You Read The Attached Supplement!
by Jeck Enen
ALMATY, May 28
(Specially for THE GLOBE
for the Investment Summit)
Welcome to Kazakhstan! This is a country with centuries of tradition of trading and bartering along a route known as the Great Silk Road, a historical corridor of commerce between Europe and Asia. Over the centuries, the Kazakh people learned the value of hospitality and charm as they attracted foreigners to their country. But today, underneath this facade of allure and charm often resides a desire in the nomenclature in the Oblasts for immediate gratification.
When you are dancing with a bear, it�s important to keep an eye on your partner. Many foreigners in Kazakhstan have their own stories of the significant economic development problems facing this country under the post-communist bureaucracy. Most foreigners are concerned for the future of their investments and their bank deposits as the demand for more and more money resounds from Astana.
You have probably read stories of other foreign investors that have preceded you in Kazakhstan. I call some of these folks unfortunates, not investors, because under existing law or new laws on the horizon, any investment, at the government�s discretion, may be converted into a contribution to the budget! My losses in Kazakhstan are insignificant compared to others, but my true story reveals the essence of this post Soviet, Central Asian culture and the immense difficulty of trying to create a western style business in Kazakhstan.
Synopsis:
The President of the Republic of Kazakhstan has repeatedly asked foreign investors to help him grow his small to midsize business sector. The President understands that it is the proliferation of this base that will add flexibility and dynamism to the Kazakh economy. The creation of this small to midsize business activity has proven to be the backbone of economic development throughout the West and is crucial to achieving the President�s goals at 2030.A small western company, ENKAZ, Ltd, did all of these things that the President envisions for the Republic of Kazakhstan. The company created over 200 local jobs in just six months in 1996 and 1997 in the Mangistau Region! The company�s well repairing business put between 400 to 500 metric tons of oil per day from over 225 wells back on production for the government. This was a win for the government, a win for the company, a win for the employees, a win for the tax people, and a win for the pension fund. But this small to midsize company, for all of it�s work, effort, and success in meeting the goals of the President of the Republic of Kazakstan, in June of 1999, is today, all but extinct.No one in the Mangistau Region had seen such quick, impressive economic development and private sector growth. Prior to 1991, all property was owned by the State. We were the first small company to arrive in the Region to build a business from the ground up and we were under suspicion for doing what comes naturally in western economies. Our offices were invaded by the commercial police, our records were confiscated and we endured vicious interrogations, and suffered tax penalties, and fines.
All the while four of our customers; AO Mangistaumunaigas, i.e., the Kazakh government (MMG), Kespi Anglo Caspian Resources (Anglo Caspian Resources PLC �London), Karakadukmunaigaz (KKM � Chapparal, Houston) and finally Karazhambasmunaigaz (Triton Vuko �Calgary, Alberta, Canada) reaped the benefit of our cash, services, and equipment and stole the fruits of our labor; about eight million U.S. dollars in total with accrued interest. The only thing that distinguishes these four entities from the great outlaws of the past is they confiscated this booty without firing a shot! Jesse James, Bonnie and Clyde, Pretty Boy Floyd, and Guy Faulk or other famous bank robbers would have been envious!If non-payment wasn�t bad enough, the tax police, who always presume guilt, entered the scene with an opinion and the gunpowder to back it up. The tax police are relentless in their pursuit of every dollar they know about; they are armed with unbridled authority to enforce tax laws that punish midsize businesses by taxing cash flow, bank deposits, losses, and business expenses! If an invoice is written, tax is due almost immediately and never-mind that the small to midsize business does not receive payment. We were left with all the operating costs, the taxes, the fines, and the penalties and our four clients calmly walked away from their ethical responsibility to pay approved invoices and interest expense.
Many of the laws of the Republic will have to change to encourage investment in the small to midsize business sectors. The horror that we experienced over the past three years is incredible in a nation that needs thousands of exactly the kind of businesses that we created in support of the President�s vision. In our view, the Republic has a responsibility to communicate the Federal economic development objectives to the leaders in the Oblasts to ensure that small to midsize companies that risk what they consider to be a fortune, will encounter reason and willingness on the part of local government officials to nurture and help their businesses grow, not take shear delight and gloat in their destruction. Based upon our experience, the post communist bureaucrats in the Oblast do not share the vision of the President of the Republic.
For example, we currently have a twelve million tenge tax liability in our catering company, CATKAZ. We are trying desperately to make this payment, but we lack the funds because our clients won�t pay us. The fine is an additional twelve million tenge, which we have contested vigorously with facts. But the eyes and ears of the local tax police are closed to reason. There is no room for compromise that would sustain the long-term economic interest of the Republic.
The tax police see one more item to confiscate for the budget, if only on a technicality. All of this money, taxes and fines, when and if received from abroad by our clients, will be confiscated by the tax police to settle our taxes. We have no recourse except the court, but if you are not paid by your clients, where do you find the 3% of the claim for the court? And if you win, you have no guarantee that you will receive your money; in fact in Kazakhstan, you probably will not.
And, can you imagine, we are required to pay the fines and penalties on our unpaid taxes caused by non payment of MMG, Anglo Caspian, Triton Vuko, and KKM! Why shouldn�t these clients, that caused our problem, be responsible for these enormous, extra expenses imposed on our businesses? The 12 million fine in tenge is the direct result of non payment for our catering services by Triton Vuko and KKM, but guess who the tax police look to for this fine? The Oblast bureaucrat will take all he can get on any technically of the law that he or she can find! The small to midsize businessman in Kazakstan has no line of defense at the local level of government except the court, which really is not an option.
We put up fifteen thousand dollars as a deposit for fifteen work permits. Since we are fading from business in Kazakhstan, we asked to have this deposit returned. No way, NefteBank says, it will take a year, and although you sent this hard currency here for a specific purpose, we�ll have to deposit tenge into your local account for confiscation by the tax police. It�s relentless, and never stops! Money flows only one way in the Oblast � to the budget!
The demise of ENKAZ and CATKAZ is all but final in Kazakhstan. We invested capital and equipment to create two meaningful small to midsize businesses. I invested 5 years of my life in Kazakhstan, and now I want to tell the true story.
What brought us to this resource rich country?
The President of the Republic of Kazakhstan and his trusted cabinet Ministers know the value of foreign investment and technology transfer into Kazakhstan for the economic well-being and future of the Republic. These leaders have a long-term vision entitled �2030�; a vision which can be healthy for the economic development, growth and stability of the Republic. As author of the book, �Venturing Abroad�, International Business Development via Joint Ventures, McGraw Hill, New York, 1991, I focused on the options for economic development in the states of the former Soviet Union as they entered the tedious new world of privatization.
While Dr. Jeffery Sachs of Harvard University was calling for shock therapy for the former Soviet Union, I was focusing on the urgent need to create small to midsize businesses as a soft landing pad, or opportunities of employment for workers as they became redundant in the government Institutions that were being dismantled or privatized throughout the C.I.S.
After my book was published, I spent considerable time in Russia and the Ukraine presenting seminars on small business development. My dream was to reinvest some of our profits in a school in Aktau to train displaced workers that will be idled from privatization. We wanted to teach intelligent people in the Oblast how to envision a business and create meaningful work for themselves and others. If you raise literacy, you will raise capital!
In a period of some social unrest, this contribution seemed to be the best that we could return to our host country and to our community in the Oblast. But, that dream has also perished, as you will read, in the ashes of non-payments, rules, regulations, strict laws, hostility, corruption, jealousy, and in the desire for instantaneous gratification.
While the entry of Chevron, Mobil, Shell, Mitsui, IBM, and the AT&T�s of the world have a major positive impact on the economy, the real opportunity for growth in the C.I.S., as it was historically in the United States, is in the encouragement and development of small to medium size companies. Having worked on six continents since 1960, I have witnessed first hand economic miracles that can happen in countries when small businesses are given incentives through flexible government policies to encourage these companies to invest, to blossom, and to grow. In the private sector, the multinationals have the assets and the impressive balance sheets, but it�s the small to midsize companies that will provide the highest level of employment for a significant tax base and dynamic economic growth. It is said that over eighty percent of Americans employed in the private sector work for small to midsize businesses.
Why not Kazakhstan? Because, the President�s vision for his country is not understood by the people that can make it happen. I suppose we small to midsize businesses are somewhat exhausted of hearing about the vision of 2030, only to be faced daily with interrogations, taxes, tax fines, penalties, and interest that decimate our business while the tax police gloat and laugh behind our backs at their contribution to the loss of jobs and corporate grief that their unilateral action causes in the Oblasts of the Republic.
F. A. Hayek, the Nobel Laurete in Economics in 1974, argued that the world is too rich in information
and too widely diffused for centrally planned states to ever satisfy the needs of their people. Political theory is being practiced before the eyes of the world and the obvious and noticeable conclusion is that free uncontrolled economic systems are far more effective than state controlled economies in providing goods and services for its people. For a state-controlled system to match a free society, it will need to transform into a clone of that free society. It cannot simply imitate essential and desirable elements.
Hayek further argued that diversity enabled mankind to master more information. World leadership will go to those nations that best assemble and employ knowledge that originates from all over the world. Long term investment in science, technology, and human capital that results in new knowledge that yields new products, processes, new resources and services, and enhanced productivity is essential for the economic growth of all nations. This is what we attempted to do to Kazakhstan, but our purpose and the President�s vision for Kazakhstan, was never understood by the post-communist bureaucrats in the Oblast. The philosophy argued by Hayek, proven again and again to function as stated, is as foreign to the local agencies in the Mangistau Region as the planet Mars.
Who were the managers of the State-owned enterprises that failed to provide economic development for the CIS society? What management skills have evolved? Where are the Henry Ford�s, the Lee Iacocca�s, or the Ross Perot business types that will need to emerge in Kazakhstan as free market pioneers in this dramatic conversion of economic principles? What is the present system�s understanding of entrepreneurship, private capital, and private property?
The communist party faithful that poorly managed the existing state enterprises using Marxist principles are themselves surrounded by multitudes of bureaucrats that have been in place for decades. To begin to develop the free economy in Kazakhstan this infrastructure must be retrained or replaced. You can be certain they will not readily submit to their own demise and changing of their leopard spots will be extremely difficult. Training replacement personnel in free enterprise, profit-oriented industries will not happen overnight. Capital, patience, and staying power will be assets for western investors, especially capital.
My background since the 1950�s has been in drilling, production, completions, manufacturing, equipment sales and service, and logistics in international operations. I have been self-employed since 1970. I operated a significant sales and service business in Southeast Asia based in Singapore, and later opened a manufacturing facility in Dallas, Texas, exporting finished drilling tools all over the world. The challenge and risk in starting and operating small to midsize businesses is not new to me, in fact, the excitement is in creating the business, nurturing it, and watching it grow.
I wanted one more opportunity to test my belief that the small business, if nurtured, can make a significant economic impact in any frontier nation. A company in Gibraltar offered me that opportunity. We would do this with know-how, show-how, investment dollars, and plenty of energy strategically placed into projects that would economically benefit the host country and the investing small business.
A Harvard law professor at a CNN World Economic Development Symposium in Washington, DC., in the 1980�s summed up the definition of a frontier as follows, �The opportunities are unlimited; the justice is rudimentary; and the natives are restless�. I believe this summed up the frontier in North America during its formative years, and I was searching for just such a frontier in the 1990�s in which to develop another small business.
I looked at many countries and selected the Republic of Kazakhstan, but specifically the small, but the robust Mangistau Region, the residence of vast resources of hydrocarbons. This was the most attractive challenge for a man that has devoted his life in the oil and gas business. Not being a Texaco, a Mobil, a Schlumberger, or other multinational company, we recognized that all that a small business can offer in its early stages of development are services that meet the needs of the market.
We arrived in 1994. We worked the first year in Uzen, then later in Aktau. In late 1995, as a western advisor to A.O. Mangistaumunigaz, we acted as a bridge to balance the strategic national interests of the Republic of Kazakhstan with the needs of the want-to-be western investor. This was an educational experience and one that prepared us for the next step in creating and registering a small oil well servicing business in Almaty and Aktau.
As I roamed the oilfields of Mangistau in 1995 and 1996 while assisting MMG, I witnessed the need for western technology and equipment to reduce the cost of repairing idle wells. Some production rates were marginal and economics dictated that these wells could not support excessive work-over costs. Following the long-term goals as outlined by the President of the Republic we invested in hardware, rigs, and people believing that we could develop a meaningful business in Kazakhstan. Kazakhstan needed the oil from idle wells, but we understood that the repairing costs had to be minimal to provide a substantial return of the investment to the Republic.
As related in my book, Venturing Abroad, the difference between west and east economic systems was made very clear while conducting a drilling engineering seminar through an interpreter in Romania in 1966. The subject of the seminar was how to drill for oil and gas using up-to-date technology to optimize efficiency and save time for maximum drilling economics. About halfway through my presentation, the light dawned. The audience was accustomed to socialist ideology that ignores costs and promotes inefficiency. Saving days of drilling time to reduce the overall costs of the well was of no interest to this group of drilling engineers. They viewed efficiency and the application of productive technology as a threat to job security. More days and months of operating time adds more days of employment. The audience, raised in state subsidized industries, was not tuned in to free-market economics and competition. This is the same attitude that we encountered when we began our well-servicing business in Kazakhstan in the Oblast. In fact, one the first steps to our downfall was in operating too efficiently. Our Kazakh competitors could not match our progress because they didn�t have western equipment or western technology, and furthermore, they were not interested in learning new techniques. They were comfortable in their old and set ways of the Soviet operating practices. But later, as we employed Kazakh specialists to work directly for our company, the Kazakh specialists became as proficient in operating western equipment as any men I have seen anywhere in the world. You will hear in Kazakhstan, that �problems create jobs�. It�s true, it�s inherent in their post-communist culture, and if you invest here, you will create substantial jobs as a result of never ending problems.By late 1996, as Director of this small company, we employed over 200 Kazakh specialists and 24 foreign consultants. We were operating five workover rigs on a 24-hour basis. Our local payroll and taxes exceeded eight million tenge per month. If you use a trickle down multiplier effect of six, that was a substantial injection of capital for economic growth in the Mangistau Region in the Republic of Kazakhstan. You should see the proud face of a Kazakh worker, who knows that he has performed well, at the moment he receives his salary! It�s sight to behold!
It was a dream come true. It was the dream of the President of the Republic of Kazakhstan. It was the President�s vision that was coming true. And we had done it again, created a viable business from scratch, from nothing but the will to face the problems and challenges that nobody else would consider. We said, if we don�t do it, it won�t get done. The government was winning by having idle wells repaired. Our local employees and foreign consultants were winning by receiving their salaries on time. The payroll tax people were winning by receiving their money on time. The pension fund was growing and operational problems were minimal.
Why did the dream end?
Our success sent up a warning flag that could be seen from the windows of the tax inspectorate, the tax police, the commercial police, the prosecutors, and all other agencies that were suspicious of our motives. We were in Kazakhstan to repair oil wells, nothing more. But, we were the first small to midsize, start-up western business ever seen in Aktau. We were employing people, we were paying our employees, taxes, etc. It was an exciting time for Mangistau. But, in their post-communist culture and in their mind, what we were doing was not possible without some criminality.
We began to face total inflexibility in all the local government agencies that were rigidly interpreting the laws of the Republic. It was then that we realized that our entrepreneurial dream was ending in an Oblast unprepared to cope with dynamic, successful small business development. The President�s vision had not worked its way down to the Oblast where the rubber meets the road. This vision plays well in Astana, but in the Oblast, they haven�t a clue what the President of the Republic of Kazakhstan is trying to convey, and they couldn�t care less.
What we needed was help and guidance in the Oblast by all the government agencies. We wanted them to understand that our small business, and other local or foreign small to midsize businesses, need to succeed, but to succeed we needed to work together with the local government in a quasi partnership if we were to stimulate economic growth and jobs. But there is no conception of the economic value of a single job or the trickle down value of having viable and healthy small to midsize businesses in the Oblast. The assistance needed and logical understanding of what it takes to sustain a small business does not exist in the Mangistau Oblast. But, there is no shortage of tax collectors, prosecutors, or customs agents that will jump all over you with fines, taxes, penalties, customs duties, etc., if they sense you have a one hundred U.S dollar bill in your pocket.
Our own true story -
An Open Letter to the President of the Republic -
Our story is an open letter to the President of the Republic of Kazakhstan. While it appears too late for our company to survive, this true story, in a very humble way, is asking His Excellency to intervene and stop this unending tax confiscation that is eliminating tax paying and job creating small to midsize businesses in Kazakhstan. To intervene and assure that small to midsize companies that invest in Kazakhstan will be paid by both the government and private sector for whom they provide high standards of service. Foreign companies or government entities in Kazakhstan that don�t meet their payment obligations to your local or international vendors are not helping the country�s image or the investment climate.
Your Excellency, small to midsize companies need to develop, prosper, and grow to form the solid foundation for your goals for 2030. We, as businessmen and women, must chart this journey with your government as partners, not adversaries, if we are all going to realize the dream of 2030.
As I write this piece for THE GLOBE in June of 1999, our small business and dreams in Kazakhstan are just about gone. We carry a huge burden on our hearts for those Kazakhs that worked so diligently to help us build a company that they admired, a company that placed almost 400 to 500 metric tons of oil per day back into production from idle well repair [over 225 wells] in less than two years. When in October 1996, Mangistaumunaigaz stopped paying for our equipment and services rendered, our company started its gradual decent into the quagmire of tax delinquency and failed payrolls. And, I have even been threatened with a gun to make a payment to a disgruntled employee from the Oblast.
MMG�s failure then, and today�s flat refusal now to pay its debt to our company has compounded the fines and penalties to an extent that all the principal earned may soon disappear. And MMG walks away with the free oil that we placed back into production, and I suppose, with a clear conscience.
We had hoped to have been a contributor towards achieving your noble goals for the year 2030, but it is impossible for any small to midsize company to survive when its clients don�t meet their moral and ethical payment obligations to companies that honored your invitation to invest in your country. Also, I don�t understand how these foreign companies such as Anglo Caspian Resources, KKM and Triton Vuko [Karashambasmunai] can be granted licenses and new opportunities in Kazakhstan when they have enormous outstanding debt to service companies in your country for work that has already been completed and approved for payment. In the Western oilfield, it would be very difficult for these folks to get any credit from anyone.
MMG�s past record in 1996 was one of making payments on time; thus we continued to repair wells placing more oil on production, but also continued to incur substantial liabilities and costs, until in July of 1997, we had to reevaluate our position. We were owed five million dollars from MMG [plus interest], which until privatization is completed, is still very much the government. We had to stop working.
We were forced to terminate 200 Kazakh specialists, endure significant abuse from the A-6 police, the tax police, prosecutors, and we wondered how many days any small business could survive in such a hostile environment in a country where our customer, such as MMG, flatly refuses to pay the principle and interest [fines on over due invoices] that today, two years and seven months later, now totals seven million U.S. dollars. But, in the eyes of the government bureaucrats in the Oblast, we were the only guilty party for not paying taxes or meeting all of our payroll on time. There is no guilt for the non-payers such as MMG, KKM, Triton Vuko and Anglo Caspian, the very entities that caused and perpetuated our untenable situation.
We cite 10 [a sampling] areas of concern in the investment climate of Kazakhstan.
We think it would be beneficial for your government and the potential investors attending this Conference, to consider some friendly suggestions, based on our five years, hands-on, in the trenches experiences, about how small to midsize foreign companies, looking at investment in Kazakhstan, should prepare themselves to do business in the Oblasts.
These points are not meant to be critical nor anti-governmental in any manner. They are simply the true facts, as lived, and now written for others to study and ponder. The points are a composite of our personal experiences, in a single Oblast, Mangistau Region, in trying to build a small to midsize business. In 1996 and 1997, our business made significant positive economic contributions in salaries, taxes, and pension funds in the Mangistau Region, but that soon became a memory!
We tried to use western economic development principles that are common practice in the West, but this effort failed miserably in the Oblast. We believed, mistakenly, that if our company employed substantial numbers of people, if it made every attempt to comply with the laws, but if we occasionally missed some regulation through ignorance, not intent, that the local government would help us correct our mistakes.
If we worked diligently and met the standards set for performance, we would be paid for such work, and that Kazakhstan, in it�s own self interest, would nurture such efforts made by an independent small to midsize business. After all, this is what the President of the Republic was saying to the world. But, it didn�t happen, and we were very wrong in our western assumptions. In some countries, if you create 200 jobs, they name a street after you; not here in the Oblast, they start looking for ways to prosecute you.
If we were consultants, we would probably charge a fee for revealing some costly lessons that were learned during the past few years in Kazakhstan. But, for the potential investors attending this Kazakhstan Conference on Investment, we are pleased to share some of our experiences. We painfully watched a viable, dynamic business be systematically destroyed over a period of years by a post communist bureaucratic system combined with non-paying clients in the Oblast. And for the non-believers, all the information being revealed in this article can be supported and documented upon request.
A potential small to midsize business investor should not invest in Kazakhstan until he/she reads these points selected from our numerous encounters during the past three years. These are but just a sampling:
No. 1 Get professional help immediately upon arrival
Our company made several mistakes in our contracts using interpreters, advocats, lawyers, and part-time accountants in the Oblast. Just because an interpreter speaks Russian and English does not remotely qualify him or her as knowledgeable in doing business in Kazakhstan. Use substantial attorneys, local or foreign, located in Almaty or Astana. Have all your contracts iron clad with every conceivable issue addressed. With this all-for-the-budget mindset, if an authority can find a blemish to permit him to levy a tax, he may use it.
I would also, before checking into a hotel, employ a significant tax firm, local or international. My experiences were that when it comes to a tax or legal fight with the government you may often find yourself alone. It�s not a criticism, the major companies want to keep in good graces with the Republic, but it could be at your expense.
I would have clear understanding in my mind, before arrival, that while there are laws in the Republic [albeit, they change frequently], there is no justice. In the definition of a frontier, we said �Justice is Rudimentary�. Kazakhstan does not stand alone on this point. America has been and is frequently guilty of such injustice, but be aware, avoid situations that would take you to court. And, the court charges three (3%) percent of your claim up front to process your case and there is no guarantee that your claim will be settled in your favor if you win.
No. 2: Avoid mistakes, they can be costly
Understand, that if you make a mistake, and you will because you may receive poor advice from any source [and especially if you don�t speak the language], or if you overlook an aspect of the law in fine print; a bureaucrat is not going to listen to anything you have to say or provide a mutually acceptable solution. The law is the law. There is no tolerance for mistakes in Kazakstan. If you are suspected of being in error of their interpretation of the law, you will be investigated. The A-6, a government police agency, invaded our personal apartment and office in April 1997 and confiscated all of our business papers and computer discs. I asked, �Are we charged with a crime�? They said no, �but we�ll find the evidence in these documents to charge you with a crime�. They returned our documents a year later without finding anything substantial except for the tax problems caused by MMG�s non-payment. But by then, they had inflicted severe damage to our reputation and our ability to conduct business in the Oblast. And further more, they didn�t care in the least.
A foreigner�s mistake opens the way for more fines, penalties, taxes and confiscations of cash for the budget. We made many mistakes in Kazakhstan. We innocently filed an incorrect tax return in Aktau in 1997 for 1996 tax, and then we encountered stringent opposition from the local authority to permit us to amend the return in Aktau. We had to get permission finally in Almaty to be able to submit a corrected return, and then our amended tax return was rejected in large part in Aktau. We brought our accountant from the United States, at considerable expense, on two occasions to present supporting international expense documents in Aktau and he was turned down both times, once by the A-6 and next by the tax authority. After such a long journey, he was not permitted to present our case. There is no flexibility in dealing with a local, Oblast and city government taxing authority that only has one thought in mind; get money for the budget.
No. 3 The Central Asian culture is different from the West, Western logic doesn�t apply
Before you get off the plane, understand that western logic can not be applied or understood on a daily basis in the Oblasts in Kazakhstan. Their background and culture in Kazakstan is different. The culture is fine, it�s just that it�s different. We tried on many occasions to apply logic with the bureaucrats to solve the many problems that threatened our survival without success in any department. Any cooperation or attempt on their part to understand our cash dilemma due to non-payment may have saved the company and the jobs. But understanding on their part was not to happen. When they are assessing penalties for unpaid tax, and you say, but MMG has not paid me for two years, they calmly reply, �that�s your problem�, you should have stopped working sooner.
Stopped working sooner? MMG was giving verbal and written assurances frequently that we would be paid to keep us on the job because the field engineers and geologists wanted more oil production. We were foolish. We trusted, but didn�t verify as Ronald Reagan said in Iceland, and continued working for oil enhancement until we ran out of money. We were very proud of the work we were doing, and the country benefited. By the way, you must get used to hearing, �That�s your problem�. You won�t get any help from the local branches of government who don�t even communicate with each other. Learn their system, it�s their country, not your country. I�ve been here five years, and I�m shocked and surprised everyday. If you plan three accomplishments per day and get nothing done, be happy that you didn�t go backward! Just be forewarned.
No. 4 The budget supercedes everything
Understand that the role of government today is highly focused on meeting the budget and have placed all agencies in the Oblasts on alert to collect every dollar or Tenge that they can find. The tax authority is all
powerful and can confiscate money for what they think they are owed by you in taxes. There is no flexibility or discussions on this subject. For example, if you ask that a small percentage of the soon to be confiscated earned income for taxes, be retained by the company for worker�s salaries, they laugh at you. The budget is kilometers ahead of any concerns for the worker and they openly tell you this as a fact of life. My unpaid expatriates in America don�t see the humor in working over wells that benefit the Republic of Kazakhstan and then not receiving a salary. The Kazakhs in the Oblast couldn�t care less if we ever worked over another well for the Republic. In fact, if the truth were known, they want all westerners out of their country with one proviso, leave their money!
MMG has not honored their contract, and the aforementioned three foreign clients have not met their payment obligations to us in accordance with their contracts, but one foreign client does honor contracts. Where do you think the tax police go? To our most loyal client, Arman Joint Venture, who enjoy significant cost savings in using our services and who if were permitted by the tax police, would pay us abroad to keep us somewhat financially healthy. But the tax police say, if you don�t pay into CATKAZ�s local bank account for confiscation, we�ll confiscate everything directly from Arman. We don�t think this is legal, as this money was earned by our company, not Arman. But in Kazakhstan, the tax police can and do act with impunity! There is no reason, discussion or negotiation. That money was earned by us, but we have no control over where it goes in the country, and neither does Arman.
Arman say they will need our services in the future to keep costs down. Our final well repair work in Kazakhstan was finished two months ago for this ethical client. The local authorities don�t and won�t understand that foreign companies have substantial expenses abroad to support the operation in the Oblast. If funds are not permitted to be sent abroad to be used to pay expenses internationally, the foreign investor cannot pay expatriate personnel, purchase spare parts for western equipment, or pay for all other services needed to sustain a business in Kazakhstan. In short, this is another powerful way a bureaucrat can kill a business. Our major expenses are abroad, and with this confiscation, we have no way to meet our obligations. But they couldn�t care less; they want money immediately. Tomorrow and/or the future is of no interest, except, maybe, in the eyes of the President of the Republic.
When taxes are owed, the tax police choke the small business to death by confiscating all working capital until they collect everything that is due. If they could see the future, maybe the tax police would negotiate with the company for a fifty percent confiscation, waive the fines, let the company continue to work until all the tax is paid. This keeps the small business alive to contribute taxes to the economy in the future. This is what we mean by a spirit of� government-business partnership to achieve long-term goals of 2030. But, no, they want all of it now, today, and if you can�t survive without any money at all, well again, �That�s your problem�.
The tax police have not looked to MMG or our three non-paying foreign companies for cash to offset our tax burden; entities who have been delinquent paying us for several months and years. No, they went for the fruits of our most recent work for our only honorable client. This total confiscation, for the value of the last invoices presented for this work insures that we will not survive in Kazakhstan. It�s sad, not only will the Kazakh workers not get paid, but our expatriates who came back from America to do this job one last time, in good faith, will also not get paid. The President has publically told his people, �It�s better to work and not get paid, than not to work at all�. I wouldn�t say that in the West.
We have been here for five years and reinvested all of our earnings in this country. We have over one million dollars in rigs and equipment in-country. We know that this is nothing compared to Chevron, but its a fortune for a small business. We now have over eight million United States dollars in approved invoices listed as unpaid accounts receivables, including MMG and the three foreign companies.
If we had been paid for the work that we did in this country, we would be a substantial mid-sized company, growing and probably today employing over 400 people! But, all of this money earned by our small company will now all go into the budget. For our efforts we�ll have souvenirs to show: all the receipts for the international and local costs of doing business with the non-paying clients in Kazakstan, all taxes, fines, and penalties, and the criticism that goes with the fact, �that�s our problem�.
We placed significant amounts of oil back on production and the Republic benefited. As you may now have surmised, we worked not for the benefit of our company, but only for the benefit of the government. All the fruits of our labors now goes to the budget; they receive the cash from our labor and investment, and we receive all the costs, operating expenses, and taxes. You can�t survive as any size business in such an environment where the cash only moves in one direction. Just be careful, that�s all.
No. 5 Taxes are due regardless if you are paid
This point is very important. We submitted millions of dollars in approved invoices to MMG in 1996 and 1997 that remain unpaid to this date. We are very delinquent in tax on that money that we never received. All the while, fines and penalties are being assessed by the tax police on our company, and MMG, the perpetrator, goes free. When we invoiced interest penalties on the unpaid invoices, although it is legal in Kazakhstan, MMG laughed. The tax police are not bashful about charging fines and interest on unpaid taxes! This may sound absurd, but don�t write an invoice and incur an immediate tax liability in Kazakhstan until you have money in your hand.
Or, if you intend to write invoices and extend credit, you should immediately go to the tax police upon arrival in Kazakhstan and make a substantial deposit, equal to six month�s operating capital, before you even think about working in this country. We can assure you there is no mercy shown in the tax department for non-payment of your invoices by your clients. And we explained that on the one hand, the government (MMG) owes us money, and on the other hand we owe the government (taxes). We asked the tax police to collect what they thought we owed in taxes from one side of government (MMG) to offset our liability (taxes) to the other side of government? Again, they laugh, with the proverbial, �That�s your problem�.
No. 6 Payments abroad may be considered pure profit for taxing purposes
Be very careful with imports. We imported a million dollars in equipment for MMG, the government. They received all of the equipment and we have the documents confirming they received the million dollars in equipment. We cash flowed a meager 3% percent commission for sourcing the equipment and handling the transaction. The government tax authority now says that we received the million dollars abroad and now wants a 20% tax from us for the total amount of the transaction. We didn�t earn a fraction on the transaction to pay the taxes that they demand. We earned but three percent for our services; the million dollars in equipment was received by MMG. It�s simply amazing.
In this world, income, cash flow, or even bank deposits may be looked upon as profits. We all know that cash flow and income is money used to pay for operating costs. Try to tell that to the tax police who
saw a million dollars being transferred to our overseas bank account. It was used for legitimate purchases and documented. The tax man sees transfer as profit and wants the tax; he�s not interested in the million dollars of equipment safely lying in MMG�s yard in Kalamkas. When it became this nonsensical, we stopped importing anything except our spare parts needed to keep our investment running. The tax police in these local areas also unilaterally determine what you can write off in international expenses. It all depends on how much they need for the budget. Prepare for that carefully.
No. 7 Get all permits and licenses or forfeit everything that you have earned
The government would say that we were delinquent in getting all of our licenses. That�s true, but as facts and requirements became known to us, we took positive action in favor of and with respect for laws of the Republic. The licensing law was passed in 1995. The bureaucracy created to issue the licenses matured toward the end of 1997, early 1998. We began working on this license in mid 1998, received it in December of 1998.
But such a discovery, that we worked for a time without this license, entitles the government to take all our earnings, without expense deductions, from the day we started to work in Kazakhstan. Why didn�t the A-6 interrogators and the tax auditors in early 1997 alert us to this requirement? We had all the GOST licenses and certificates. It was our mistake, because we didn�t know about this licensing law; we all thought GOST approval was sufficient.
Ignorance is no excuse for not having done the right thing on time, but an extremely excessive penalty obviously does not fit the crime. Whatever you do, research the operating license law. Our advisors, attorneys, and accountants failed to alert us of this little known law passed in 1995. When the prosecutor informed us in Aktau that he was going to confiscate all of the company�s income and demand all income received from work performed, he bragged, �but, don�t be upset, we caught seven other companies in your situation, too�. And, he added, �We may open a criminal investigation against you, that would, if you are convicted, put you away for 5 to 7 years�. For what, I asked, �a clerical oversight of a law tucked away in a small book and creating over 200 jobs�? This is all in a day�s work in Kazakhstan.
This law wiped out eight small business in one foul swoop and the prosecutors and tax police seem to be proud and gloat at the annihilation of these businesses. I remember in July of 1997 in one of
my many interrogations by the A-6, I mentioned that all of this tax harassment and police work [which turned up nothing], damaged my small company and contributed to loss of over 200 jobs. He replied, �you are not anybody, I was in Chambol last week and destroyed 3,500 jobs�. He was so proud of his authority and power. I don�t believe the President of this great Republic would find that amusing at all!
No. 8 Contract only for the period required
We blundered in issuing contracts to our employees. When MMG was making payment on their invoices, we felt, as did they, that enhancing oil production was in the nation�s interest, our operating efficiency was meeting the expectations of the NGDU and MMG, and the Republic was receiving needed oil from idle wells. We began to sign one-year contracts with our people because we were confident that work would continue. Now, over two years later, the debt is still being paid off to our local employees through the court in Aktau. Never, repeat never sign employee contracts, car and driver contracts, etc. beyond any period of time that you will need their services; and then anticipate the worse. You will be liable for payment through the entire term of the contract, and rightly so. Just be careful.
No. 9 Corruption �it�s everywhere, be careful
This is the unpleasant topic in Washington DC, Mexico, Nigeria, Indonesia, and many other countries, but also here in Kazakhstan; corruption. This activity is related to function and time. What do you need processed and in what order of magnitude of time? Does it need to be done today? What is the demeanor of your mistake? Was it intentional or an oversight? How soon do you need it solved? A small mistake, no problem; a larger infraction requires more money, etc., etc. Will you hire my relatives? This is a very common approach; I can shut down your operation on the smallest inference of misconduct or noncompliance with Kazakh law, but if you hire my uncle, albeit he has no training for the job, you won�t have any problems. The examples are too numerous to list in the space allotted. Enough said. Just be careful, it�s out there at every turn.
The President is doing everything that he can to stop this practice, but it is so ingrained in the culture, that the Chief Executive of the Republic has a tough uphill fight, but I admire his tenacity and moral integrity in embracing this dilemma. I personally wish him all the success in the world in his courageous quest to stop corruption. It would drastically reduce the operating costs of all the small to midsize businesses in the country.
No.10 Be aware of your custom�s obligations
We brought in our equipment just over two years ago. The law says that a foreign company must export the equipment outside of Kazakhstan, and then re-import it, if the equipment is needed again in the Republic. Obviously, we didn�t have the funds to do this. Now, the deal is that we can keep our rigs and equipment if we go to court and convince the court that we should be able to keep our equipment. If, and only if, the court says we can have our equipment back, the fine is equal to 100% of the original import value of the equipment when it arrived here two years ago. You do not get credit for consumables that have long since been used, or equipment that was destroyed and junked; no, the fine is 100% across the board based on the original import documents.
It means we get to buy our own depreciated equipment at full price for a second time, except in this case, we pay the second time to the government custom�s office, not the seller of the goods from whom we made the original purchase. That�s a great deal, isn�t it. So as not to take your eyes off the issue here, all of our money troubles revert back to the government�s, i.e., MMG�s failure to pay its debts on time to our company. Then, another agency of the same government, Customs, is penalizing us for not having money to pay the duties; a direct result of not collecting the money from the other agency of government, i.e. MMG!
Because we didn�t have the money, for reasons previously stated, Customs have now confiscated our work-over equipment, the tools of our trade. Again, it relates to non-payment by our clients. Although it is not written anywhere that a small to midsize business should finance the government of any nation or western clients, this became our destiny, wrongfully based on trust in their promises and need for our services.
Anyway, within weeks the equipment confiscated will be pillaged and not be useful to customs or others. We�ll be out of business and our tools will be disintegrated, no use to anyone, but alas, the strictest sense of the law will have been upheld. By taking our assets, Customs, i.e., the government has assured that we will not employ people, contribute to economic development, or pay future taxes. The President of the Republic said in speech last week, that the collections for the budget are down, and that pensioners will have to be patient to receive their payments. When you eliminate small to midsize businesses in the Oblasts, of course your budget revenues will drop! Every time a business is destroyed, a potential taxpayer is eliminated!!
In a user-friendly government environment, you would have liked to have heard a conversation with customs that may have sounded like this, �You have not shipped out your equipment, why�? We would respond, �There are so many outstanding payments that are due to us that we don�t have the cash at this moment in time to ship the rigs or pay the duty�. In a small to midsize user-friendly country, customs might add, �Do you have work for these rigs�? Yes, we would reply, and we can put about 40 people to work immediately�. It�s ok says customs, �put your rigs to work and with some of your cash flow, come back and start making the payments that you owe. Stay in touch and good luck�. �Oh, by the way, we won�t impose a 100% fine as it really isn�t your fault. We all know that you completed the work to your client�s satisfaction and they didn�t pay�.
The above conversation would be a fantasy in Kazakhstan. The real world is strict adherence to the law. This further assures that we will not be around tomorrow, or in the years to come to pay future taxes. And, this Custom�s action, perfectly legal and subject to the strictest interpretation of the law, drives the final nail into the coffin of our small, once viable business, that made the kind of significant economic contributions that Kazakhstan now so desperately needs.
The end of the story
The local authorities would argue, from their point of view, that we often acted outside the laws of the Republic of Kazakstan. We did make some honest mistakes, but when voluntarily admitted by us, the bureaucrats refused to listen to extenuating circumstances, all of which relate back to the governments, i.e. MMG�s refusal to pay for the five million dollars in services and equipment that we supplied. We created five million dollars in value, and someone or some entity in this country has that value-added component. But, I suppose the local government would argue that if we didn�t have enough capital to pay all the taxes, fines, and penalties forever and ever on unpaid invoices that we should have stayed away from Kazakhstan.
Richard Jones, the U.S. envoy to Kazakhstan, voiced a theme common to all the ambassadors from Central Asia in a meeting in Washington in early May of this year. �Kazakhstan is not a market for the faint hearted. It�s a high maintenance business environment that will require financial strength and a significant amount of executive time and energy to make your business profitable,� he said. Costly customs delays, bureaucratic red tape to obtain work permits, inconsistent application of the tax code and lack of respect for contracts are a partial list of pitfalls facing U.S. businesses in Kazakhstan, Jones said.
Nevertheless, more than 100 U.S. companies have opened offices in Almaty, the commercial capital of Kazakhstan, in sectors such as oil and gas, consumer goods, power generation and telecommunications,
Jones said. The ambassador has a doctorate in business and said he was chosen for the Kazakhstan assignment because he could be instrumental in helping the country�s conversion to a Western-style economy.
With all due respect to Ambassador Jones, I only have an undergraduate degree in business, not a doctorate. But if he thinks anything he learned in an institute of higher learning in the West has prepared him to deal with the types of daily factual, problems, revealed in this article, I wish him all the best of jolly old good British luck! I�ve lived and worked abroad practically all of my life, but I didn�t learn a single thing at the University of Texas or in any of the 60 countries where I have worked to prepare me for what I have witnessed in Kazakhstan for the past five years!
It�s now a bottomless pit for us in Kazakhstan. MMG says they will never pay. We have no way to recover any contributions that we are asked to make to the budget, which are demanded on behalf of the work we completed for MMG. We stayed and fought the battle for three additional years for my employer hoping that some logic and common sense would creep back into a community; a community that would embrace an economic development atmosphere. I was incredibly wrong. It didn�t happen, and further more it isn�t likely to happen until the local government agencies become user friendly to investors who create jobs, not user nasty.
Many laws in the Republic act against the nurturing of small businesses that are crucial to local and national economic development. In many frontier and developing countries, you�ll find corporate tax holidays granted to foreign investors as an incentive to invest and create desperately needed jobs in difficult to reach, abusive and often impoverished environments. The taxes are recouped through the growth of the small business as they add employees to their payrolls. It could be a win-win philosophy in Kazakhstan for the investor, the economy, and for the enhanced financial well being of the Republic. The government would need to reduce some of its expectations for the budget while this new, significant small to midsize tax base was evolving.
Another idea that perhaps the President of the Republic may embrace, is the implementation of tax free zones, whereby a small to midsize company may import components for assembly without tax, add value to these components in Kazakhstan, and re-export. Kazakhstan has a wealth of skilled and knowledgeable labor. Its workforce is one of Kazakhstan�s greatest assets. I realize that Kazakhstan is miles from areas of manufactured goods, but this idea could be a lead-in to modern manufacturing in-country. In my book, Venturing Abroad, I call this the SAM strategy; sell, assemble, manufacture. The Maquiladoras in Mexico are a prime example of an economic engine that that has been successful for years in generating real jobs for real people.
Anyway, the jobs that we created in the Oblast have disappeared. We watched MMG and the three foreign companies systematically accept eight million dollars in services and equipment and then turn their back on their commitments without shame. It was like watching them enjoy an expensive meal in a restaurant then walk out without paying. I suppose it was my fault that we granted so much credit, but it happened so quickly, and to my utter amazement, I was stunned at the lack of integrity on their part and blatant contempt for the welfare of the service provider. They are all staying in high dollar hotels, traveling on business class, looking for new deals in Kazakhstan, and they are doing all of this with much of the money that they owe us!
I liken this to a grand heist; maybe the largest burglary in Mangistau�s history. It�s up there with the Great Train Robbery in the UK in the 1960�s. Our western work-over operation was revered, enjoyed, used, abused, and not supported; then criticized by the very people who looted the store. Our operation contributed to substantially lower operating costs for both Kazakhstan and foreign clients. We saved them and the Republic, as their partners, significant sums of money by repairing wells with modern western technology and operating methods. In fact, we saved them all their costs because our services were free, as they didn�t pay! But, now that is history, but we are still looking to collect this money that was honestly earned in the Oblast.
In Kazakhstan, it is believed that �what is mine is mine, and even though I can�t do anything with it, it�s mine and I�m going to keep it�! We learned this three years ago when we wanted to commission, or place into service, three, new workover rigs that had been stored in a garage in Uzen for over four years. There was no way that a deal could be struck in the interest of both parties. This is 1999, and the same three rigs remain in storage. I remember trying to lease a warehouse in Uzen in 1994. The rental price demanded for this facility was equal to the payroll requirements of the lessor. The amount was greater that you would pay in downtown Houston, Texas for an equivalent property. This is 1999, and the facility remains vacant.
In Kazakhstan Oblasts, it�s the law without compromise, and the future survival of any tax paying business is of absolutely no interest to anyone in local government. We weren�t the only dog they kicked, they have kicked many dogs that were trying to find a way to stay in business. The country will now lose all of our future taxes from the company�s business had we survived. The survival of tax paying entities is important to the President of the Republic, but of no importance in the Oblast!
The tax people have frightened our clients to the point they won�t use our services because of our tax problem. Between non-payments, tax problems, unpaid employees, frightening of our clients, and the custom�s confiscation, it�s not possible to earn new income to pay old debt. It�s a Catch 22 of the greatest proportions.
The government, i.e., MMG kept all the money that we earned, and they kept all of the enhanced oil production that our equipment, unpaid Kazakhs, and expat labor contributed to the country. The tax inspectorate want all of our remaining money [although there is none], accounts receivables, and assets. The prosecutors want their friends and relatives that worked for us to be compensated in full in front of the others. Now customs, who want substantial money, have now taken the tools of our trade, our rigs.
How we do compensate for all of these demands for money from many bureaucratic agencies coming from all directions without any incoming cash flow for past six months? Without incoming cash, there can be no business! A post-communist bureaucrat would say quickly with a smile on his face, I suppose, once again, �that�s your problem�. Does anyone in the government of the Republic of Kazakhstan, who may read this article, have the answer to this question or have any suggestions as to how a small to midsize company can survive in Kazakhstan under such conditions?
We fought an uphill battle with every agency for the past three years and now feel whipped. We never won a battle without some payment of money. We, the investors in the small to midsize business sector that you, the President of this Republic, embraces, have a limit, your Excellency, as to how much of our labor, energy, and cash resources that can be taken away from us in trying to accomplish your objectives for your nation. In our case, the system and present laws took it all. It�s not a pretty or welcome picture to put cash in this high-risk country without any real and honest possibility for a healthy return on our investment. You can�t defy the law of gravity; but the Oblast is doing an excellent job of trying. Mr. President, we depart Kazakstan without any animosity or hard feelings towards the government, the people, the nation or our clients that got a real [free!] deal for using our services. I would personally urge that each attendee to your conference, that reads this true story, keep an open mind as Kazakhstan offers worlds of opportunity for investment. I thought I could bring 34 years, now 39 years of international experience to the table here and succeed in this country by adhering to the goals of the President and the Republic. We made great strides for a while, and then the local, leftover communist bureaucratic system jumped on us without mercy. We didn�t realize that we would be expected to work without compensation, and in the absence of such compensation, we did not bring enough money to Kazakhstan to meet all of the demands of the budget! All the while we were paying for the cost of the services that we provided and being continuously harassed by all the local authorities for money, money, money. All foreigners are targets for confiscation of money. The local authorities genuinely believe that all foreigners have �money trees� that grow US$ 100 bills; that we can satisfy their insatiable appetite for money. They have no concept of operating expenses, profits, or cash flow needed to sustain a business.
To the attendees of the Investment Conference, we would say the Kazakhstan people are hard working and loyal and the investor will receive more than their dollar�s worth from their services as managers and employees. Enjoy the conference and don�t take this true story as negative, it is meant to be informative only, not critical of the government or the non-payers. It�s just a true story of how one company�s dream perished, as you have now read, in the ashes of non payment, rules, regulations, strict laws, hostility, corruption, jealousy, and the desire for instantaneous gratification. If any information in this true story saves you a few coins along the way in Kazakhstan, you can pay for a beer when we next meet. In closing, and what�s most disturbing, is that no one in the local Oblast government in Mangistau cares at all about the fate of our company or our ex-employees; or the fate of any other small to midsize company in the Region. Nor does anyone recognize or care about the financial contributions that our companies made or were trying make in the Republic of Kazakhstan under the most trying and difficult circumstances. The saving grace for the Republic of Kazakhstan is that the President does care and will, I believe, somehow, put the wheels back on track to provide incentives and encouragement to prospective investors, and to control his bureaucratic cowboys in the Oblasts. If this doesn�t happen, the sun may quickly set on the President�s goals for 2030.
We wanted to be here to witness one of the President�s greatest achievements, that of attracting vibrant, economic engines - the real job creators, and the future solid tax payers to the Republic of Kazakhstan; known around the world as �the small to midsize business.� But, as much as we tried, we were overwhelmed by the post-communist system!I wrote this article with the deepest respect and admiration for his Excellency, the President of the Republic of Kazakhstan. I hope that you and your Ministers will consider the many suggestions presented throughout the article to be constructive and helpful.Jack Enen,
ALMATY, May 25
by Baker & McKenzie
(Specially for THE GLOBE for the Investment Summit)
Since June 1998, the Kazakhstani economy has been faced with a number of challenges arising primarily out of the Russian crisis. The substantial devaluation of the Russian currency together with Russian political instability led to concerns over the investment potential of the Commonwealth of Independent States, including Kazakhstan. The world-wide depression in commodity and oil prices also contributed to the hesitation of foreign investors, pressure on the Kazakhstan budget and increases in unemployment. The culmination of these factors was the driving force behind a number of legislative and administrative measures implemented over the past 12 months that have created an atmosphere of uncertainty for foreign investors. These measures include:
1. Floating of the Tenge, including the introduction, at least temporarily, of mandatory conversions of Tenge to Dollar requirementssale of 50% of the export currency;
2. Strengthening of the tax collection system;
3. Erection of various trade barriers; and
4. Steps to accord greater protection of Kazakh employees.
Many issues of interest to foreign investors were deferred during the course of the year in view of the perceived importance of dealing with matters of domestic economic concern. However, the current hiatus in moving the Kazakh economy towards a market oriented economy (with an underlying legal system to support this) hopefully will resume once the effects of the foregoing have been stabilized. Indeed, floating of the Tenge after efforts to support the currency indicate that the Government is again moving towards more market-oriented reforms.
A summary of the significant legal developments since June 1998 is set out below.
Currency control
Among the first considerations of foreign investors when deciding whether to establish a presence in an emerging market is the ability to convert local currency into hard currency, as well as the ability to freely repatriate the profits earned in the country.
Generally, Kazakhstan has no restrictions on the repatriation of profits or on the conversion of currency by foreign owned legal entities. However, a significant development within the period covered by this article was the new requirement for mandatory conversion of 50% of all export revenues introduced by the National Bank in April this year. The mandatory conversion requirement was part of the package proposed by the Government to ameliorate the adverse consequences of the freely floating exchange rate (�FFER�), which was implemented at that time.
On April 4, 1998, Kazakhstan effectively devalued its currency by introducing the FFER and ceasing its regular and increasingly costly support of the national currency. The Tenge plunged to 150 to the Dollar on April 7, from 88.3 the previous week. It bounced back, however, to around 110 per Dollar during the next few days and is at 118 Tenge per Dollar as of this writing.
The need to float the Tenge was clearly a result of the Russian currency crisis. Russian goods had become more price competitive as a result of its weak currency and many cheap Russian goods were imported while the amount of Kazakhstani exports decreased by US $1,250,000,000 from the previous 9month period. Kazakhstan also faced a sharp decrease in its foreign trade, which shrank by 9%, or US $1,300,000,000 from the previous 9month period. In the last half of 1998 and early 1999, the National Bank regularly intervened to support the National currency and the Government also imposed trade barriers with Russia to diminish the flood of imports. However, the current Tenge devaluation is an acknowledgement that this policy was ineffective.
The government has declared that the introduction of the FFER and subsequent Tenge devaluation will become an effective means of protecting domestic producers, boosting exports and increasing the country�s currency reserves. It has promised not to allow fluctuations in exchange rates that exceed �rational expectations.�
The government�s goal for the mandatory conversion of foreign currency is clear � it wants to boost the dollar supply while not depleting its hard currency reserves for interventions. However, recently the Minister of Finance, Mr. Dzhandosov, announced the government�s intention to lift the mandatory currency conversion requirement. No explanations were provided for removing the measure so soon after its introduction.
Taxation
In general, the trend in the development of tax legislation in Kazakhstan has been to expand the authority of the Tax Committee by broadening the tax base and strengthening the means of tax collection, including seizure of funds in bank accounts without the taxpayer�s consent, selling the assets of taxpayers and obtaining court orders for the mandatory issuance of company shares to satisfy tax debts.
Transfer Pricing
A new concept of transfer pricing was introduced and amplified in the Tax Code in the period covered by this article. Pursuant to the amended Tax Code, the transfer pricing provisions can be applied to:
1. transactions between related parties;
2. exchange of goods (barter) transactions;
3. transactions where the prices fluctuate more than 20% from the market price on identical goods, works or services during a given quarter; and
4. import transactions where the prices on imported goods exceeds the market price for identical or similar goods by more than 20%.
The tax authorities have the right to impose taxes including interest and penalties based on prices that would have been used if a transaction had been on an arms-length transaction. In case of import transactions, the tax authorities have the right to impose additional taxes and penalties calculated as if the expenses were incurred at market prices.
For the purposes of the transfer pricing provisions, related parties are defined to include individuals and/or legal entities when the relationship between them may enable one party to influence the activity of the other, namely, when:
1. one entity owns more than 33 % of the other entity;
2. persons representing counter parties in the transaction are related by family or by Law.
The mere fact that the parties may be related does not trigger the applicability of the transfer pricing provisions. The transfer pricing provisions are only applicable to taxpayers that have an aggregate annual income of more than 100,000 times the monthly calculation index (currently approximately USD 620,000) as well as taxpayers that produce and/or sell goods subject to excise tax. The tax authorities may apply the transfer pricing provisions to the import and export of goods even if the aggregate income of the importer is less than the above amount.
Individual Income Tax
Effective April 1999, the number of graduated rates for the individual income tax has been decreased from six tax brackets to four ranging from 5% to 30%. Intermediate tax brackets of 15% and 25% have been eliminated. The top tax bracket of 30% applies to individual annual income exceeding roughly US $5,500.
Social Tax
Taxes that were previously paid to the State Pension Fund (15%), the Employment Fund (2%), and the Medical Insurance Fund (3%) were replaced by a single Social Tax. The Social Tax is imposed at a rate of 21% of the payroll of Kazakhstani nationals before withholding relevant income taxes. The social tax rate payable by employers with respect to the salaries of foreign citizens is five times the monthly calculation index (approximately US $35) per month for each foreign specialist, and ten times the monthly calculation index (approximately US $70) per month for each foreign worker. The difference between a foreign worker and a foreign specialist is not indicated in the relevant laws.
Starting April 1999 the State Social Security Fund was eliminated and the burden of social payments was shifted to employers. Employers are entitled to deduct from their income expenses incurred from social payments, but not to exceed 1.5% of the payroll except for compensation for work related injuries. Social payments exceeding this amount must be paid from the net profits of the employer. A series of amendments was also made to a number of different laws to coincide with these amendments, including limiting the amount of sick leave and maternity leave payments to 10 times the monthly calculation index (about US $70) per month. Paid maternity leave now also is limited to 126 calendar days per year.
The responsibility for paying the 10% mandatory pension contribution has also been shifted from employers to employees themselves, but employers are still obligated to withhold and transfer pension contributions to pension funds.
It is worth noting that as a result of the latest changes in legislation, the cost of employing Kazakhstani citizens has been reduced from 32.5% of payroll to roughly 22.5%.
Road and Vehicle Tax
The Road Tax was eliminated entirely over the course of the year, but the Vehicle Tax was raised significantly. The Vehicle Tax is paid annually by the owners of automotive vehicles. The amount of tax depends on the age, origin and engine power of the vehicle. The amount of the Vehicle Tax for a new car ranges from US $25 to US $725.
Property Tax
Amendments were made to the Tax Code in March 1999 to provide that all depreciable assets (as opposed to just fixed assets) subject to a 1% property tax. As a result, it appears that intangible depreciable assets (such as licenses, computer software and the like) may become subject to the property tax, along with tangible fixed assets. No clarification on this issue has been provided by the tax authorities thus far.
Tax Administration
As stated above, amendments to the Tax Code during the past year expand the government�s means to collect taxes. The amount of advance payments declared by a taxpayer in its preliminary tax return filed in the beginning of the tax year may be seized without the taxpayer�s consent if not paid when due. Penalties and interest on unpaid amounts may also be seized without the taxpayer�s consent.
If a tax audit has been conducted and additional taxes, penalties and interest are imposed on the taxpayer, the tax authorities may seize such funds from the account of the taxpayer if it does not appeal the decision of the tax authorities within 5 banking days of receipt of the audit report and the notice. If no appeal is filed within 5 banking days, the taxpayer is deemed to have consented to the additional taxes.
If the taxpayer files an appeal, taxes may not be seized until 30 banking days from the date of the initial notice. Within 30 banking days of the initial notice, the matter is supposed to be resolved either by the higher tax authority or the court. After this period is over and if the appeal is not successful, the tax authorities have the right to seize additional taxes from the taxpayer�s account without its consent. The tax authorities are not entitled to seize the funds in the taxpayer�s account pending the court appeal.
Customs
In an effort to protect domestic producers from currency-related price differentials resulting in the �dumping� of foreign, mainly Russian, goods on Kazakhstani markets, Kazakhstan implemented a number of new tariffs and trade restrictions in the first quarter of 1999. The new measures include a ban on the import of many Russian food products (including meat, milk and grain), the imposition of higher customs duties on certain products (including sugar, tea and various meat products) regardless of origin and a 200% tariff on certain Uzbek and Kyrgyz goods (including tobacco products, alcoholic and non-alcoholic beverages).
In connection with the recently renewed emphasis on the enforcement of the 1997 law On Languages (which was intended to foster the use of Kazakh as the state language), customs officials are more likely to require compliance with requirements that product labels with special information, markings and instructions on goods produced either abroad or in Kazakhstan be in both the Russian and Kazakh languages. Indeed, beginning 1 October 1999, the import or sale of goods that are not properly labeled and (with respect to certain types of goods) accompanied by information in Kazakh and Russian will be prohibited.
The decree regulating the import of personal goods was amended in late 1998 to divide such goods into two categories: consumables and non-consumables. VAT and customs duties are to be paid only on imported consumables. Expatriates are allowed to import non-consumables (such as electronic and electrical appliances) tax and duty free on a �temporary import� basis.
To remove currency exchange rate fluctuations as an impediment to the export of certain Kazakhstani goods (gasoline, diesel fuel, raw oil, gas condensate and alcohol), the government recently decided to denominate the excise tax on such goods in tenge instead of in euros (European hard currency units). Excise taxes on imported goods will still be denominated in euros.
Employment Law
Potentially, the Law On Employment of the Population (the �Employment Law�) adopted in December 1998, will have a serious impact on the manner in which all legal entities (foreign and local) operate their businesses in Kazakhstan. The Employment Law provides for the following:
1. The number of foreigners who are permitted to work in Kazakhstan will be subject to a quota. The quota will be an aggregate number broken down into specific numbers for particular types of foreign workers. The Law gives no guidance as to how the quota will be allocated between particular employers and the categories of employees.
2. A minimum quota will be introduced in relation to the employment of certain categories of underprivileged persons. The definition of underprivileged persons is extremely broad. It appears that, potentially, an employer may be obliged to employ a minimum specified number of underprivileged persons irrespective of the employer�s work requirements. In addition, the employer cannot fill any such �vacancies� with persons who are not nominated by the Employment Centers.
In general, the need for work permits, the extensive documentation that is required in connection therewith, the fees payable and the bureaucrats involved in the process have not been diminished by the new Law but only expanded.
Corporate Law
The new law On Joint Stock Companies (the �JSC Law�) became effective in August 1998 and was welcomed by investors in Kazakhstan. The newly adopted JSC Law is closer to international standards and allows JSCs greater flexibility in their capitalization and operations. The JSC Law has introduced a number of changes which aim to further develop Kazakhstan�s securities market.
The JSC Law has significantly reduced the share registration burden for JSCs (both open and closed) by exempting certain types of offerings from the registration process. It also enhances the ability of JSCs to issue Eurobonds or other types of bonds and increases financing flexibility through the issuance of convertible securities. Ultimately these provisions will facilitate access of JSCs to international capital markets.
It should be noted that although the new JSC Law is generally treated as a positive step towards the development of a new and effective company law in Kazakhstan, it also contains a number of provisions which are controversial at best and unique to Kazakhstani company law, specifically the provisions on additional share issue pursuant to a court decision, the notification requirements for certain types of acquisitions in an open JSC, etc.
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Overall, within the period covered by this review, while there were a number of positive changes in the legislative framework in Kazakhstan, domestic economic issues largely dominated the agenda. In addition, practical implementation of the laws aimed at supporting investments were often overshadowed by the inability or refusal of the lower level bureaucracy to comprehend their purpose or the importance of their faithful implementation.
Ayan Kuchukov
�Kazcommertsbank�
ALMATY, May 28
((Specially for THE GLOBE for the Investment Summit)
The formation of the institutional investors, who today may be divided into three groups: insurance companies (IC), investment privatisation funds (IPF) and pension funds (PF), assets of which are governed by the companies managing the pension assets (CMPA), is presently being completed in Kazakhstan. The largest Kazakhstan banks may be also referred to as institutional investors. Banks have been the main contributors of capital into the enterprises, including the so-called �blue chips� - in order to control their operations. But the possibilities of the banks are not so great, especially taking into consideration the experience of the Russian banks. Having purchased the biggest industrial facilities to create �oligarchic groups�, the Russian banks lost control of liquidity and could not fulfil their current and urgent liabilities in the panic periods when money was urgently required. Thus, we may assume that Kazakhstan bankers will take into consideration the experience of their Russian colleagues. Moreover as the economy faces its current fall in production, it is not the most favourable moment for the long-term investments. Even in the best case scenario, profits will not be realized for 2 to 3 years.
... we may assume that Kazakhstan bankers will take into consideration the experience of their Russian colleagues
The decision of the Government to let the tenge �float freely� has significantly reuced the investment potential for Kazakhstan investors - which had already been small. In my opinion, this step was for several years, at least half a year belated. More competitive Russian products and products from other CIS countries filled Kazakhstan�s market. As a result, hard currency left the country and Kazakh enterprises oriented to the domestic market were greatly damaged. The trust of all Kazakhstan�s investors in the Government�s promises that the Russian crisis will not influence the Kazakhstan economy and that the tenge will be kept within the limits provided in the budget-1999, was shaken. I think that after such actions the most optimistic investors will not trust to the national currency. This situation will make them to invest exclusively in hard currency, thus increasing pressure on tenge. A worsening of the condition of the Kazakh banks, especially of their liquidity, is also possible. Of course, in such a situation it is worthless to talk about any investments of the banks. As far as the insurance companies are concerned, the tenge�s devaluation has also influenced them in a negative way.
According to the data of the National Bank of the Republic of Kazakhstan (NBRK), as of 01.01.99, the assets of all Kazakhstan insurance companies were 5398 million tenge, including the immovables � 26.7%; short-term fixed deposits � 24.62%; deposits available upon demand � 8.82%; inventory � 7.28%; stocks and shares of other juridical persons � 2.95%; state securities � 2.22%; cash in hand � 0.83%; intangible assets � 0.81% and other assets � 25.77%.
As is it obvious from the above-mentioned figures (in which the insurance companies invested only 119 million tenge into the state securities), that taking into consideration the total value of the assets, state securities attracted a very small amount. To accurately judge how much ICs suffered from the introduction of the free-floating tenge�s rate, it is necessary to answer two questions: i) what was �tenge/hard currency� ratio of the deposits and ii) what is concretely included in the �other assets�? The latter amounts are quite significant; from 1805 to 1391 million tenge. However, it is very difficult to receive the answers to such questions, as the required information is not published anywhere. Further, the information is only available for the organisations supervising the insurance companies.
During 1998, the investment potential of IC has increased by approximately 1.8 billion tenge (taking into consideration the insurance payments and reinsurance abroad). This figure may be considered optimal for the developing market. Nevertheless, taking into consideration the essential devaluation of tenge, this amount seems insufficient to influence the financial market. In light of the recent events, it seems to me that the role of the insurance companies in the stock market will be reduced to their efforts to protect their assets from devaluation, converting them to hard currency only. Most probably, they will invest in Eurobonds and hard currency deposits. For the time being there are no more interesting instruments available in the stock market. Of course, we may talk about hard currency bonds (MEKABM) being placed in the Kazakhstan market, but their profitability proposed by the Finance Ministry does not satisfy the professional participators of the securities market.
Unlike ICs, the investment potential of the pension funds is increasing at a higher speed. Pension reform began a little more than a year ago, but the pension funds have already demonstrated their significance and at present they are able to invest great amounts to different financial instruments, mainly state securities. For the nine months of 1998 the total pension assets were 15744428 thousand tenge. As of 01.01.99 pension assets totalled 23577339 thousand tenge; as of 01.03.99 � 27080089 thousand tenge. It may be stated with confidence, that if the existing trend is contiuned, in a year the assets of the PFs will be able to cover the entire state loans in the domestic market. At present the pension funds are the main creditors of the Government.
The measures regarding the pension funds taken by the Government after the tenge�s devaluation managed to secure the pension savings and to prevent panics. The exchange of securities nominated in tenge (������, ������, bonds of NBRK) to the securities denominated in hard currency at the old rate 88.3 tenge per US dollar prevented the pension assets nominated in tenge from devaluation was done in a single day. The exchange of the medium and long-term state securities of the Finance Ministry to the five-year hard currency securities was implemented at a rate that slightly exceeded the return of US Treasury Bonds. It is obviously a very profitable transaction for the Government. First, the Government will not have to pay these securities for the next five years, except coupon payments. Second, the Government would hardly find such an amount in the domestic market with this return. To be more persuasive, I would like to mention some exact indices.
The special hard currency bonds of the National Bank of Kazakhstan (1/vn, KZ95K1305996) having a nominal cost of US$ 100 were emitted by the conversion of the assets of the pension accumulating funds, which had previously been invested in the debts of the NBRK. The emission volume was 40043 units for a total of US$ 4004300.00. The bonds were emitted on April 8, and may circulate in the secondary market from April 12, to be reimbursed by the National Bank on May 13, 1999. The circulation period is 35 days. The annual bonus on these bonds is 5.40%. The reimbursement will be realized in tenge at the official rate valid on the date of reimbursement.
At present the pension funds are the main creditors of the Government
The special hard currency state bonds of the Finance Ministry ������� (B1/60, KZ55L0804A42) having the nominal price of US$ 100, were emitted by means of conversion of the assets of the pension accumulating funds which had been invested to the debts of the Finance Ministry. The volume of emmission was 2440975 units, for a total amount of US$ 244097500.00. The date of the emission was April 9, the date of the beginning of the circulation is April 12. The date of the reimbursement is April 8, 2004. The interest will be paid in tenge on every April 9 and October 9 until the date of reimbursement. The annual interest on these securities is 6.14%. The securities will be paid off at the official rate at the date of reimbursement.
As the volume of conversion of the assets of each PAF was not divisible into US$ 100, the assets of PAFs �remaining� after the emission were returned to the accounts of the funds in tenge without any conversion. The exact amount remaining in the bonds of the NBRK was 35197.70 tenge and in the securities of the Finance Ministry � 54078.57 tenge.
Thus, the total amount of the securities of the Finance Ministry converted to hard currency securities was more than 27 billion tenge. The total amount of the NBRK securities was about five hundred million tenge. It may be stated that the Government has implemented the complete restructurisation of the internal debt and compared to Russia, I think that it has been done in a more professional way.
The fact that many CMPAs began to penetrate the international capital markets to buy the Eurobonds of the Finance Ministry of the Republic of Kazakhstan, was a positive aspect. Thus, the CMPAs insured pension savings against the fall of the tenge in respect to US dollar (that occurred). The CMPA of the non-state PF had a significant share of their investments in Eurobonds. This was natural, as the private managers are more interested in a higher profitability of the assets managed by them than the NBRK. As governor of the pension assets of the State PF, the NBRK is simultaneously a depositor and a debtor. We have an interesting situation in which when the NBRK takes credits in the internal capital market, it gives itself the money of the State PF at a rate that the NBRK is interested. This is why the State, as represented by the Finance Ministry and NBRK determines the low rates and the State PF allots money at these rates. As a result, the depositors face a very difficult task: either to trust the non-state PF and receive higher profits or to trust the state PF and to get much lower, but safe profits. For the time being we may say that CMPAs have been well oriented in this situation and have placed the pension assets more successfully than the state PF has done.
The penetration of the PFs into the market of Eurobonds promoted the growth of quotes of sovereign Eurobonds. That is obvious from the following example: before the Kazakhstan pension funds penetrated the external loan markets, the �net price� quotes of the Eurobonds of the first credit line with the reimbursement term 20.12.99, as of 25.10.98 were 81/86, while annual return by the time of reimbursement is 25%. The �net price� of the Eurobonds of the second credit line was 70/72.5, while their return was 21.2%/year by the time of reimbursement. If we take into consideration that profits from the state securities are not taxable, such a hard currency profitability may be considered very high. Today the return of this type of securities is fluctuating between 11 to 13% of annual. Thus, the pension funds have stabilized the price of Eurobonds in the external markets, as PFs have great investment potential. After the Government announced the free exchange currency rate, the prices of the sovereign Eurobonds began to fall and subsequently their profitability rose. At that moment CMPAs started to purchase these securities with a higher return from non-residents, creating a demand sufficient to return the prices to the previous profitability level in amount of 11 to 12%.
As far as the investment privatisation funds are concerned, the question of their establishment and functions was not thoroughly thought over and that is why it was not practically realised. Today the investment potential of IPFs is practically zero, even though they were established before PFs. After the coupon auctions the IPFs had to deal with the average enterprises, that do not have such results which would allow IPFs to increase their capital because of previous investments to these enterprises. Actually IPFs are supposed to accumulate the population�s money, which at present only at the deposits of the National Banks are more than 20 billion tenge. Based upon these facts, we may come to conclusion that despite everything, the population wishes to invest its savings anywhere. The point is - who is trustworthy?
We may remark about the foresightedness of those economists and politicians who two to three years ago pressed for the establishment of the accumulative pension system. In pension funds all over the world, insurance companies and investment funds have the substantial investment potential. This is true because the volumes of their revenues and payments, as a rule, have a positive balance. These institutional investors undertake all the responsibility for investments and that is why they follow a conservative policy regarding the investments of their money. Having a big staff of analysts the institutional investors conduct thorough research of the financial markets in which they took part, a prognosis of economic development of different countries, and an analysis of concrete economic branches and enterprises.
Today the investment potential of IPFs is practically zero
This is why they often have more exact economic information and with their investments they demonstrate to common investors the priority sectors. It seems to me that in future we will also have institutional investors in Kazakhstan that comply with international standards, though it will take some time.
Mark Goettsche, Audit Senior Manager, Ernst & Young Kazakhstan.
ALMATY?, May 25
(Specially for THE GLOBE for the Investment Summit)
The Basis of the Reform
Shortly after its independence, the Government of Kazakhstan recognized the need for foreign investment to promote economic development. Legislative reform was essential in attracting foreign investors to transform the country into a market economy. Rapid legislative change set the stage for new laws on privatization, foreign investment, demonopolization, banking reform, bankruptcy, security markets etc.. Through the guidance of western advisers, new Kazakstan Statutory Accounting Standards similar to International Accounting Standards and a Tax Code comparable to other tax jurisdictions were introduced. On the surface, the tax legislation and accounting principles provide the basis for a system comparable with international guidelines. In practise, vagueness of laws, lack of interpretations, resolution contradictions and poor implementations remain a concern.
The legislative system and its reform need a phase of stabilization. Those individuals who have led the legislative reform should now focus on the local level to ensure that the reform process has filtered down completely and the applications of law become more transparent. In a period of such transformation it is necessary to provide foreign investors with a certain level of assurance in respect to their investments and the applied legal regime.
The Russia Crisis
The Russia crisis has had a devastating impact on the investment climate of the republics of the former Soviet Union. The crisis has made the foreign investor skeptical of investments in Central Asia, including Kazakhstan. It has directly influenced Kazakhstan economic performance and currency policy over the last 9 months. Although all of these countries have a common Soviet history, their techniques for transforming themselves into a market economy are different.
After the Russia crisis, the Government supported the Tenge and it was said that the upcoming �re-election� of Nazarbaev played a major role. In the first quarter of 1999 it became clear that there was a significant drop in the exports, mainly to Russia. The Government�s decision to let the Tenge float freely, allowed the currency to devalue. If the recession in Russia continues, the Kazakhstan economy may show little or no improvement despite its more competitive position. An increase in oil export pipeline capacity should give Kazakhstan, the opportunity to widen its export base and become less dependent on developments in Russia.
According to the published statistics there has been almost no inflation after the initial post devaluation price jump. In fact, these same figures indicate prices actually decreased. Inflation in the long term will affect the more disadvantaged groups of society. Although there were no signs of massive lay offs similar to those that occurred in Russia, unemployment is relatively high and salaries are not expected to increase as most companies closely monitor their expenditures and assume a more conservative approach with respect to the future.
The Russian crisis made further budget revisions for the Government inevitable. In their ongoing efforts to reduce expenditures, the Government has taken various cost cutting measures over the last few months such as reducing their involvement in public welfare, offering fewer safety nets for its citizens by reducing payments individuals previously received from social funds/budgets.
The Oil & Gas Industry and future
The Government gives high priority to the investment areas of oil & gas, power generation, infrastructure and telecommunication.
The Caspian region offers a huge potential with its estimated reserves of approximately 30 billion barrels of oil and 337 trillion cubic meters of gas. World commodity prices and export transportation issues will be the determining factors in Kazakhstan�s success in exporting oil to the world markets over the next few years. The country has historically been unable to fully develop its potential due to low margins in the oil industry and high transportation cost. Although oil companies have demanded lower transportation tariffs, only new pipelines appear to give Kazakhstan the opportunity to become a key player in the world economic market.
Several pipeline routes are being given high priority by the government of Kazakhstan: CPC, the Trans- Caspian, the Chinese Route and the Iranian Route. All options are characterized by high up-front cost, low fixed operating cost and long pay back periods.
The CPC pipeline, a 2.3 billion USD project, has finally been approved by the Governments of Kazakhstan and the Russian Federation. CPC began construction in early 1999 and is expected to load the first tanker with CPC oil in the summer of 2001. The pipeline will connect Kazakhstan Tengiz field to CPC�s marine terminal on the Russian Black Sea coast near Novorossisk. Initial capacities are estimated to be 560,000 barrels per day with plans to increase capacity to 1.34 million barrels per day by 2014.
When the pipeline reaches its full capacity, Kazakhstan will receive 8.2 billion in taxes and shared revenue over the following 35 years. The Tengiz field and CPC development will bring approximately 150 billion USD to the summary GDP of Kazakhstan and Russia and provide a minimum of 200,000 direct and indirect jobs related to construction and operation.
Iran has demonstrated an increased interest in the Region and is willing to financially support the Iranian pipeline transporting oil from the Caspian Sea to Iran�s Northern refineries. Kazakhstan producers will swap this oil for oil coming from the Persian Gulf. Although this is a relatively cheap option, progression has been blocked by US sanctions and design difficulties faced by Iranian refineries in processing oil from the Caspian Region. In the meantime Mobil has applied for an exemption to the US sanctions and restrictions are easing.
The proposal to build an East-West pipeline to China has received limited support and estimations of the final costs remain unknown. The Chinese National Petroleum Company, operating with its interest in Aktobemunaigas and its potential interest in Uzen Field, would like to open the Caspian Region to markets in Northwest China.
The Trans Caspian route has received the most support from the US and Turkey. This route does not pass through Iran or Russia and is probably the most politically suitable option. The Government of Kazakhstan appears willing to support the idea, however if US financial support is withheld, it will probably favor the Iranian route.
Oil companies have maximized their utilization of available pipeline and railway capacity. In anticipation of future pipeline development exploration and production expenditures are scheduled to increase. The Offshore Kazakhstan International Operating Company (OKIOC) will begin exploratory drilling in the North Caspian Sea early this summer. The TengizChevroil venture will boost production to 12 million tons per year by the time the Caspian Pipeline Consortium (CPC) export pipeline comes online in 2001. Production in 1998 was 8.3 million tons with targets of 9.3 million tons in 1999.
We has witnessed a broad expansion in the business development of our clients over the last seven years. Our clients have a positive long term investment vision for Kazakhstan and we share this vision.
(a supplement to THE GLOBE)
History will never reveal the secret reasons of appearance and successes of the Ottoman dynasty, we may only try to understand, why this small beylik attracted such a great number of the prominent warriors-gazis (fighters for the faith), how the whole galaxy of the sultans, great stars, red-coloured like the God of War, could appear in the horizon of the World history. From the very beginning, the Ottoman rulers were not only conquerors, they were creators of their own state system, which proved its viability for the several centuries and excelled the systems of that time by its stability and effectiveness. The military successes of the Ottomans curtained from the contemporaries Ottoman�s achievements in creating and supporting the religious, political and moral aspirations in the society as well as supporting different Dervish organisations and brotherhoods�
This special material is dedicated to the 700th anniversary of the Ottoman empire, you can find it in the next issue of the �Energy of Kazakhstan� magazine.
The roots of the movement can be found in 1945, when the Society of Islam Believers was founded. The society insisted on the necessity to establish the State Pakistan�
The Pakistani medreses created a developed commanders� recruitment network in the refugee� camps. Even before the Taliban movement was organised, thousands of the Talibs-Pushtuns from Afghanistan left their medreses to take part in Jihad, side by side with Mojahedeen. But after the fall of Nadzibulla�s regime in the spring of 1992, the pupils returned to their studies. They were disappointed by the conflicts between the Mojahedeen groups, whom the Talibs considered guilty in continuation of the war. After that, the Talibs were headed by their teachers (moulyavis), who were also dissatisfied with the inability of the political parties to insure the order in Afghanistan and stop the bloodshed. In 1978, the moulyavis were the first to stir the peasants to war against the regime of the PDPA. Two years later, the moulyavis also called for a Jihad after the1980 invasion of the Soviet army�
The Talibans� invasion of Afghanistan in the autumn of 1994 radically changed the civil character of the war, resulting in some changes in the political situation in the country. The first Taliban troop, of less than one thousand people, appeared at the end of September in the Chaman region at the southern border and seized the town of Spinbuldak in early October�
�Lastly we will remark that for many Afghans, the main possibility and almost the only chance to save a single country and its independence is the return of its king, Muhammad Zahir-shah. But the Taliban leaders, despite believing this possibility worthy of consideration a long time ago, now do not seem ready to compromise or to share their power with anybody else.
The detailed history of the Taliban Movement is presented in the next issue of �The Energy of Kazakhstan�
Haidu had 24 sons and several daughters. One of his daughters was named in Mongolian Hutulun-Chaha, in Turkic � Ai-Yaruk (�Moon�s luster�). Haidu loved her more than his other children, and the princess also loved her father and wished to be like him�..
�the love of the princess Ai-Yaruk to her father Haidu was love-agape, which, due to her and readiness to sacrifice her own interests to the other person, was recognized as the highest of the human earthy feelings�
The sad narration about love of two Chingizids and one Timurid is presented in the artticle.
�
�Such were the Hunnus, who captured power in the beginning of the 2nd century and reigned there for about half a century. The headquarters of the Hunnus� ruler-shanyui was Dzhungaria, in the place of Beshbalyk. Though Chinese forces managed to defeat the Hunnus, the latter did not disappear: some of them settled in Eastern Turkestan, and in the province of Gansu in western China�
�The Tibets influenced the development of some features of Buddhism, art and architecture in Eastern Turkestan. Later, after being defeated by China, the Tibetans captured Eastern Turkestan�.
�In some modern historical writings, the history and culture of Eastern Turkestan are interpreted as an integral part of China. It is also stated that Eastern Turkestan in ancient times and in the Middle Ages was constantly a part of the Chinese empires, and that Chinese people always lived in this territory. However, the historical facts contradict it�
Read the article �Eastern Turkestan.�
�The first thing that is striking is the great number of houses and administrative buildings with black holes for windows. If today�s citizen of Arkalyk arrives to, for example, Chechnya or Yugoslavia, the semi-ruined town is unlikely to excite him. The citizen grew among similar deserted concrete cases which once were called homes�
�Now after some three years one can understand why residents of Arkalyk so feared the liquidation of the Oblast�
� A child from Arkalyk would be surprised to find out that everyone in Almaty can wash the hands with hot water�
Read the article �Arkalyk. There was a town there��
Oil and gas no longer seem to be the sources of unexhaustible wealth that will pay for everything Kazakhstan needs to take a prominent place among developed countries of the next century. Only 12 deposits provide 88% of the proven oil resources in the country. That estimate comes from the state statistics. Other sources in the industry provide different numbers�
The answer for a difficult question can be found in the article �We did not appreciate what we had. We don�t cry having lost that��
Kazakstan�s investment climate
ITIC Survey Shows Trend By Investors Toward Larger Investments in Kazakhstan
By Wayne E. BEAUREGARD
ALMATY, June 3 (THE GLOBE)
Almaty is hosting an investment summit, an event in many ways. First because it doesn�t happen so often, secondly because an arena for meditating, discussing, proposing, debating, arguing perhaps, upon the econmy of this country is desperately needed. The trend has lost its upgoing trajectory and seems, to many operators indeed, spiralling around the reached degree of growth at best. To many other observers, in fact, economy indicators are showing the way down.
What�s wrong with Kazakstan? According to the former premier Akezhan Kazhegeldin the government is responsible for the dull situation of the country�s economy. About one year ago he mentioned 3 ways to get out of the �then� actual crisis: (A) a more dynamic government, (B) a government that doesn�t give in to �reflexes�, and (C) a freer government. The crisis has not been overcome, so Mr. Kazhegeldin would have apparently proved right.
His opinions, however, are worth a deeper analysis, specially if one considers that were coming from somebody who had been sacked from a position defined, prior to that event, �untouchable�. He might have had reasons to manifest such a bitter judgement.
Nevertheless on one point I thhink the reader may agree with the former government leader: surely the country needs a more dynamic government. Mind you, not that the government is still, on the contrary it�s even too active. The wrong way, however, economically speaking. In other words the executive should be less active on wrong measures and more active on the right ones. Not easy, I admit, when a country is so short of first class economists, nevertheless rather than for purchasing long black limousines, national money ought to be spent to hire expert professionals.The free market economy is not something that is learnt overnight, it has taken centuries in the Free World to develop and to be able to share its beneficial effects over the population. And yet even in the experienced western free economies are occurring mistakes, but not so often like here, anyway.
One such mistake, professionals say, is that to revitalize an economy taxes shouldn�t be raised, that�s a way � bizarre indeed � to divert good money from the productive circle. The equation is an elementary one: less investments = less benefits. Kids know that.
Taxes, anyhow needed, should not choke investments, ought not to push investors to the margins of the market, must not discourage potential investing newcomers.
What the many governments that have been created in so little years of independent life of the country should have learned, is that foreign investors are by now fully aware of the conditions of the market: it�s no longer like at the beginning when foreigners came and had no references, so they had only to take risks and rely on the words, promises, even acts of governments and governmental agencies. Only to see them, step by step, stripped of their luring characteristics (tax holidays, special privileges, etc.). What seems it hasn�t been fully understood is that taxes are the fees that investors and citizens alike pay to the state in exchange for services rendered by the latter. Question is: where are those services?
But this is only one way to look at the ongoing disinvestment climate. There�s also another consideration to be made on the taxation issue: taxes are usually introduced like the classic cherry on the cake, i.e. one must have the cake first. Out of metaphors, taxes must be imposed on fully grown economies, not on transitional ones or those on the making, otherwise the risk is that the transition will be endless or that those economies will never wholly establish themselves.
The government has only one primary duty in matters of economy: creating conditions for economy to expand. Up to that moment it should reduce the state elephantiac structure of unproductive people, yet costly, to basic services and allow the private sector � the investors � to create jobs, fulfilling that way its social role.
All Over the Globe is published by IPA House.
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