Openness to Foreign Investment
The Kyrgyz Republic has a liberal investment regime on paper with a broad base of commercial laws in place. These laws, however, are not always implemented consistently and the legal concept of contract sanctity is not consistently observed.
Kyrgyz law on foreign investment guarantees protection for foreign investors from expropriation and nationalization. Individual investors have become involved in disputes over licensing, registration, and enforcement of contracts, and, in one case, the government has persistently entertained the issue of nationalization. Corruption remains a serious problem despite the Government of the Kyrgyz Republic’s efforts to combat it. The Commercial Arbitration Court of Kyrgyzstan began considering cases in April 2004.
Foreign investors must register their firms with the Ministry of Justice. In addition to registration, expatriate employees must obtain a work permit from the Ministry of Labor, Employment and Migration. Visa requirements and fees may change on short notice. Foreign investors usually form joint ventures with local partners.
Under the aegis of the World Bank-sponsored "Doing Business" project, and with U.S. government assistance, Kyrgyz authorities have taken steps to cut regulatory measures in order to benefit the business sector. Under the U.S.-funded Millennium Challenge Program, the Kyrgyz Republic is implementing reforms to reduce corruption and improve the judicial system.
Banking laws do not discriminate against foreign banks. However, foreign institutions seeking new banking licenses from the Kyrgyz Central Bank may encounter difficulties in trying to establish operations in the country. At least eight foreign banks operate in the Kyrgyz Republic, although no U.S. banks operate in the country.
It is official government policy that there is no discrimination against foreign investors. However, procedures for licensing and approvals are often not transparent, which can make the process seem discriminatory. Tax authorities may apply greater scrutiny to foreign entities operating in the Kyrgyz Republic. Kyrgyz officials are working to streamline customs procedures to spur foreign trade and investment.
Conversion and Transfer Policies
Foreign exchange is widely available, and the local currency, the som, is freely convertible. As of January 2010, the exchange rate was 44 soms to the U.S. dollar. The National Bank of the Kyrgyz Republic (NBKR) conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single working day.
Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out. Payment disputes adjudicated through the court system can be extremely lengthy.
There have been hostile takeovers of some Kyrgyz banks in the past two years, with at least one facilitated by government authorities.
Expropriation and Compensation
To date, the Kyrgyz government has not expropriated any foreign owned properties. In recent years some Kyrgyz parliamentarians and government officials have advocated the nationalization of a foreign-run gold mine. Another foreign investor has complained about attempts by a state-owned company to seize assets. Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of distinctions among historical book value, replacement value and actual market value, which brings into question whether the government would provide fair compensation in the event of expropriation. The government has frozen bank accounts and other liquid assets until disputes were resolved.
Foreign ownership of land continues to be prohibited; however, there is no prohibition on foreign rental of land for residences or factory sites. A central land registry has helped potential lenders and others deal with the financing of real property (e.g., land, buildings, and other improvements) in a relatively sophisticated manner. The recent introduction of property taxes may make land ownership more transparent.
The Law on Commercial Arbitration allows for international and domestic arbitration of disputes. If feasible, the arbiter and the terms of arbitration should be identified in the contract. Establishing the terms for arbitration beforehand may prevent further complications in the event of a dispute. However, Kyrgyz business partners may attempt to ignore arbitration requirements. There has been little recourse to arbitration in Kyrgyzstan, as yet, so it is uncertain how such cases might result and how the results of arbitration might be respected/enforced in practice.
The Kyrgyz Republic is a member of the International Center for the Settlement of Investment Disputes (ICSID). It signed the ICSID agreement on June 9, 1995, and ratified it on July 5, 1997. The Kyrgyz Republic became a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on March 18, 1997.
Performance Requirements and Incentives
A World Trade Organization (WTO) member, the Kyrgyz Republic is compliant with WTO Trade Related Investment Measures obligations. The Kyrgyz government has also reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors.
The Kyrgyz government adopted a new tax code, which took force in January 2009 that aims to be more business and investment friendly. Under the new tax code, a number of taxes were abolished and some new taxes were introduced. The VAT rate was decreased from 20% to 12%. Hotel, advertising and resort taxes were abolished. A unified sales tax replaced several previous taxes, and property taxes have been approved.
The new tax code also establishes a presumption of innocence of the taxpayer, improves collection provisions, and supports automation and e-filing.
Payroll taxes such as social fund payments, used for the National Pension System, are complex. Many recent tax inspections of companies, including foreign companies, have focused on social fund payments.
Right to Private Ownership and Establishment
Foreign and domestic private entities may own business enterprises and engage in a broad range of commercial activities. Foreign entities are expressly forbidden from owning land, including farmland, although regulations allow for up to 99-year leases of property, which is adequate for most business purposes.
Foreign investors are theoretically given equal treatment under Kyrgyz law. In reality, the business operating environment is complex in the Kyrgyz Republic and many foreign investors are disadvantaged less by outright discrimination than by a simple lack of knowledge of how to "work the system."
Protection of Property Rights
Property right protections are slowly emerging. However, the judicial system remains under-developed and lacks independence. Court actions can force the sale of property to enforce payments and other contractual obligations.
The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. Counterfeit goods, however, are widely available in certain stores and markets. The Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002.
Transparency of Regulatory System
The legal and regulatory system of the Kyrgyz Republic continues to develop. The process of implementing regulations and court orders relating to commercial transactions remains inconsistent. Some court decisions, which appear to contradict established procedures, can be implemented expeditiously in certain cases and are subject to outside influence. The Kyrgyz system is heavily bureaucratic and investors must overcome a great deal of red tape in order to conduct business.
There is an investment department at the Ministry of Economic Regulation, which assists investors with bureaucratic procedures. This department also consolidates information about potential investment projects in the Kyrgyz Republic. However, the ability of this office to steer firms through the system has not been fully demonstrated. An investment council, under the auspices of the president, exists ostensibly to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for undocumented incentives. The newly established Central Agency for Development, Investment and Innovations has also been made responsible for attracting foreign investments to the country.
Efficient Capital Markets and Portfolio Investment
The National Bank of the Kyrgyz Republic is a nominally independent body which, in 2009, intervened repeatedly in the market to stabilize the Kyrgyz national currency, the som, against the U.S. dollar. The currency is freely convertible, Kyrgyz bonds are available for foreign ownership, and the stock market is developing. According to the Kyrgyz National Statistical Committee, the Kyrgyz Republic's Consumer Price Index was down 0.5% in 2009, while in 2008 prices increased 20%. The economy of the Kyrgyz Republic is cash-based.
There are three stock exchange companies on the Kyrgyz market – Kyrgyz Stock Exchange (KSE), Stock Exchange Kyrgyzstan (SEK) and Central Asia Stock Exchange (CASE). In 2009, the value of transactions of all three exchanges combined amounted to 5.2 billion soms ($121 million), which was 16% higher than in 2008. There were 5,396 transactions in 2009. The stock market has not fully matured and no mutual funds exist.
Total capitalization of the banking sector as of October 2009 was around $208 million and is almost unchanged in dollar terms from October 2008 due to changes in the exchange rate. There are currently 22 commercial banks in the Kyrgyz Republic, with a total of 238 branches throughout the country.
Several foreign banks operate in the Kyrgyz Republic. Demir Bank, Bank of Asia, National Bank of Pakistan, Halyk Bank, Kazcommerce Bank - Kyrgyzstan, FinanceCredit Bank and ATF Bank – Kyrgyzstan are entirely foreign held. Other banks are partially foreign held, including the Asia Universal Bank, Manas Bank and Kyrgyz Investment and Credit Bank. Although no U.S. bank has set up operations in the Kyrgyz Republic, many Kyrgyz banks maintain correspondent relations with U.S. and other foreign banks to facilitate short-term commercial lending, such as letters of credit.
The Kyrgyz Investment and Credit Bank (KICB) began operating in mid-2001. Established to provide commercial lending and other services, KICB introduced western banking practices and encouraged the entry of other banks into the Kyrgyz market. KICB's principle shareholder is the Aga Khan Fund for Economic Development, which has a 21% stake. Habib Bank Ltd (Pakistan), which is the newest shareholder, has an 18% stake. The International Finance Corporation, the European Bank for Reconstruction and Development, and the German Corporation for Investments and Development each hold 17% stakes. The Kyrgyz government retains a 10% share.
Outside investors have rarely sought financing from domestic banks. Bank lending is heavily biased towards short-term loans and traditionally has not favored using physical assets as collateral.
Since March 2008, new banks must have a minimum charter capital requirement of 600 million soms ($14.8 million). Banking laws also require that banks maintain a 10% reserve with the National Bank. A deposit insurance system exists for the benefit of individual investors.
Accounting systems in banks and enterprises are being converted to international standards. The Kyrgyz government has supported this exercise. International assistance programs have contributed to rapid progress in reaching these standards via accounting training and certification.
Political violence is rare in Kyrgyzstan. In March 2005, a popular uprising led to the overthrow of President Askar Akayev. During the uprising there was some looting in Bishkek. Since the March 2005 uprisings, there have been no known incidents of politically related damage to business facilities or installations. Kyrgyz citizens enjoy basic civil rights, including the right to protest and demonstrate, although the Kyrgyz government has increasingly restricted these rights.
Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement remain active in Central Asia. These groups have expressed anti-U.S. sentiments and may attempt to target U.S.-affiliated interests in the region, including in the Kyrgyz Republic.
Due to past militant attacks along the Kyrgyz-Tajik border, the Department of State urges U.S. citizens to avoid travel to the Batken Oblast and along the Kyrgyz-Tajik border. U.S. citizens planning to travel to the Kyrgyz Republic should refer to the U.S. Department of State for updated security information. This information is available on the Internet at http://travel.state.gov.
There are occasional tensions among ethnic Kyrgyz, Russians, Uzbeks and other ethnicities in the Kyrgyz Republic over such issues as language, land rights, and religion. Such tensions, however, seldom affect foreign employers. The Kyrgyz Republic's relations with its neighbors sometimes are complicated over disagreements regarding water rights, energy supplies, refugees and other issues.
Corruption remained a serious problem at all levels of society. According to the Transparency International Corruption Perception Index, in 2009 the Kyrgyz Republic ranked 162 out of 180 countries surveyed.
The Kyrgyz Government recognizes the damage corruption can cause. As part of an IMF Poverty Reduction and Growth Facilitation program, the Kyrgyz government agreed to take action to stem corruption. In 2003, the law on combating corruption was adopted. In 2005, the Kyrgyz Government adopted the National Anti-Corruption Strategy, founded the National Anti-Corruption Agency and the National Anti-Corruption Council, and the Parliament ratified the UN Convention Against Corruption. The U.S. government is aiding anti-corruption activities through its Millennium Challenge Threshold Program with the Kyrgyz Republic.
The law provides criminal penalties for official corruption; however, the government has not consistently implemented the law. The Ministry of Internal Affairs investigates corruption, together with the Prosecutor General and subordinate prosecutors. The government has also created special police anti-corruption units.
Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law.
It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.
The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U. S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.
U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person’s Guide at: http://www.justice.gov/criminal/fraud/docs/dojdocb.html.
Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements. Kyrgyzstan is party to the UN Convention.
OECD Antibribery Convention: The OECD Antibribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (see http://www.oecd.org/dataoecd/59/13/40272933.pdf). Major exporters China, India, and Russia are not parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Antibribery Convention through the U.S. FCPA. Kyrgyzstan is not a member of OECD.
UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009 (see http://www.unodc.org/unodc/en/treaties/CAC/signatories.html). The UN Convention is the first global comprehensive international anticorruption agreement. The UN Convention requires countries to establish criminal and other offences to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Antibribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery. Kyrgyzstan is a party to the UN Convention.
Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see www.coe.int/greco). Kyrgyzstan is not a party to the Council of Europe Conventions.
Free Trade Agreements: While it is U.S. Government policy to include anticorruption provisions in free trade agreements (FTAs) that it negotiates with its trading partners, the anticorruption provisions have evolved over time. The most recent FTAs negotiated require trading partners to criminalize “active bribery” of public officials (offering bribes to any public official must be made a criminal offense, both domestically and trans-nationally) as well as domestic “passive bribery” (solicitation of a bribe by a domestic official). All U.S. FTAs may be found at the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements. Kyrgyzstan does not have a FTA with the United States.
Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.
Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in major U.S. and foreign cities, or through its Website at www.trade.gov/cs.
The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center “Report A Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.
Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, Website, at http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed below.
Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to various international conventions discussed above.
Some useful resources for individuals and companies regarding combating corruption in global markets include the following:
Bilateral Investment Agreements
The Kyrgyz Republic currently enjoys bilateral investment treaties with the United States, Armenia, Azerbaijan, Belarus, China, Finland, France, Georgia, Germany, India, Indonesia, Iran, Kazakhstan, the Republic of Korea, Lithuania, Malaysia, Moldova, Mongolia, Pakistan, Sweden, Switzerland, Tajikistan, Turkey, United Kingdom, Ukraine and Uzbekistan.
The U.S.-U.S.S.R. treaty on double taxation, which was signed in 1973, remains in effect between the U.S. and the Kyrgyz Republic. The Kyrgyz Republic has also signed double taxation treaties with Armenia, Austria, Belarus, Canada, China, Finland, Germany, India, Iran, Kazakhstan, Lithuania, Malaysia, Moldova, Mongolia, Pakistan, Poland, Russia, Switzerland, Tajikistan, Turkey, Ukraine and Uzbekistan.
OPIC and Other Investment Insurance Programs
OPIC has provided insurance in the Kyrgyz Republic in the past and welcomes applications for financing or insurance in the country.
There is significant competition for skilled individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens have found lucrative job opportunities abroad. International organizations are generally able to employ competent staff, often bilingual in English or other languages. Literacy in the Kyrgyz Republic is approximately 97 percent. According to Kyrgyz Government officials, the unemployment rate was around 11 percent at the beginning of 2009.
Foreign-Trade Zones/Free Ports
There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek (2), Naryn, Karakol and Maimak. Each is situated to make use of transportation infrastructure and/or customs posts along the Kyrgyz borders. Government incentives for investment in the zones include exemption from several taxes, duties and payments; simplified customs procedures; and direct access to utility suppliers. The production and sale of petroleum, liquor, and tobacco products in FEZs are banned.
Foreign Direct Investment Statistics
According to the Kyrgyz National Statistical Committee, Foreign Direct Investment (FDI) totaled $866.2 million in 2008, $436.8 million in 2007, $335.6 million in 2006, $210.3 million in 2005 and $176 million in 2004. For the first nine months of 2009, FDI totaled nearly $500 million. However, Government statistics on employment, the tax-base and national economic performance are questionable and the shadow economy may account for up to one-half of overall economic activity.
Foreign direct investment is chiefly oriented towards manufacturing, food processing, banking and mining. Many foreign firms are the contractors of foreign assistance organizations. U.S. direct investment is concentrated in the hotel and telecommunications sectors, with increasing interest in construction and mining.
Joint ventures and foreign companies in the Kyrgyz Republic include the Reetsma Kyrgyzstan Company (cigarettes), the Plaskap Bishkek Company (packaging/bottling), the Central Asian Group (entertainment/garments), the Hyatt Regency Bishkek, and the Kyrgyz Petroleum Company. A joint venture operates a Coca-Cola franchise that bottles its soft drinks, and the Canadian gold-mining firm Centerra Gold has formed the largest western joint venture in the Kyrgyz Republic, the Kumtor Operating Company. Joint ventures play a leading role in the mining, petrochemical, hotel, and food processing sectors.
According to the National Statistical Committee, the following countries were the largest sources of FDI in first nine months of 2009: Kazakhstan 40%, UK 17%, China 11%, and Russia 6%. In 2008 largest sources of FDI were Kazakhstan 42%, Canada 11%, UK 9%, China 7%, and Germany 6%.
Bishkek and the surrounding Chui region received approximately 80% of FDI in 2009, while the Jalal Abad region received 10% and the Osh region 6%.
The Hyatt Regency in Bishkek is the only five-star hotel in the Kyrgyz Republic, though there are four and three star hotel alternatives in Bishkek. Other cities have more limited hotel options. There are direct air connections from Bishkek to Istanbul, London, Moscow, and Dubai, as well as flights to other countries in Central Asia. Other cities, such as Amsterdam, Vienna and Frankfurt, are served from Almaty, Kazakhstan, a four hour drive from Bishkek. There is also a Bishkek-Almaty flight. The capital city of Bishkek has an international English-language school and other services for expatriate families.