign investment is 400 million s'om ($1 equals about 10,600 s'om as of March 2021). The same requirement for companies registered in the Republic of Karakalpakstan and the Khorezm region is 200 million s'om. Minimum charter funding requirements can be different for business activities subject to licensing. For example, the requirement for banking activities is 100 billion s'om; for activities of microcredit organizations – 2 billion s'om; for pawnshops – 500 million s'om; for production of ethyl alcohol and alcoholic beverages – 10,000 Base Calculation Rates (BCR) (one BCR equals 245,000 s'om or about $23, as of March 2021); lotteries – 200 million s'om; and for tourism operators – 400 BCRs. Foreign investment in media enterprises is limited to 30%.
The government may scrutinize foreign investment, with special emphasis on sectors of the economy that it considers strategic, such as mining, energy, transportation, banking and telecommunications. There is no standard, transparent screening mechanism, and some elements of Uzbekistan's legal framework are expressly designed to protect domestic industries and limit competition from abroad, such as a list created in 2020 of several hundred imported items banned from the public procurement process. There are no legislative restrictions that specifically disadvantage U.S. investors.
The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) have not conducted investment policy reviews of Uzbekistan in the past three years.
The GOU has declared that business facilitation and improvement of the business environment are among its top policy priorities. Uzbekistan's working-age population has been growing by over 200,000 people per year over the past decade. Therefore, the GOU prioritizes private businesses and joint ventures with the potential to create additional jobs and help the government address unemployment concerns. The introduction of one-window and on-line registration practices and electronic reporting systems simplified and streamlined business registration procedures. The GOU has created 12 industrial, seven pharmaceutical, two agricultural, and one tourism-focused free economic zones (FEZ), as well as 64 special small industrial zones (SIZ) in all regions of the country to attract more FDI. New legislation has created additional tax incentives for private businesses and promised firms protection against unlawful actions by government authorities.
By legislation (effective from January 2018), foreign and domestic private investors can register their business in Uzbekistan using any Center of Government Services (CGS) facility, which operate as "Single Window" (SW) registration offices, or the Electronic Government (EG) website – https://my.gov.uz/en. The registration procedure requires electronic submission of an application, company name or trademark, and foundation documents. The SW/EG service will register the company with the Ministry of Justice, Tax Committee, local administration, and other relevant government agencies. The registration fee is equivalent to one BCR for local investors and 10 BCR for foreign investors (one BCR equals 245,000 s'om, or about $23, as of March 2021). Applicants receive a 50% discount for using the EG website. The new system has reduced the length of the registration process from several weeks to 30 minutes.
Depending on the extent of foreign participation, a business can be defined as an "enterprise with foreign capital" (EFC) if less than 15% foreign-owned, or as an "enterprise with foreign investment" (EFI) if more than 15% foreign-owned and holding a minimum charter capital of 400 million s'om (about $38,000 as of March 2021). Foreign companies may also maintain a physical presence in Uzbekistan as "permanent establishments" without registering as separate legal entities, other than with the tax authorities. A permanent establishment may have its own bank account.
The World Bank ranked Uzbekistan as eighth in the world for the "Starting a Business" indicator in its 2020 Doing Business report.
In general, the GOU does not promote or incentivize outward investments. The Ministry of Investments and Foreign Trade coordinates outward investments mainly in the form of bilateral economic cooperation engagements. Some state-owned enterprises invest in development of their marketing networks abroad as part of efforts to boost export sales. Private companies that operate primarily in the retail, manufacturing, transportation, construction, and textile sectors use outward investments for market outreach, to access foreign financial resources, for trade facilitation, and, in some cases, for expatriation of capital. The most popular destinations for outward investments are Russia, China, Kazakhstan, Singapore, UAE, and Germany.
There are no formal restrictions on outward investments. However, financial transactions with some foreign jurisdictions (such as Afghanistan, Iran, Syria, Libya, and Yemen) and offshore tax havens can be subject to additional screening by the authorities.
Uzbekistan has signed bilateral investment agreements with 51 countries, though the 1994 agreement signed with the United States has not been ratified, and those with several other countries, including Turkey, Bahrain, Belarus, and South Korea, have not yet entered into force. In 2004, Uzbekistan and Russia signed a Strategic Framework Agreement with free trade and investment concessions, and an alliance agreement in 2005. Uzbekistan has signed bilateral free trade agreements with 11 CIS countries (Russia, Belarus, Ukraine, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Turkmenistan and Tajikistan). In 2004, Uzbekistan and Ukraine agreed to remove all bilateral trade barriers. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014. In 2020, Uzbekistan assumed observer status in the Eurasian Economic Union (EAEU). In December 2015, the GOU officially announced that Uzbekistan would not join the Free Trade Zone within the Shanghai Cooperation Organization (SCO). See UNCTAD's database for more details: https://investmentpolicy.unctad.org/international-investment-agreements/by-economy.
Since its independence in 1991, Uzbekistan has signed double taxation agreements with 55 countries, of which three have not yet entered into force. The U.S. Internal Revenue Service (https://www.irs.gov/businesses/international-businesses/uzbekistan-tax-treaty-documents) considers Uzbekistan to be one of the former Soviet republics now covered by a taxation treaty with the Commonwealth of Independent States (CIS), as the successor to the dual taxation treaty signed between the United States and the Union of Soviet Socialist Republics (USSR) (signed in 1973 and entered into force in 1976). However, the Government of Uzbekistan argues that this agreement cannot be considered in effect and has proposed signing a new double taxation treaty. Uzbekistan officially presented a draft of a new dual taxation treaty to the U.S. government in December 2017. In 2015, Uzbekistan and the United States signed the Intergovernmental Agreement to Improve International Tax Compliance with respect to the United States Information Reporting Provisions, commonly known as the Foreign Account Tax Compliance Act (FATCA). The FATCA agreement entered into force in July 2017.
Reform of the taxation system, which for many years had been considered discouragingly burdensome and inadequate, was among the most desired reforms by the new administration. President Mirziyoyev first announced tax reform initiatives in 2016, and active discussions on their parameters started in 2017. The new Tax Code went into effect on January 1, 2020. The tax reform has led to a notable decrease of the tax burden to businesses and simplification of tax reporting. Key changes included: the 8% social security contributions and all mandatory payments to various state funds were abolished; corporate and individual income taxes were reduced from a progressive rate of up to 24% to a single flat rate of 12%; the income tax rate on dividends was reduced from 10% to 5%; the VAT tax rate also decreased from 20 to 15%; and 13 forms of tax inspections were consolidated into two.
Uzbekistan has a substantial body of laws and regulations aimed at protecting the business and investment community. Primary legislation regulating competition includes the 2012 Law on Competition (last updated in 2019), the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the 2003 Law on Private Enterprise (last updated in 2018), the 2019 Law on Investments and Investment Activities and a body of decrees, resolutions and instructions. In late 2016, the GOU publicly recognized the need to improve and streamline business and investment legislation, which is still perceived as complicated, often contradictory, and not fully consistent with international norms. In some cases, the government may require businesses to comply with decrees or instructions that are not publicly available. To simplify and streamline the legislation, Parliament and the GOU adopted 35 laws and over 100 regulations on amendments to the legislation, which abolished nearly 1000 laws and regulations in 2020. For example, the Law on Changes in the Legislation for the Reduction of Bureaucracy (ZRU-638 of September 28, 2020) and the Presidential Decree on Improvement of the Business Environment through Systematic Review of Irrelevant Legislation (UP-6075 of September 27, 2020) abolished and simplified more than 600 outdated decrees, resolutions and regulations. To avoid problems with tax and regulatory measures, foreign investors often secure government benefits through Cabinet of Ministers decrees, which are approved directly by the president. These, however, have proven to be easily revocable.
For additional information, please review the World Bank's Regulatory Governance assessment on Uzbekistan: https://rulemaking.worldbank.org/en/data/explorecountries/uzbekistan.
Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but rather with influential local politicians or well-connected local elites.
Most rule-making and regulatory authority exists on the national level. Businesses in some regions and special economic zones can be regulated differently, but relevant legislation must be adopted by the central government and then regulated by national-level authorities.
Only a few local legal, regulatory, and accounting systems are transparent and fully consistent with international norms. Although the GOU has started to unify local accounting rules with international standards, local practices are still document- and tax-driven, with an underdeveloped concept of accruals.
Parliament and GOU agencies publish some draft legislation for public comment, including draft laws, decrees and resolutions on the government's development strategies, tax and customs regulation, and legislation to create new economic zones. Public review of the legislation is available through the website https://regulation.gov.uz.
Uzbekistan's laws, presidential decrees, and government decisions are available online. Uzbekistan's legislation digest (http://www.lex.uz/) serves as a centralized online location for current legislation in effect. As of now, there is no centralized nor comprehensive online location for Uzbekistan's legislation, similar to the Federal Register in the United States, where all key regulatory actions or their summaries are published. There are other online legislative resources with executive summaries, interpretations, and comments that could be useful for businesses and investors, including http://www.norma.uz/ and http://www.minjust.uz/ru/law/newlaw/.
Formally, the Ministry of Justice and the Prosecutor's Office of Uzbekistan are responsible for oversight to ensure that government agencies follow administrative processes. In some cases, however, local officials have inconsistently interpreted laws, often in a manner detrimental to private investors and the business community at large.
GOU officials have publicly suggested that improvement of the regulatory system is critical for the overall business climate. In 2020, Uzbekistan adopted several laws and regulations to simplify and streamline business sector legislation and regulations, including eight decrees on providing additional support to the economy and entrepreneurs affected by the pandemic, and two decrees on the improvement of anti-corruption measures. In May 2020, the GOU said it planned to present 24 laws to the Parliament by the end of the year (Resolution 278 of May11, 2020), but its implementation was slowed by the pandemic. In general, Presidential Decree UP-5690 "On Measures for the Comprehensive Improvement of the System of Support and Protection of Entrepreneurial Activity," adopted in March 2019, set enforcement mechanisms for effective protection of private businesses, including foreign investors. The Law on Investments and Investment Activities, adopted in December 2019, guarantees free transfer of funds to and from the country without any restrictions. This law also guarantees protection of investments from nationalization. The GOU has implemented several additional reforms in recent years, including the currency exchange liberalization, tax reform, simplification of business registration and foreign trade procedures, and establishment of the business Ombudsperson.
The government's development strategies include a range of targets for upcoming reforms, such as ensuring reliable protection of private property rights; further removal of barriers and limitations for private entrepreneurship and small business; creation of a favorable business environment; suppression of unlawful interference of government bodies in the activities of businesses; improvement of the investment climate; decentralization and democratization of the public administration system; and expansion of public-private partnerships.
Previously implemented regulatory system reforms often left room for interpretation and were, accordingly, enforced subjectively. New and updated legislation continues to leave room for interpretation and contains unclear definitions. In many cases, private businesses still face difficulties associated with enforcement and interpretation of the legislation. More information on Uzbekistan's regulatory system can be reviewed at the World Bank's Global Indicators of Regulatory Governance (http://rulemaking.worldbank.org/data/explorecountries/uzbekistan).
The Ministry of Justice and the system of Economic Courts are formally responsible for regulatory enforcement, while the Institute of Business Ombudsperson was established in May 2017 to protect the rights and legitimate interests of businesses and render legal support. The state body responsible for enforcement proceedings is the Bureau of Mandatory Enforcement under the General Prosecutor's Office. Several GOU policy papers call for expanding the role of civil society, non-governmental organizations, and local communities in regulatory oversight and enforcement. The government also publishes drafts of business-related legislation for public comments, which are publicly available. However, the development of a new regulatory system, including enforcement mechanisms outlined in various GOU reform and development roadmaps, has yet to be completed.
Uzbekistan's fiscal transparency still does not meet generally accepted international standards, although the government demonstrated notable progress in this area in 2019. A Presidential Resolution, dated August 22, 2018, called for transparency of public finances and wider involvement of citizens in the budgetary process. One positive step was the publication of the detailed state budget proposals for the 2018-2021 fiscal years (FY) within the framework of Budget for Citizens project. In 2019, the GOU introduced amendments to the Budget Code mandating the publication of the conclusions of the Accounts Chamber of the Republic of Uzbekistan, which are based on the results of an external audit and evaluation of annual reports on the implementation of the state budget and the budgets of state trust funds. The Law on the State Budget for 2021 introduced amendments to the Administrative Code, which establishes fines for senior officials of ministries and departments who fail to publish reports on the execution of budgets, off-budget funds and state trust funds, or commit other violations that undermine the transparency of the budget process.
In accordance with the law, the Ministry of Finance now posts state budget related reports on its Open Budget website: https://openbudget.uz. Recent legislation also contains measures to harmonize budget accounting with international standards, provides for international assessment of budget documents through the Public Expenditure and Financial Accountability (PEFA) process, and submitting the budget for an Open Budget Survey ranking. In 2019, the GOU officially requested the U.S. Government's technical assistance to improve fiscal accountability and transparency, initiating an assistance program that began in 2020.
In line with the December 2019 Law on the State Budget, in 2020, government agencies, state trust funds, and the Reconstruction and Development Fund of Uzbekistan (FRDU) published quarterly reports on: distribution of budget funds by subordinate budget organizations; financial statements; implementation of budget funded projects; and all major public procurements. By law, such reports must be published within 25 days after the end of the reporting quarter. The GOU uses https://openbudget.uz/ to ensure transparency of state budget funds directed to the Investment Program of Uzbekistan, tax and customs benefits provided to the taxpayers, measures to control and combat financial violations, and spending of above-forecasted budget incomes.
Despite this progress, the government is still not releasing complete information on its off-budget accounts or on its oversight of those accounts, publishing only some generalized parameters at https://www.mf.uz/en/deyatelnost/deyatelnost-ii/mestnyj-byudzhet.html. In FY2019 and FY2020, the GOU's budget implementation reports were less itemized than in previous years.
Uzbekistan is not currently a member of the WTO or any existing economic blocs although it is pursuing WTO accession. In 2020, Uzbekistan assumed observer status in the Eurasian Economic Union. No regional or other international regulatory systems, norms, or standards have been directly incorporated or cited in Uzbekistan's regulatory system – although GOU officials often claim the government's regulatory system incorporates international best practices. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014, but that does not constitute an economic bloc with supranational trade tariff regulation requirements.
Uzbekistan's contemporary legal system belongs to the civil law family. The hierarchy of Uzbekistan's laws descends from the Constitution of the Republic of Uzbekistan, constitutional laws, codes, ordinary laws, decrees of the president, resolutions of the Cabinet of Ministers, and normative acts, in that order. Contracts are enforced under the Civil Code, the Law "About the Contractual Legal Base of Activities of Business Entities" (No. 670-I, issued August 29, 1998, and last revised in 2020), and several other regulations.
Uzbekistan's contractual law is established by the Law "About the Contractual Legal Base of Activities of Business Entities." It establishes the legal basis for the conclusion, execution, change, and termination of economic agreements, the rights and obligations of business entities, and also the competence of relevant public authorities and state bodies in the field of contractual relations. Economic disputes, including intellectual property claims, can be heard in the lower-level Economic Court and appealed to the Supreme Court of the Republic of Uzbekistan. Economic court judges are appointed for five-year terms. This judicial branch also includes regional, district, town, city, Tashkent city (a special administrative territory) courts, and arbitration courts.
On paper, the judicial system in Uzbekistan is independent, but government interference and corruption are common. Government officials, attorneys, and judges often interpret legislation inconsistently and in conflict with each other's interpretations. In recent years, for example, many lower-level court rulings have been in favor of local governments and companies which failed to compensate plaintiffs for the full market value of expropriated and demolished private property, as required under the law.
In December 2020, President Mirziyoyev approved additional measures to eliminate corruption in the courts and ensure the independence of judges (Decree UP-6127). Starting from February 1, 2021, these measures include the introduction of a transparent selection of judicial candidates with the process streamed online, electronic systems for assessment of their qualifications and performance evaluation. The Decree also creates new inspections for combating corruption in the judicial system.
Court decisions or enforcement actions are appealable though a process that can be initiated in accordance with the Economic Procedural Code and other applicable laws of Uzbekistan, and can be adjudicated in the national court system.
Several laws, presidential decrees, and government resolutions relate to foreign investors. The main laws are:
Law on Investments and Investment Activities (ZRU-598, December 25, 2019)
Law on Guarantees of the Freedoms of Entrepreneurial Activity (ZRU-328, 2012)
Law on Special Economic Zones (ZRU-604, February 17, 2020)
Law on Production Sharing Agreements (№ 312-II, 2001)
Law on Concessions (№ 110-I, 1995)
Law on Investment and Share Funds (ZRU-392, 2015)
Law on Public-Private Partnership (ZRU 537, 2019)
In 2020, Parliament, the President and the government of Uzbekistan adopted 62 laws, 125 decrees, and over 4,000 resolutions, regulations, and other judicial decisions. New legislation that could affect foreign investors includes:
The Law on the State Budget for 2021, (ZRU-657, adopted December 25, 2020). The law establishes Uzbekistan's macroeconomic outlook and consolidated state budget parameters for FY 2021, and budget targets for 2022-2023. It also amends some tax regulations and introduces additional measures to improve fiscal transparency.
The Law on Innovative Activities (ZRU-630, adopted July 24, 2020). The law determines subjects and objects of innovation and establishes a conceptual framework with legal interpretation of innovation-related activities and other relevant terms. The text is available in English: https://lex.uz/docs/5155423.
The Law on Special Economic Zones (ZRU-604, adopted February 17, 2020). The law sub-categorizes special economic zones (SEZ) into free economic zones, special scientific and technological zones, tourism-recreational zones, free trade zones, and special industrial zones. It sets both general rules for SEZs and specific rules for each category of zones, with provisions for the creation, terms of operation, liquidation, management, customs regulation, taxation, land use, and the legal status of participants. The law also establishes local content requirements, such as a requirement to have at least 90% of the labor force sourced locally. The text is available in English: https://lex.uz/docs/4821319.
The Law on State Fees (ZRU-600, adopted January 6, 2020). The law specifies the state fee as a mandatory payment charged for the commission of legally significant actions and (or) the issuance of documents (including consular and patent) by authorized institutions and (or) officials. It also defines the rates of the fees.
The Law on Joining the International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto, May 18, 1973, as amended on June 26, 1999) (ZRU-654, adopted December 12, 2020).
The Law on Ratification of the Statute of the Hague Conference on Private International Law (The Hague, October 31, 1951) (ZRU-605, adopted March 2, 2020).
Presidential Decree on Measures to Reduce the Grey Economy and Improve the Efficiency of Tax Authorities (UP-6098, adopted October 30, 2020). The decree simplifies taxation for small businesses, real estate developers, and employers in the construction sector.
Presidential Decree on Measures for Accelerated Reform of Enterprises with State Participation and Privatization of State Assets (UP-6096, adopted October 27, 2020). The decree orders the optimization and transformation of the structure of 32 large SOEs, the introduction of advanced corporate governance and financial audit systems in 39 SOEs, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector.
Presidential Decree on Improvement of Licensing and Approval Procedures (UP-6044, adopted August 28, 2020). The decree cancels 70 (out of 266) licensing requirements and 35 (out of 140) permit requirements.
Presidential Decree on Measures for Development of the Export and Investment Potential of Uzbekistan (UP-6042, adopted August 28, 2020). The decree, along with GOU Resolution PKM-601 of October 6, 2020, orders the creation of the Governmental Commission for the Development of Export and Investment. The Commission, headed by the Deputy Prime Minister for Investments and Foreign Economic Relations, will coordinate investment attraction and ensure implementation of investment projects.
Presidential Decree on Measures for Development of a Competitive Environment and Reduction of State Participation in the Economy (UP-6019, adopted July 7, 2020). This document elevates the status of the Anti-Monopoly Committee and introduces requirements to improve the transparency of public procurements, among other provisions.
Presidential Decree on Cancellation of some Tax and Customs Privileges (UP-6011, adopted June 6, 2020). This decree abolished privileged groups' exemptions from paying social tax and says that VAT exemptions for services procured from foreign entities shall not apply to services provided by foreign entities operating in Uzbekistan through permanent establishments. It also abolishes VAT privileges in compliance with the Tax Code and other legislation.
Presidential Decree on Banking Sector Reform Strategy (UP-5992, adopted May 12, 2020). The decree approves a five-year strategy for reforming the banking sector with a goal to reduce the state share in its capital from the current 85% to 40%. It also orders the privatization of six large state-owned banks in close cooperation with international financial institutes.
As of now, there is no real "one-stop-shop" website for investors that provides relevant laws, rules, procedures, and reporting requirements in Uzbekistan. In December 2018, the GOU created a specialized web portal for investors called Invest Uz (http://invest.gov.uz/en/), which provides some useful information. The website of the Ministry of Investments and Foreign Trade (http://mift.uz/) offers some general information on laws and procedures, but mainly in the Uzbek and Russian languages.
Competition and anti-trust legislation in Uzbekistan is governed by the Law on Competition (ZRU-319, issued January 6, 2012, and last revised in 2019). The main entity that reviews transactions for competition-related concerns is the State Antimonopoly Committee (established in January 2019). This government agency is responsible for advancing competition, controlling the activities of natural monopolies, protecting consumer rights and regulating the advertisement market. There were no significant competition-related cases involving foreign investors in 2020.
Private property is protected against baseless expropriation by legislation, including the Law on Investments and Investment Activities and the Law on Guarantees of the Freedoms of Entrepreneurial Activity. Despite these protections, however, the government potentially may seize foreign investors' assets due to violations of the law or for arbitrary reasons, such as a unilateral revision of an investment agreement, a reapportionment of the equity shares in an existing joint venture with an SOE, or in support of a public works or social improvement project (similar to an eminent domain taking). By law, the government is obligated to provide fair market compensation for seized property, but many who have lost property allege the compensation has been significantly below fair market value.
Uzbekistan has a history of alleged expropriations. Profitable, high-profile foreign businesses have been at greater risk for expropriation, but smaller companies are also vulnerable. Under the previous administration, large companies with foreign capital in the food processing, mining, retail, and telecommunications sectors oftenfaced expropriation. In cases where the property of foreign investors is expropriated for arbitrary reasons, the law obligates the government to provide fair compensation in a transferable currency. However, in most cases the private property was expropriated based upon court decisions after the owners were convicted for breach of contract, failure to complete investment commitments, or other violations, making them ineligible to claim compensation.
Decisions of Uzbekistan's Economic Court on expropriation of private property can be appealed to the Supreme Court of the Republic of Uzbekistan in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors have characterized the process as unpredictable, non-transparent, and lacking due process.
Uzbekistan is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).
By law, foreign arbitral awards or other acts issued by a foreign country can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. According to new Law on International Commercial Arbitration (which will enter into force by September 2021), the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral agreements of Uzbekistan with foreign states and multilateral agreements.
Dispute settlement methods are regulated by the Economic Procedural Code, the Law on Arbitration Courts, and the Law on Contractual Basics of Activities of Commercial Enterprises. The Law on Guarantees to Foreign Investors and Protection of their Rights requires that involved parties settle foreign investment disputes using the methods they define themselves, generally in terms predefined in an investment agreement. Investors are entitled to use any international dispute settlement mechanism specified in their contracts and agreements with local partners, and these agreements should define the methods of settlement.
The Law on Guarantees to Foreign Investors and Protection of their Rights permits resolution of investment disputes in line with the rules and procedures of the international treaties to which Uzbekistan is a signatory, including the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1992 CIS Agreement on Procedure for Settling Disputes Arising Out of Business Activity, and other bilateral legal assistance agreements with individual countries. Currently there is no such bilateral treaty that covers U.S. citizens.
If the parties fail to specify an international mechanism, Uzbekistan's economic courts can settle commercial disputes arising between local and foreign businesses. The economic courts have subordinate regional and city courts. Complainants may seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through the economic courts. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling.
Currently Uzbekistan does not have a ratified Bilateral Investment Treaty (BIT) or a Free Trade Agreement (FTA) with an investment chapter with the United States. The governments of the United States and Uzbekistan signed a BIT in 1994, but ratification documents have not been exchanged and the agreement never entered into force.
Since President Mirziyoyev came to power, investment disputes have been more limited in scope, but still exist: 1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward.
1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward. 2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government's new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market.
2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government's new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market. 3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment.
3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment. 4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court.
4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court. 5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.
5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.
Post is aware of a number of cases of commercial or investment disputes involving foreign investors which occurred nearly a decade ago. These have included alleged asset seizures, alleged expropriations, or liquidations; lengthy forced production stoppages; pressure to sell off foreign shares in joint ventures; and failure to honor contractual obligations. These cases have involved a variety of sectors, including food production, mining, telecommunications, agriculture, and chemicals. Although government actions in such cases have been taken under the guise of law enforcement, some observers have claimed more arbitrary or extralegal motives were at play.
In September 2012, the Tashkent City Criminal Court seized the assets of a cellular telecom provider for financial crimes. An appeals court reversed this decision in November 2012, but upheld the $600 million in fines imposed. The company wrote off its total assets in Uzbekistan of $1.1 billion and left the market. In 2013, the government transferred all of the company's assets to a state-owned telecom operator after twice trying unsuccessfully to liquidate them. In 2014, the company dropped legal proceedings against Uzbekistan and signed a settlement.
In October 2011, the government halted the production and distribution operations of a brewery owned by the Danish firm Carlsberg during a dispute over alleged tax violations. The interruption of business lasted 18 months before the company re-opened.
Earlier in 2011, the government liquidated the Amantaytau Goldfields, a 50-50 joint venture of the British company Oxus Gold and an Uzbekistani state mining company.
In March 2011, government authorities also seized a large chain grocery store and approximately 50 smaller companies owned by Turkish investors.
By the Law on International Commercial Arbitration (will enter into force by September 2021), foreign arbitral awards, including those issued against the government, regardless of the country in which it was made, are recognized as binding, and must be enforced upon written application to the court. Foreign arbitral awards or other acts issued by a foreign country also can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. If international arbitration is permitted, awards can be challenged in domestic courts.
Although in many cases investor-state disputes in Uzbekistan were associated with immediate asset freezes, almost all of them were followed by formal legal proceedings.
Alternative dispute resolution institutions of Uzbekistan include arbitration courts (also known as Third-Party Courts), and specialized arbitration commissions. Businesses and individuals can apply to arbitration courts only if they have a relevant dispute-settlement clause in their contract or a separate arbitration agreement. The Civil Procedural Code and the Commercial Procedural Code also have provisions that regulate arbitration. The Law on International Commercial Arbitration, drafted in late 2018 and approved in February 2021, will enter into force by September 2021. It states that contractual and non-contractual commercial disputes can be referred to international commercial arbitration by agreement of the parties. The parties can determine the number of arbitrators and the language or languages that can be used in the arbitration. The interim measure prescribed by the arbitration court shall be recognized as binding. The award must be made in writing.
The main domestic arbitration body is the Arbitration Court. General provisions of the Law on Arbitration Courts are based on principles of the UNCITRAL model law, but with some national specifics – namely that Uzbekistani arbitration courts cannot make reference to non-Uzbekistani laws. According to the Law, parties of a dispute can choose their own arbiter and the arbiter in turn choses a chair. The decisions of these courts are binding. The Law says that executive or legislative bodies, as well as other state agencies, are barred from creating arbitration courts and cannot be a party to arbitration proceedings. Either party to the dispute can appeal the verdict of the Arbitration Court to the general court system within thirty days of the verdict. Separate arbitration courts are also available for civil cases, and their decisions can be appealed in the general court system. Arbitration courts do not review cases involving administrative and labor/employment disputes.
The Tashkent International Arbitration Center (TIAC) under the Chamber of Commerce and Industry of Uzbekistan was created in late 2019 as a non-governmental non-profit organization. The main function of this organization is to facilitate dispute resolution for businesses, including foreign investors. The Center may employ qualified arbitration lawyers, both local and foreign. The Center has the right to resolve disputes through mediation or other alternative methods permitted by the law.
The Law on International Commercial Arbitration was approved by Parliament in 2020 and signed by the president in February 2021. It will enter into force by September 2021. According to the law, the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral and multilateral agreements of Uzbekistan with foreign states.
Most investment disputes involving Uzbekistan's state-owned enterprises (SOEs) that were brought into Uzbekistan's have either been decided in favor of the SOEs or have been settled out of court. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling. In some cases, the Ministry's authority is limited and co-opted by other elements within the government. Judgments against SOEs have proven particularly difficult to enforce.
The Law on Bankruptcy regulates bankruptcy procedures. Creditors can participate in liquidation or reorganization of a debtor only in the form of a creditor's committee. According to the Law on Bankruptcy and the Labor Code, an enterprise may claim exemption from paying property and land taxes, as well as fines and penalties for back taxes and other mandatory payments, for the entire period of the liquidation proceedings. Monetary judgments are usually made in local currency. Bankruptcy itself is not criminalized, but in August 2013, the GOU introduced new legislation on false bankruptcy, non-disclosure of bankruptcy, and premeditated bankruptcy cases. In its 2020 Doing Business report, the World Bank ranked Uzbekistan 100 out of 190 for the "Resolving Insolvency" indicator (https://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan).
All investment incentives to foreign investors are regulated by national level legislation, which can be adopted only by the president. Regional and local governments have limited authorities to offer any additional preferences. Exceptions can be made for tax incentives granted by special government resolutions or presidential decrees. By the new Tax Code, the GOU may provide holidays for land taxes, property taxes and water use taxes to some companies with foreign direct investments on a case-by-case basis.
The first law on free economic zones in Uzbekistan appeared in 1996. After dozens of modifications, in February 2020 it was finally replaced by the Law on Special Economic Zones (SEZ) (ZRU-604), which entered into force May 19, 2020 (the text is available in English: https://lex.uz/docs/4821319 ). The law provides the following classification of special economic zones:
Free Economic Zone (FEZ) – territory allocated for the construction of new high-tech, competitive, import-substituting, and export-oriented industrial production capacities, and for development of industrial, engineering, telecommunications, road, and social infrastructure, as well as appropriate logistics services.
Special Scientific and Technological Zone – territory allocated for the development of innovation infrastructure by scientific and science-related organizations, including technology parks, technology distribution/transfer centers, innovation clusters, venture funds, and business incubators.
Tourist-Recreational Zone – territory allocated for tourism infrastructure development investment projects, including construction of hotels, cultural and recreational facilities, and functional and seasonal recreation areas.
Free Trade Zones – territories for consignment warehouses, areas of special customs and tax regimes, facilities at border crossing points for processing, packing, sorting, storing goods, airports, railway stations or other custom control sites.
Special Industrial Zone – territory with special economic and financial regulations of production and logistical business activities.
According to the new Law of SEZ (Article 39) and the Tax Code (Article 473), investors to special economic zones of Uzbekistan may expect:
Holidays for paying property taxes, land taxes and taxes for the use of water resources. The term of the holiday shall be determined by a separate presidential resolution depending on the size of investments. Such tax holidays can be applied only to business activities stipulated in the relevant investment agreement with administration of a special economic zone. Participants of special economic zones also may get some VAT exemptions and other tax benefits.
Exemption from paying customs payments (except for value added tax and customs clearance fees) for construction materials that cannot be sourced locally; technological equipment that cannot be sourced locally, raw materials, materials and components used to produce export-oriented output.
The following activities are prohibited within the SEZs:
Businesses that violate environmental and labor protection standards.
Businesses related to weapons and ammunition.
Businesses related to nuclear materials and radioactive substances.
Production of alcohol and tobacco products.
Rawhide processing, livestock corrals, or slaughter of animals.
Production of cement, concrete, cement clinker, bricks, reinforced concrete slabs, coal, lime and gypsum products.
Processing, decomposition, incineration, gasification, chemical treatment, final or temporary storage or burial underground of all types of waste.
Placement of oil refineries, nuclear power plants, nuclear installations, or radiation sources, or points and installations designed for storage, disposal, and processing of nuclear fuel, radioactive substances, and waste, as well as other radioactive waste.
The first Free Industrial and Economic Zone (FIEZ) was created in 2008 in the Navoi region. By the end of 2020, the GOU had created 12 industrial, seven pharmaceutical, two agricultural, and one tourism free economic zones, as well as over 143 special small industrial zones in all regions of the country. According to official statistics, about 380 investment projects have been implemented in these zones, creating nearly 31,000 new jobs.
The GOU considers attraction of foreign investments as one of the key instruments for addressing rural poverty and growing unemployment in Uzbekistan.
There are several restrictions and quantitative limitations on employment of foreign nationals in Uzbekistan. The chief accountants in banking and auditing companies must be Uzbekistani nationals. The law also requires that either the CEO or one member of a board of directors be a citizen of Uzbekistan. In the tourism sector, only Uzbekistani nationals can be professional tour guides. The Law on Special Economic Zones (ZRU-604) requires having at least 90% locally sourced labor force in projects operating within special economic and small industrial zones. The Agency on Foreign Labor Migration under the Ministry of Employment and Labor Relations is responsible for enforcing limits on employment of foreign nationals in various industries. For example, the number of foreign nationals in energy companies that operate in the country under Production Sharing Agreement terms cannot exceed 20% of the total number of employees, and additional foreign personnel can be hired only if there is no qualified local labor.
All foreign citizens, except those from certain countries of the former Soviet Union, need visas to work in Uzbekistan and all individuals must register their residences with authorities. Legislation permits foreign investors and specialists to obtain multiple entry visas for the period of their contract. To apply for a work visa, American citizens must submit documents regarding their company to an Uzbekistani embassy or consulate. American investors have complained in the past about the short validity of visas and the limited number of entries, though we understand that practice is changing, and investors can specifically request multiple entry/longer term visas.
Foreign workers must also register with the Ministry of Employment and Labor Relations.
Formally, permission from the government is not required to invest in Uzbekistan except for investments in the special economic zones and businesses that are subject to licensing. At the same time, the GOU's economic policy still maintains an intense focus on import substitution and export-oriented industrialization. Investors in non-priority sectors can expect less support in importing capital and consumer products than those in priority industries.
The government welcomes foreign investors mainly in the areas of localization, building local production capacities, and developing export potential. To support local producers, the GOU introduced a rule (GOU Resolution PKM-41, adopted January 29, 2021), which says import contracts of enterprises and joint ventures with at least a 50% state share exceeding 50,000 BCRs ($1,155,660 as of March 2021) are subject to mandatory review by the supervisory boards of these entities on a quarterly basis. The government also bans import of 529 categories of goods and certain services through public procurement processes. The list includes food products, construction materials, fertilizers, industrial products, textile and clothing products, footwear and leather goods, furniture, household goods, household electrical appliances, vehicles, paper and cellulose products, medical products, and others. The GOU also has established a procedure for public procurement of these imported goods through the portal website of the Center for Electronic Cooperation under the Ministry of Economic Development and Poverty Reduction.
Uzbekistan's legislation stipulates that the government must apply requirements to use domestic inputs in manufacturing uniformly to enterprises with domestic and foreign investments, but in practice, this is not always the case. There are no requirements for using only local sources of financing.
To qualify as an enterprise or business with foreign investment and be eligible for tax and other incentives, the share of foreign investment must be at least 15% of the charter capital of a company. The investment must consist of hard currency or new equipment, delivered within one year of registering the enterprise. The minimum requirements for charter capital for incentives (except financial institutions) is 400 million s'om (about $38,000 as of March 2021).
Tax incentives for foreign investment are essentially the same as for local enterprises participating in an investment, localization, or modernization program. Enterprises with significant investment in priority sectors or registered in one of free economic or special industrial zones can expect additional benefits.
On February 20, 2020, the GOU announced its plan to require localization of personal data storage, in line with the Law on Personal Data (ZRU-547), adopted July 2, 2019. Per the law, large internet companies like Facebook, Google, and Russian search engine Yandex are encouraged to move their server equipment with local users' personal data to the territory of Uzbekistan. According to the law, the GOU may block services in the country in the event of non-compliance.
As of now, the legislation of Uzbekistan prevents or restrict companies from freely transmitting customer or other business-related data outside the country.
Transfers of technology or proprietary information are not required by the law and can be the subject of an agreement between the foreign investor and its local partner.
Property ownership is governed by the Law on Protection of Private Property and Guarantees of the Owner's Rights. Uzbekistani and foreign entities may own or lease buildings, but not the underlying land. Mortgages are available for local individuals only, but not for legal entities. There are no mortgage lien securities in Uzbekistan.
The new Law on Privatization of Non-agricultural Land Plots (ZRU-522, August 13, 2019) allows private land ownership for plots that do not fall under the definition of agricultural land by the Land Code of Uzbekistan. Land ownership is granted only to entities and individuals who are residents of Uzbekistan. Foreign citizens and entities do not have land property rights in Uzbekistan. Effective March 1, 2020, Uzbekistan residents can privatize:
Land plots of entities, on which their buildings, structures and industrial infrastructure facilities are located, as well as the land extensions necessary for their business activities;
Land plots provided to citizens for individual housing construction and maintenance;
Unoccupied land plots;
Land plots allocated to the Urban Development Fund under the Ministry of Economy and Industry.
The following types of land cannot be privatized:
Land plots located in territories that are not covered by officially documented layout plans.
Land plots that contain mineral deposits or state property of strategic importance. The list of such land plots shall be specified by appropriate legislation.
Land plots reserved for environmental, recreational, and historical-cultural purposes, state owned land and water resources, and public areas of cities and towns (e.g. squares, streets, roads, boulevards).
Land plots affected by hazardous substances or susceptible to biogenic contamination.
Land plots provided to residents of special economic zones.
However, according to Article 55 of Uzbekistan's Constitution, the land, its subsoil, waters, flora and fauna and other natural resources are national wealth, subject to rational use and are protected by the state. The Land Code also states that the land is state property (Article 16). Contradictions in the legislation are still to be resolved.
The World Bank ranked Uzbekistan 72nd in the world in the Registering Property category of its 2020 Doing Business Report. More details can be reviewed here: https://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan#DB_rp
Land privatization is a new concept for Uzbekistan. All agricultural land in Uzbekistan is still owned by the state. As of March 1, 2020, a new law on privatization allows for the privatization of non-agricultural land plots.
Legislation governing the acquisition and disposition of immoveable property (buildings and facilities) poses relatively few problems for foreign investors and is similar to laws in other CIS countries. Immoveable property ownership is generally respected by local and central authorities. District governments have departments responsible for managing commercial real estate issues, ranging from valuations to sale and purchase of immoveable property. Legally purchased but unoccupied immoveable property can be nationalized for several reasons, including by an enforcement process of a court decision, seizure for past due debts on utility or communal services, debts for property taxes, and, in some cases, for security considerations. Unauthorized takeover of unoccupied immoveable property by other private owners (squatters) is not a common practice in Uzbekistan. Usually, authorities inspect the legitimacy of immoveable property ownership at least once every year.
While the concept of registering intellectual property (IP) is still new to Uzbekistan, the GOU recognizes intellectual property rights (IPR) as critical to its economic goals. As Uzbekistan prepares for accession to the World Trade Organization (WTO), its leaders have further reiterated the importance of IPR protections. In 2018 and 2019, Uzbekistan completed accession to the Geneva Phonograms Convention and two WIPO Internet Treaties. Responsibility for IPR issues lies with the formerly independent Uzbekistan Agency for Intellectual Property (AIP), which was subsumed under the Ministry of Justice (MOJ) (AIP, http://www.ima.uz/ ) in February 2019.
Uzbekistan's Customs Code, entered into force April 2016, allows rights holders to control the importation of intellectual property goods. The Code introduced a special customs record procedure, which is based on a database of legal producers and their distributors. Uzbekistan also introduced several amendments to its IPR law, as well as amendments to civil and criminal codes meant to enforce stricter punishment for IPR violations.
Uzbekistan's patent protections are generally sufficient, but enforcement remains one of the biggest challenges. Foreign companies face obstacles proving IP violations and receiving compensation for losses sustained due to violations. IP violators are rarely obligated to cease infringing activities or pay meaningful penalties. AIP lacks any kind of enforcement power, as does the MOJ. Enforcement is weak across different kinds of IP. Copyright cases are almost never brought before the Antimonopoly Committee (the body responsible for responding to IP complaints) because companies makes the decision that the cost of fighting copyright violations outweighs the benefits. Trademark cases often take years to settle in the courts, driving up costs and consuming time and resources. For companies who cannot meet the demands of a multiyear court battle it becomes cost prohibitive to pursue action to protect their IP.
While Uzbekistan took important steps in recent years to address longstanding issues pertaining to IPR, there remain serious deficiencies in trademark and copyright protections, judicial processes related to IPR, and enforcement of actions against IPR violations and violators.
In December 2018, President Mirziyoyev signed a bill into law for Uzbekistan to accede to the Geneva Phonograms Convention. The GOU forwarded signed copies of the law to WIPO and the UN, thus completing the formal ratification of these conventions. In February 2019, the President approved adoption of two bills into the law for Uzbekistan to accede to the WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty ("Internet Treaties"). The GOU is working on amendments to national legislation to bring it in line with the requirements of the IPR Treaties. These measures represent the necessary short-term actions for Uzbekistan to maintain its benefits under the U.S. Generalized System of Preferences (GSP). The full list of IPR-related international agreements/treaties that Uzbekistan has acceded to is available here: https://wipolex.wipo.int/en/legislation/profile/UZ .
In April 2018, the GOU provided greater authority to a new inspectorate under the Ministry of Information Technologies and Communications to monitor compliance and enforce copyright protections on the internet. The GOU is also establishing a system of licensing for companies that sell software legally, in order to stem the flow of pirated software to the marketplace, as described in GOU Resolution #72 of 2012 (https://www.lex.uz/acts/1982899).
There are no publicly available reports on seizures of counterfeit goods in 2020. In 2020, the AIP recorded 111 cases of trademark violations and many cases of trading counterfeit goods, including about 540 cases of selling counterfeit alcohol. The agency also recorded production and sale of counterfeit Head & Shoulders products (a brand owned by Procter & Gamble) and Mars candy bars. The Board of Appeal had reviewed cases of five American companies (Colgate-Palmolive Company, Under Armour Inc., Delta Hotels by Marriott, Apple Inc., and Emerson) and issued rulings in their favor.
Under current Uzbekistani law, the court considers copyright infringement cases only after the copyright holder submits a claim of damages. Similarly, for imported products, customs officials do not have an ex-officio function, and the onus is on the rights holder to initiate an action against a suspected infringer. The Prosecutor General's Office (PGO) has the authority to both penalize violators and order them to desist from producing, marketing, or selling infringing goods, but few cases ever make it to the PGO. The burden of proving an IP violation is so high that most cases never leave the Antimonopoly Committee or the administrative court system. While these cases are stalled in the court system, infringing companies may continue to operate without restrictions.
Uzbekistan has been on the Watch List of the U.S. Trade Representative's (USTR) Special 301 Report since 2000. The political will to improve IPR protection seems to exist at the highest levels of the government, but effective enforcement policies are still not in place. Although Uzbekistan has taken some important first steps to address concerns raised in previous USTR's reports, the country will have to demonstrate measurable and sustained progress before removal from the Special 301 Watch List.Uzbekistan is not, listed in USTR's notorious market report.
For additional information about national laws and points of contact at local IP offices, please see WIPO's country profiles at http://www.wipo.int/directory/en/ .
Prior to 2017, the government focused on investors capable of providing technology transfers and employment in local industries and had not prioritized attraction of portfolio investments. In 2017, the GOU announced its plans to improve the capital market and use stock market instruments to meet its economic development goals. The government created a new Agency for the Development of Capital Markets (CMDA) in January 2019 as the institution responsible for development and regulation of the securities market and protection of the rights and legitimate interests of investors in securities market. CMDA is currently implementing a capital markets development strategy for 2020-2025. According to CMDA officials, the goal of the strategy is to make the national capital market big enough to attract not only institutional investors, but to become a key driver of domestic wealth creation. The U.S. Government is supporting this strategy through a technical assistance program led by the Department of the Treasury.
Uzbekistan has its own stock market, which supports trades through the Republican Stock Exchange "Tashkent," Uzbekistan's main securities trading platform and only corporate securities exchange ( https://www.uzse.uz ). The stock exchange mainly hosts equity and secondary market transactions with shares of state-owned enterprises. In most cases, government agencies determine who can buy and sell shares and at what prices, and it is often impossible to locate accurate financial reports for traded companies.
Uzbekistan formally accepted IMF Article VIII in October 2003, but due to excessive protectionist measures of the government, businesses had limited access to foreign currency, which stimulated the grey economy and the creation of multiple exchange rate systems. Effective September 5, 2017, the GOU eliminated the difference between the artificially low official rate and the black-market exchange rate and allowed unlimited non-cash foreign exchange transactions for businesses. The Law on Currency Regulation (ZRU-573 of October 22, 2019) fully liberalized currency operations, current cross-border and capital movement transactions.
In 2019, the GOU considerably simplified repatriation of capital invested in Uzbekistan's industrial assets, securities, and stock market profits. According to the law (ZRU-531), foreign investors that have resident entities in Uzbekistan can convert their dividends and other incomes to foreign currencies and transfer them to their accounts in foreign banks. Non-resident entities that buy and sell shares of local companies can open bank accounts in Uzbekistan to accumulate their revenues.
Under the law, foreign investors and private sector businesses can have access to various credit instruments on the local market, but the still-overregulated financial system yields unreliable credit terms. Access to foreign banks is limited and is usually only granted through their joint ventures with local banks. Commercial banks, to a limited degree, can use credit lines from international financial institutions to finance small and medium sized businesses.
As of January 2021, 32 commercial banks operate in Uzbekistan. Five commercial banks are state-owned, 13 banks are registered as joint-stock financial organizations (eight of which are partly state-owned), seven banks have foreign capital, and seven banks are private. Commercial banks have 884 branches and a network of exchange offices and ATMs throughout the country. State-owned banks hold 84% of banking sector capital and 85% of banking sector assets, leaving privately owned banks as relatively small niche players. The nonbanking sector is represented by 63 microcredit organizations and 64 pawn shops.
In May 2020, President Mirziyoyev approved a five-year strategy for reformation of the banking sector to address existing weaknesses of the banking sector, such as excessive share of state assets, insufficient competition, poor quality of corporate governance and banking services in comparison with best international standards, as well as a relatively low penetration of modern global technologies. The goal of the strategy is to reduce the state share in the sector from the current 84% to 60% and to increase the market share of the non-banking sector from current 0.35% to 4%. The government will privatize its shares in six banks and facilitate modernization of banking services in remaining state-owned banks.
According to assessments of international rating agencies, including Fitch and Moody's, the banking sector of Uzbekistan is stable and poses limited near-term risks, primarily due to high concentration and domination of the public sector, which controls over 80% of assets in the banking system. Moody's notes high resilience of the country's banking system to the impact of the COVID pandemic in comparison with other CIS countries. The average rate of capital adequacy within the system is 18.4%, and the current liquidity rate is 67.4%. The growing volume of state-led investments in the economy supports the stability of larger commercial banks, which often operate as agents of the government in implementing its development strategy. Privately owned commercial banks are relatively small niche players. The government and the Central Bank of Uzbekistan (CBU) still closely monitor commercial banks.
According to the Central Bank of Uzbekistan, the share of nonperforming loans out of total gross loans is 2.1% (as of January 1, 2021). The average share of nonperforming loans in state-owned banks is about 2.1% and 1.9% in private banks. A majority of Uzbekistan's commercial banks have earned "stable" ratings from international rating agencies.
As of January 1, 2021, the banking sector's capitalization was about $5.8 billion, and the value of total bank assets in the whole country was equivalent to about $37 billion. The three largest state-owned banks – the National Bank of Uzbekistan, Asaka Bank, and Uzpromstroybank – hold 46% of the banking sector's capital ($2.7 billion) and 47.7% of the assets ($17.5 billion).
Uzbekistan maintains a central bank system. The Central Bank of Uzbekistan (CBU) is the state issuing and reserve bank and central monetary authority. The bank is accountable to the Supreme Council of Uzbekistan and is independent of the executive bodies (the bank's organization chart is available here: http://www.cbu.uz/en/).
In general, any banking activity in Uzbekistan is subject to licensing and regulation by the Central Bank of Uzbekistan. Foreign banks often feel pressured to establish joint ventures with local financial institutions. Currently there are seven banks with foreign capital operating in the market, and five foreign banks have accredited representative offices in Uzbekistan, but do not provide direct services to local businesses and individuals. Information about the status of Uzbekistan's correspondent banking relationships is not publicly available.
Foreigners and foreign investors can establish bank accounts in local banks without restrictions. They also have access to local credit, although the terms and interest rates do not represent a competitive or realistic source of financing.
Uzbekistan adopted Article VIII of the IMF's Articles of Agreement in October 2003, but full implementation of its obligations under this article began only in September 2017. In accordance with new legislation (ZRU 531 of March 2019 and ZRU-573 of October 2019), all businesses, including foreign investors, are guaranteed the ability to convert their dividends and other incomes in local currencies to foreign currencies and transfer to foreign bank accounts for current cross-border, dividend payments, or capital repatriation transactions without limitations, provided they have paid all taxes and other financial obligations in compliance with local legislation. Uzbekistan authorities may stop the repatriation of a foreign investor's funds in cases of insolvency and bankruptcy, criminal acts by the foreign investor, or when so directed by arbitration or a court decision.
The exchange rate is determined by the CBU, which insists that it is based on free market forces (10,600 s'om per one U.S dollar as of March 2021). On February 15, 2015, trade sessions at the local FX Exchange transferred from the previous "fixing" methods to the combination of "call auction" and bilateral continuous auctions ("matching"). The CBU publishes the official exchange rate of foreign currencies at 1600 every business day for accounting, statistical and other reporting purposes, as well as for the calculation of customs and other mandatory payments in the territory of Uzbekistan.
After the almost 50% devaluation of the national currency in September 2017, the exchange rate had been relatively stable in 2018 with an average of 2.4% annual devaluation. In 2019, the devaluation of s'om accelerated to 14%, although the CBU reported it had made $3.6 billion in interventions in the forex market to support the local currency. In 2020, the annual devaluation was held below 10%. The local currency's relative stability in 2020 was supported by reduced imports and strong FX reserves ($34.9 billion by January 1, 2021).
President Mirziyoyev launched foreign exchange liberalization reform on September 2017 by issuing a decree "On Priority Measures for Liberalization of Monetary Policy." The Law on Currency Regulation (ZRU-573), adopted on October 22, 2019, has liberalized currency exchange operations, current cross-border, and capital movement transactions. Business entities can purchase foreign currency in commercial banks without restrictions for current international transactions, including import of goods, works and services, repatriation of profits, repayment of loans, payment of travel expenses and other transfers of a non-trade nature.
Banking regulations mandate that the currency conversion process should take no longer than one week. In 2019 businesses reported that they observed no delays with conversion and remittance of their investment returns, including dividends; return on investment, interest and principal on private foreign debt; lease payments; royalties; and management fees.
The Fund for Reconstruction and Development of Uzbekistan (UFRD) serves as a sovereign wealth fund. Uzbekistan's Cabinet of Ministers, Ministry of Finance, and the five largest state-owned banks were instrumental in establishing the UFRD, and all those institutions have membership on its Board of Directors.
The fund does not follow the voluntary code of good practices known as the Santiago Principles, and Uzbekistan does not participate in the IMF-hosted International Working Group on sovereign wealth funds. The GOU established the UFRD in 2006, using it to sterilize and accumulate foreign exchange revenues, but officially the goal of the UFRD is to provide government-guaranteed loans and equity investments to strategic sectors of the domestic economy.
The UFRD does not invest, but instead provides debt financing to SOEs for modernization and technical upgrade projects in sectors that are strategically important for Uzbekistan's economy. All UFRD loans require government approval.
State-owned enterprises (SOEs) dominate those sectors of the economy recognized by the government as being of national strategic interest. These include energy (power generation and transmission, and oil and gas refining, transportation and distribution), metallurgy, mining (ferrous and non-ferrous metals and uranium), telecommunications (fixed telephony and data transmission), machinery (the automotive industry, locomotive and aircraft production and repair), and transportation (airlines and railways). Most SOEs register as joint-stock companies, and a minority share in these companies usually belongs to employees or private enterprises. Although SOEs have independent boards of directors, they must consult with the government before making significant business decisions.
The government owns majority or blocking minority shares in numerous non-state entities, ensuring substantial control over their operations, as it retains the authority to regulate and control the activities and transactions of any company in which it owns shares. The Agency for Management of State-owned Assets is responsible for management of Uzbekistan's state-owned assets, both those located in the country and abroad. There are no publicly available statistics with the exact number of wholly and majority state-owned enterprises, the number of people employed, or their contribution to the GDP. According to some official reports and fragmented statistics, there are over 3,500 SOEs in Uzbekistan, including 27 large enterprises and holding companies, about 2,900 unitary enterprises, and 486 joint stock companies, which employ about 1.5-1.7 million people, or about 13% of all domestically employed population. In 2020, the share of SOEs in the GDP was about 55%, and taxes paid by 10 largest SOEs contributed 63.3% of total state budget revenues.
The published list of major Uzbekistani SOEs is available on the official GOU website (listing large companies and banks only): http://www.gov.uz/en/pages/government_sites .
By law, SOEs are obligated to operate under the same tax and regulatory environment as private businesses. In practice, however, private enterprises do not enjoy the same terms and conditions.
In certain sectors, private businesses have limited access to commodities, infrastructure, and utilities due to legislation or licensing restrictions. They also face more than the usual number of bureaucratic hurdles if they compete with the government or government-controlled firms. Most SOEs have a range of advantages, including various tax holidays, as well as better access to commodities, energy and utility supplies, local and external markets, and financing. There are cases when gaps in the legislation are used to ignore the rights of private shareholders (including minority shareholders and holders of privileged shares) in joint stock companies with a state share.
A May 2019 IMF Staff Report concluded that SOEs absorbed disproportionate shares of skilled labor, energy, and financial resources, while facing weak competition enforcement and enjoying a wealth of investment preferences. The GOU has officially recognized the problem. President Mirziyoyev said strong involvement of the state in the fuel and energy, petrochemical, chemical, transport, and banking sectors was hampering their development. In 2020, he issued several decrees and resolutions to improve the competition environment and reduce the dominance of SOEs in the economy. New legislation has strengthened the role of the Anti-Monopoly Committee, overturned over 600 obstructing laws and regulations, abolished 70 (out of 266) types of licenses and 35 (out of 140) permits for various types of businesses. The Presidential decree on SOE reformation and privatization (adopted October 27, 2020) orders 32 large SOEs to optimize and transform their corporate structure, 39 SOEs to introduce advanced corporate governance and financial audit systems, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector. The reform covers large SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. Another decree orders large-scale privatization in the banking sector. In 2020, the government started projects to privatize six state-owned banks in cooperation with international financial institutions. In addition to privatization efforts, the GOU intends to attract private investments to the public sector through promotion of public-private partnerships (PPP). The new law on PPP, adopted in 2019, and a number of follow-up regulations introduced in 2020 create a more favorable environment for such partnerships.
Implementation of this SOE optimization and reform program will likely take some time, as the GOU seeks to avoid high social costs, such as mass unemployment. In September 2020, the IMF staff noted, "The crisis should not delay the reform of the state-owned banks and state-owned enterprises—including by improving their governance—and the agricultural sector. As the crisis abates, the authorities should also continue with reducing the role of the state in the economy, opening up markets and enhancing competition, and improving the business environment."
GOU policy papers indicate it is prioritizing further privatization of state-owned assets. The GOU's goal is to reduce the public share of capital in the banking sector and business entities through greater attraction of foreign direct investments, local private investments, and promotion of public-private partnerships.
The new public sector optimization policy was first announced in 2018. A special working group headed by the Prime Minister performed careful due diligence on about 3,000 enterprises with state shares and developed proposals for their reorganization and privatization. Based on the results, the GOU approved a program that covers over 620 SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. The program foresees privatization of 541 state-owned enterprises, six state-owned banks, and the sale of 15 public facilities to the private sector. In a longer-term perspective, the government plans to privatize over 1,115 SOEs and offer about 50 SOEs for public-private partnership projects. Companies that operate critical infrastructure and enterprises that qualify as companies of strategic importance will remain in full state ownership.
Senior government officials see privatization and public-private partnerships as a solution to improve the economic performance of inefficient large SOEs and as an instrument to attract private investments. They view such investments as critical for the creation of new jobs and mitigation of state budget deficits. The GOU believes it needs to prepare SOEs for privatization by introducing advanced corporate governance methods and restructuring the organization and finances of underperforming SOEs.
By law, privatization of non-strategic assets does not require government approval and can be cleared by local officials. Foreign investors are allowed to participate in privatization programs. For investors that privatize assets at preferential terms, the payment period is three years, and the investment commitment fulfillment term is five years. Large privatization deals with the involvement of foreign investment require GOU approval. Formally, such approval can be issued after examination by the Contracts Detailed Due Diligence Center under the Ministry of Economy.
C. Do these programs have a public bidding process? If so, is it easy to understand, non-discriminatory and transparent? Please provide a link to the relevant government website.
Privatization programs officially have a public bidding process. The legislation and regulations adopted in 2020 for acceleration of the privatization program are intended to ensure the transparency and fairness of the process, as well as facilitating greater involvement of international financial institutions and foreign experts as consultants. In the past, however, privatization procedures have been confusing, discriminatory, and non-transparent. Many investors note a lack of transparency at the final stage of the bidding process, when the government negotiates directly with bidders before announcing the results. In some cases, the bidders have been foreign-registered front companies associated with influential Uzbekistani families. The State Assets Management Agency of Uzbekistan coordinates the privatization program (https://davaktiv.uz/en/privatization).
There is no legislation on responsible business conduct (RBC) in Uzbekistan, and the concept has not been widely adopted, though many companies are active in charitable and corporate social responsibility activities, either through their own initiative or because they were mandated by local government officials.
Historically, the level of forced labor involved in the annual cotton harvest (September – November) was high, as citizens were pressed into service in the fields to meet government targets for cotton production. However, much has changed since President Mirziyoyev took office and the GOU has reversed course and worked hard to eradicate forced labor from the harvest and move away from Soviet-era cotton production targets. According to the International Labor Organization (ILO) 2020 monitoring reports, the total percentage of the approximately two million pickers recruited for the 2020 harvest who experienced some coercion fell from 6% to 4% – a year-over-year reduction from approximately 102,000 to 80,000 pickers.
Efforts to eliminate trafficking in persons and forced labor leaped forward in 2020 with the government's February 2020 decision to end the state quota system for cotton. Dismantling the complex quota system required further development of the cluster system, first introduced in 2018 as a means to reduce forced labor. By the end of 2020, the number of clusters (privately operated, vertically integrated, cotton textile producing enterprises, including those with foreign capital) in Uzbekistan exceeded 90 and the percentage of land cultivated by or on behalf of private businesses grew considerably. With increased privatization of cotton production, the government ceded decisions about labor to private businesses.
Relevant government agencies and departments inspect both newly registering and operating local businesses and enterprises for enforcement of the Labor Code in respect to labor and employment rights; the Law on Protection of Consumer's Rights for consumer protections; and the Law on Protection of Nature for environmental protections. Labor or environmental laws and regulations are not waived for enterprises with private and foreign investments.
Legislation, including the Law on Joint-Stock Companies and Protection of Shareholder's Rights, issued in 1996 and last updated in 2018, sets a range of standards to protect the interests of minority shareholders. In 2018, the GOU approved corporate governance rules for SOEs. Their introduction is in progress.
The Law on the Securities Market requires businesses that issue securities (except government securities) to publish annual reports, which should include a summary of business activities for the previous year, financial statements with a copy of an independent audit, and material facts on the activities of the issuer during the corresponding period.
There are no independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC in Uzbekistan. Some international organizations, like the Asian Development Bank, provide technical and advisory assistance to the government and local enterprises.
Uzbekistan adopted its Corporate Governance Code in 2015 as a voluntary requirement. The same year, the GOU set corporate governance requirements for joint-stock companies (Decree UP-4720).
At present, Uzbekistan does not adhere to the OECD guidelines regarding responsible supply chains of minerals from conflict-afflicted and high-risk areas, and there has been no substantial evidence to suggest the government encourages foreign and local businesses to follow generally accepted CSR principles such as the OECD Guidelines for Multinational Enterprises. Uzbekistan does not participate in the Extractive Industries Transparency Initiative (EITI).
Uzbekistan's legislation prohibits the private security industry or use of private security companies within the country.
Uzbekistan's legislation and Criminal Code both prohibit corruption. President Mirziyoyev has declared combatting widespread corruption one of his top priorities. On January 3, 2017, he approved the law "On Combating Corruption." The law is intended to raise the efficiency of anti-corruption measures through the consolidation of efforts of government bodies and civil society in preventing and combating cases of corruption, attempted corruption, and conflict of interest, ensuring punishment for such crimes. On June 29, 2020, Presidential Decree UP-4761 created an Anti-Corruption Agency. Subordinate to the president and reporting to Parliament, the agency is responsible for developing and implementing state policy to prevent and combat corruption. Earlier in 2019, the GOU adopted the 2019-2021 Anti-Corruption Program to strengthen the independence of the judiciary system, develop a fair and transparent public service system requiring civil servants to declare their incomes and establishing mechanisms to prevent conflicts of interest, and facilitate civil society and media participation in combating corruption.
Along with the Anti-Corruption Committee, the Prosecutor General's Office of Uzbekistan (PGO) is the government arm tasked with fighting corruption. Since Mirziyoyev took office in September 2016, the number of officials prosecuted under anti-corruption laws has increased. According to official statistics, roughly 2,300 corruption-related crimes were registered in 2018-2019. In January-September 2020, Uzbekistani law enforcement agencies initiated 838 corruption related criminal cases and prosecuted 647 government officials, including, six tax collectors, 57 healthcare managers, 89 police officers, 140 education officials, 184 SOE managers, and seven deputy governors. By preliminary assessments, the damage caused by budget embezzlement crimes in 2020 exceeded $24 million, while corruption cost over $20 million. Punishment has varied from fines to imprisonment with confiscation of property.
Formally, the anti-corruption legislation extends to all government officials, their family members, and members of all political parties of the country. However, Uzbekistan has not yet introduced asset declaration requirements for government officials or their family members. In May 2020, the GOU published a new draft of the Law on State Civil Service. It requires obligatory income and asset declaration by all civil servants and their families. The requirement applies to the president, deputies of the Legislative Chamber, members of the Senate, the Central Election Commission, the Ombudsman, deputies of the Parliament of the Republic of Karakalpakstan and local representative bodies of state power, as well as judges. The draft version caused heated discussions among the public and government officials. In October 2020, Director of the Anti-Corruption Agency stated that all waivers must be excluded from the draft of the law. The law is still under consideration.
C. Does the country/economy have laws or regulations to counter conflict-of-interest in awarding contracts or government procurement?
The process of awarding GOU contracts continues to lack transparency. According to a presidential decree issued on January 10, 2019, all government procurements must now go through a clearance process within the Ministry of Economy. Procurement contracts involving public funds or performed by state enterprises with values of over $100,000 need additional clearances from other relevant government agencies.
The law "On Combating Corruption" prescribes a range of measures for preventing corruption, including through raising public awareness and introduction of transparent rules for public-private interactions. The law, however, does not specifically encourage companies to establish relevant internal codes of conduct.
Currently only a few local companies created by or with foreign investors have effective internal ethics programs.
Uzbekistan is a member of the OECD Anti-Corruption Network (ACN) for Eastern Europe and Central Asia. One of the latest OECD reports on anti-corruption reforms in Uzbekistan (March 21, 2019) says that, although Uzbekistan has already undertaken a number of key anti-corruption reforms, the GOU now needs to systematize its anti-corruption policy by making it strategic in nature.
There are very few officially registered local NGOs available to investigate corruption cases and Embassy Tashkent is not aware of any genuine NGOs that are presently involved in investigating corruption. The law "On Combating Corruption" encourages more active involvement of NGOs and civil society in investigation and prevention of crimes related with corruption.
Corruption is still a notable factor in the economy and social sphere of Uzbekistan due to the insufficiency of law enforcement practices and relatively low wages in the public sector. Recognizing the issue, the country's leadership has initiated legislative and institutional reforms, which has already raised Uzbekistan's rating in Transparency International's Corruption Perceptions Index from 157 (out of 180 rated countries) in 2017 to 146 in 2020. U.S. businesses have cited corruption and lack of transparency in bureaucratic processes, including public procurements and licensing, as among the main obstacles to foreign direct investment in Uzbekistan.
The government agencies that are responsible for combating corruption are the Anti-Corruption Agency, the Prosecutor General's Office and the Ministry of Justice. Currently, no international or local nongovernmental watchdog organizations have permission to monitor corruption in Uzbekistan.
Contact information for the office of the Anti-Corruption Agency of Uzbekistan:
Address: 8A, Shota Rustavely St., 100070, Tashkent, Uzbekistan
Website: https://anticorruption.uz/en/item/report-corruption
Hotline telephone numbers: +998(71) 202-0400 (Ext 709), 271-1007
Email: info@unticorruption.uz
Contact information for the office of Uzbekistan's Prosecutor General:
Address: 66, Akademik Gulyamov St., 100047, Tashkent, Uzbekistan
Website: www.prokuratura.uz
Hotline telephone numbers: +998(71) 1007, 202-0486
Contact information for the office of Uzbekistan's Ministry of Justice:
Address: 5, Sayilgoh Street, 100047, Tashkent, Uzbekistan
Website: http://www.minjust.uz/en/, http://www.minjust.uz/ru/anticorruption/feedback/
Hotline telephone numbers: +998(71) 1008, 262-9245б 207-0443
E-mail: info@adliya.uz
Uzbekistan does not have a history of politically motivated violence or civil disturbance. There have not been any examples of damage to projects or installations over the past ten years. Uzbekistani authorities maintain a high level of alert and aggressive security measures to thwart terrorist attacks. The environment in Uzbekistan is not growing increasingly politicized or insecure.
During 2020, the population of Uzbekistan increased by 653,113 people (1.8%) to 34,558,913. According to publicly available statistics, about 30% of the population is under 16 years old; 60% is working age (16-60); and 10% are 60 years old and older. Uzbekistan's State Statistics Agency reports indicate the total number of laborers, as of January 1, 2021 was 19,142,300 people (0.7% increase year-on-year). 13,239,600 of them were considered employed (0.2% increase year-on-year). The share of the non-agricultural workforce is about 73.1%. There are about two million Uzbekistani citizens who work abroad as labor migrants. The official number of unemployed is 1.55 million people, or 10.5%. Note: The accuracy of given statistics is based on records of the residents' registration offices and studies conducted by the Ministry of Labor, but does not always reflect the actual situation in the country. The next national census in Uzbekistan is expected in 2023, while the last one was in 1989. End note.
It is relatively easy to find qualified employees in Uzbekistan, and salaries are low by Western standards. According to both government and independent analysts' statistics, about 12-15% of the population live below the poverty level, and approximately 48% of the employed population have low-productivity and low-income jobs. Accordingly, Uzbekistan is one of the largest suppliers of labor migrants among former Soviet Union republics.
At 99%, literacy is nearly universal, but most local technical and managerial training does not meet international business standards. Foreign firms report that younger Uzbekistanis are more flexible in adapting to changing international business practices but are also less educated than their Soviet-trained elders. Widespread corruption in the education sector has lowered educational standards as unqualified students purchase grades and even admittance to prestigious universities and lyceums.
Legislation requires companies to hire Uzbekistani nationals for specified positions in banking and auditing companies. The chief accountant must be an Uzbekistani national, as should either the CEO or any one member of the board of directors. Only Uzbekistani nationals can be tour guides. Businesses registered within special economic and industrial zones must have at least 90% locally sourced labor force.
According to Uzbekistan's Labor Code, labor-management relations should be formalized in a fixed-term or temporary employment contract. The maximum length of a single fixed-term contract is 60 months (https://www.doingbusiness.org/en/data/labormarketeconomy/uzbekistan). The Labor Code and subordinate labor legislation differentiate between layoffs and firing. Employees can terminate their employment by filing written notice two-weeks prior or applying for leave without pay. Layoffs or temporary leave without pay can be initiated by an employer if the economic situation declines. For firing (severance), the employer should personally give two months' advance notice in the case of corporate liquidation or optimization, two weeks' advance notice in the case of an employee's incompetence, and three days' advance notice in the case of an employee's malpractice or unacceptable violations. In case of severance caused by corporate liquidation or optimization, an employee should receive compensation, which should not be less than two average monthly salaries paid during their employment plus payment for unused leave (if another form of compensation was not agreed to in the employment contract). In reality, however, many businesses choose to avoid signing formal contracts with employees, especially those involved in seasonal agricultural or construction work.
Officially, labor legislation cannot be waived or applied differently for private or foreign-owned enterprises, including those that operate in special economic and industrial zones. On March 4, 2020, Uzbekistan joined the Hague Conference on Private International Law.
The new Law on Trade Unions (ZRU-588) was adopted in December 2019. According to this law, all trade union activities should be based on the principles of the compliance, voluntariness, non-discrimination, independence and self-governance, equality, transparency and openness. The law guarantees rights of trade unions and their associations and protects them from illegal interventions of government agencies, officials and employers. Currently, the Board of the Federation of Trade Unions of Uzbekistan incorporates 37,659 primary organizations and 14 regional trade unions, with official reports of 6.1 million employees in the country participating. These trade unions are all government owned and operated, including the Federation of Trade Unions.
By law, all employees of either local or foreign-owned enterprises operating in Uzbekistan have the right to: fair and timely payment of wages that should not be less than the minimum monthly salary amounts set by the government;
fair and timely payment of wages that should not be less than the minimum monthly salary amounts set by the government;
a standard workweek of forty hours, with a mandatory rest period of twenty-four hours and annual leave;
overtime compensation as specified in employment contracts or agreed to with an employee's trade union, which can be implemented in the form of additional pay or leave. The law states that overtime compensation should not be less than 200% of the employee's average monthly salary rate (broken down by hours worked). Additional leave time should not be less than the length of actual overtime work;
working conditions that meet occupational health and safety standards prescribed by legislation;
compensation of any health or property damages incurred as a result of professional duties through an employer's fault;
professional training;
formation and joining of labor unions;
pensions; and
legal support in protection of workers' rights.
There is no single state institution responsible for labor arbitration. The general court system, where civil and criminal cases are tried, is responsible for resolving labor-related disputes. This can be done on a regional or city level. Formally, workers can file their complaints through the Prosecutor General's Office. The Ministry of Employment and Labor Relations should provide legal support to employees in their labor disputes.
The law neither provides for nor prohibits the right to strike. In recent years, SOE employees in the mining and petrochemical industries and workers involved in various public projects conducted strikes, protesting against salary payment delays and demanding improvement of their working conditions. Reportedly, ministerial and local government officials met with strike initiators and promised to resolve issues raised by the workers. There is no public information about the role of official unions in these negotiations.
Although employees in Uzbekistan enjoy many rights by law, in practice these laws are subject to arbitrary and inconsistent interpretation. For example, the law prohibits compulsory overtime – and only 120 hours of overtime per year is permitted. In practice, overtime limitations are not widely observed, and compensation is rarely paid. Wage violations have become more common in recent years. 17 conventions and one Protocol of the UN's International Labor Organization (ILO) are officially in force in Uzbekistan:
17 conventions and one Protocol of the UN's International Labor Organization (ILO) are officially in force in Uzbekistan:
Forced Labor Convention;
Freedom of Association and Protection of the Right to Organize Convention
Right to Organize and Collective Bargaining Convention;
Equal Remuneration Convention;
Abolition of Forced Labor Convention;
Discrimination [Employment and Occupation] Convention;
Minimum Age Convention;
Worst Forms of Child Labor Convention;
Labor Inspection Convention;
Employment Policy Convention;
Labor Inspection (agriculture) Convention;
Tripartite Consultation (International Labor Standards) Convention;
Forty-Hour Week Convention;
Holidays with Pay Convention;
Maternity Protection Convention [Revised];
Workers' Representatives Convention;
Collective Bargaining Convention; and
Protocol of 2014 to the Forced Labor Convention.
The most recent observations of the ILO's Committee of Experts on the Application of Conventions and Recommendations (CEACR) can be reviewed here: https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:11200:0::NO::P11200_COUNTRY_ID:103538.
The law prohibits all forms of forced or compulsory labor, including by children, except as legal punishment for offenses such as robbery, fraud, or tax evasion, or as specified by law. Uzbekistan has eliminated the systematic use of child labor in the annual cotton harvest and has implemented reforms to significantly improve its record on adult forced labor. Despite strong political will in the central government to eradicate adult forced labor, at the local level its use in the cotton harvest is still reported, albeit in steadily decreasing numbers. The Ministry of Employment and Labor Relations establishes and enforces occupational health and safety standards. Labor inspectors conduct routine inspections of small and medium-sized businesses once every four years and inspect larger enterprises once every three years. The labor inspectorate – significantly expanded in size — was previously unable to conduct unscheduled inspections, but these are now legal and in regular use.
In 2020, Uzbekistan adopted a number of labor related laws and regulations, including:
The Law on Employment of the Population (ZRU-642, adopted October 20, 2020, entered into force January 21, 2021). This law applies to citizens of Uzbekistan, foreign citizens, and individuals without citizenship, as well as foreign citizens permanently residing or employed in the country. The law obliges government bodies to pursue a policy of developing the labor market and ensuring employment, developing family entrepreneurship, handicrafts, agricultural production on personal subsidiary plots, and home-based employment. The law establishes the status of a self-employed person, the procedure for their taxation, and their rights to have benefits. The law also specifies the rights of unemployed people.
The Law on Persons with Disabilities (ZRU-641, adopted October 15, 2020, entered into force January 16, 2021). The law defines the rights of persons with disabilities, and stipulates issues of their education, vocational training, advanced training, and employment.
The Law on Ratification of the Statute of the Hague Conference on Private International Law (The Hague, October 31, 1951) (ZRU-605, adopted March 2, 2020, entered into force March 3, 2020).
The Law on Special Economic (ZRU-604, adopted February 17, 2020). The law establishes local content requirements, such as a requirement to have at least 90% labor force sourced locally.
The Law on Amendments to the Criminal Code and the Administrative Code of Uzbekistan (ZRU-673, adopted February 12, 2021). The amendments establish direct criminal liability for child forced labor in any form.
USG or International
Source of Data: BEA;
IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $57,698 2019 $57,921 www.worldbank.org/en/country
U.S. FDI in partner country ($M USD, stock positions) 2019 N/A 2019 $82 BEA data available at
https://apps.bea.gov/
international/factsheet/
Host country's FDI in the United States ($M USD, stock positions) 2019 N/A 2019 $0 BEA data available at
direct-investment-and-
multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 5.7% 2019 4.1% UNCTAD data available at https://stats.unctad.org/
handbook/Economic
Trends/Fdi.html
* Source for Host Country Data: BEA and the World Bank
Total Inward $2,484 100% Total Outward $1,032 100%
China $1,010 40.7% Russia $839 81.3%
The Netherlands $324 13% Cyprus $52 5%
Republic of Korea $269 10.8% Latvia $36 3.5%
Turkey $184 7.4% UK $34 3.3%
Russia $127 5.1% Azerbaijan $17 1.6%
Portfolio Investment Assets
Equity Securities
Total Debt Securities
All Countries $1,003 100% All Countries Amount 100% All Countries Amount 100%
Luxemburg $502 50% Country #1 N/A N/A% Country #1 N/A N/A%
Netherlands $100 10% Country #2 N/A N/A% Country #2 N/A N/A%
Germany $100 10% Country #3 N/A N/A% Country #3 N/A N/A%
Denmark $63 6.3% Country #4 N/A N/A% Country #4 N/A N/A%
Ireland $61 6.1% Country #5 N/A N/A% Country #5 N/A N/A%
Eric Salzman
3, Maykurgan St., Yunusabad District, 100093, Tashkent, Uzbekistan
Telephone Number: +998-71-140-2130
Email address: BusinessInUzbekistan@state.gov .