Attracting Foreign Investment in Kazakhstan through Anti-Corruption Reforms

Kazakhstan Business
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Kazakhstan, Central Asia’s largest and most prosperous country, has a closing political space. Nursultan Nazarbayev, the country’s leader since 1989, wins elections by Soviet-style margins – 97.7 percent in April 2015. Opposition journalists and politicians routinely face harassment, arrest, and imprisonment. Once-ignored internet activists are getting prison sentences for “inciting ethnic hatred” as Kazakhstan’s authorities become increasingly sensitive to providing a pretext for its giant neighbor to the north, Russia, to make the kind of land grab seen in Ukraine. The domestic political environment is deteriorating in response to external threats and a brittle domestic system based on one elderly man’s hold on power.

All the same, faced with the economy in crisis, Kazakhstan is choosing to open up to the international business community as never before. To do this successfully, Kazakhstan must offer potential investors transparency, rule of law, and a fair way to settle business related disputes. This potentially translates into a significant dividend for the country, as anti-corruption measures and the fair privatization of state-owned companies could benefit all Kazakh citizens and open the door for broader reforms.

This is what CIPE is counting on in exploring a new program in Kazakhstan that would support the adoption of internationally accepted anti-corruption measures aimed at both attracting foreign investment and improving the climate for all Kazakh businesses. Working with KazBar, the country’s largest independent bar association, CIPE plans to help establish a public-private dialogue that will frame anti-corruption reforms in the context of economic development. Based on other countries’ experiences, such development will benefit both Kazakh entrepreneurs looking to partner with risk-averse foreign firms and Kazakh taxpayers looking for better governance and value in the country’s state-owned enterprises.

“The perception of corruption risk plays a substantial role in investors’ decisions to enter Kazakhstan and do business here,” says Sofiya Zhylkaidarova, managing partner of the Signum law firm in Kazakhstan’s business capital, Almaty. “Most of the companies, especially those that are publicly listed, do evaluate those risks when making decisions on whether to invest in Kazakhstan,” continues Zhylkaidarova, who sits on the management council of the 200-member KazBar.

So far, indications are strong that the Kazakh government is willing to embark on reforms to cope with the ongoing perfect storm of falling energy prices and a crash in the economy of Russia, its largest trading partner. In late 2014, Nazarbayev launched a new economic policy, Nurly Zhol or the Path to the Future, which demands a series of quick, deep reforms aimed at improving the business climate. Last year, after years of negotiation, Kazakhstan acceded to the World Trade Organization. In December, the European Union and Kazakhstan signed an Enhanced Partnership and Cooperation Agreement following two years of negotiation. These moves, taken together, bode well for some degree of change, according to Arman Sultanbek, the director of Delta-credit (cq).

“We have a government program for counteracting corruption that is currently underway. We have entire government structures that are devoted to this effort and working with government officials on financial crimes. They are getting results,” says Sultanbek, whose Delta-credit provides financing to small businesses in the northern Kazakhstan city of Pavlodar. “The problem is that you can put away two or three government officials but the overall environment doesn’t change, so businesses are forced to work with the same old problems.”

Sultanbek believes that lasting improvements will only come about from a change in the overall environment, including reducing business incentives to make bribes. Under a project envisioned to start in late spring, CIPE experts would support the legal advocacy efforts of KazBar and large business associations representing entrepreneurs, including those interested in joining the value chains of international multinationals or in finding foreign business partners, to take part in the privatization of state assets. As covered in detail on the U.S.-based FCPA Blog, Kazakhstan’s privatization process represents both tremendous opportunities and corruption risks for foreign investors.

The potential CIPE-KazBar partnership comes at an opportune time. Already, the Organisation for Economic Co-operation and Development (OECD), is working with the government of Kazakhstan through the OECD’s Anti-Corruption Network for Eastern Europe and Central Asia. The project includes the issuance of candid, regular reports on Kazakhstan’s efforts to reduce corruption. Working with KazBar, CIPE’s role will be to provide the international expertise necessary to frame private sector economic reform efforts in economic development terms. In other words, if Kazakhstan wants to rescue its economy through increased investment, then it must reduce corruption risks to the point that the Kazakh market becomes an attractive one for foreign investors.

Frank Brown is a Senior Program Officer for Eurasia and the Value Chain/Anti-Corruption Program Team Leader at CIPE.