Kyrgyz Republic

Bureau of Economic and Business Affairs
Report
July 5, 2016

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Executive SummaryShare    

The investment climate in the Kyrgyz Republic is best for those who are intrepid and have a high risk tolerance. The country struggles with major commercial issues. Corruption is rampant and rule of law is weak. The judicial system lacks independence and every sector of government confronts capacity and resource shortages. For most areas of commercial interest, a legal framework technically exists, but enforcement is poor - especially with regard to intellectual property rights. Potential investors should be aware that an estimated 60% or more of the economic activity in the country occurs in the unregulated gray economy. Investors in politically sensitive sectors, such as resource extraction, spend much of their time renegotiating contracts, as evidenced by the experience of the Canadian-operated Kumtor gold mine.

Government officials in the Kyrgyz Republic speak positively and with hope of factors they say indicate an improving investment climate. The government has identified FDI as a key component to growing the economy in the coming years and has created a strategic roadmap for economic development designed to facilitate this growth. The government is taking steps to streamline the process of starting a business, as well as its tax regime. Still, many burdensome regulations strangle business development for foreigners and locals alike. Entrepreneurs have yet to see tangible results from reforms.

Additionally, the Kyrgyz Republic struggles to meet basic infrastructure needs. The government has difficulty providing adequate power supply, especially outside of the capital, Bishkek. Power plants, roads, and canals are dilapidated. Municipal waste problems routinely plague Bishkek. Chinese infrastructure projects only improve market access for Chinese goods, and the Russian economic recession has delayed receipt of promised development assistance.

The Kyrgyz Republic is on the verge of several major economic transitions. In August 2015, the country joined the Eurasian Economic Union (EAEU), whose current members also include Russia, Kazakhstan, Armenia, and Belarus. The accession process has altered economic conditions, as cheaper goods from competitive firms of EAEU member states have flooded the local market and disrupted the gray economy, shuttle trading and currency stability. Additionally, EAEU accession has brought a slew of new regulatory burdens with it and Kyrgyz government and business alike have struggled to adapt. Persistent reliance on Russia as a source of remittances, imports, and government financing makes the economy vulnerable Moscow's whims.

Table 1

Measure

Year

Index or Rank

Website Address

TI Corruption Perceptions index

2015

123 of 175

transparency.org/cpi2015/results

World Bank’s Doing Business Report
“Ease of Doing Business”

2016

67 of 189

doingbusiness.org/rankings

Global Innovation Index

2015

109 of 143

globalinnovationindex.org/
content/page/data-analysis

U.S. FDI in partner country
($M USD, stock positions)

2015

$12.0 million

BEA

World Bank GNI per capita

2015

$1,250

data.worldbank.org/indicator/NY.GNP.PCAP.CD

Millennium Challenge Corporation Country Scorecard

The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a per capita gross national income (GNI) of $4,125 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of the MCC’s indicators and a guide to reading the scorecards are available here: http://www.mcc.gov/pages/docs/doc/report-guide-to-the-indicators-and-the-selection-process-fy-2015.

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

Attitude toward Foreign Direct Investment

The Kyrgyz Republic is open to foreign direct investment and the government publicly recognizes that foreign direct investment is an important component to growing the economy. Laws exist that make the investment climate more favorable than in the past for foreign companies. Application of these laws, however, is inconsistent, which can cause problems for and deter foreign investors. In addition, government activities, including demands for renegotiation of operating contracts that were legally concluded, invasive and time-consuming audits, levy large retroactive fines, and disputes over licenses are impediments to foreign investment.

Other Investment Policy Reviews

In 2014, the World Trade Organization (WTO) reviewed Kyrgizstan. In 2016, IFC, a member of the World Bank Group, released a report on the Kyrgyz investment climate in January 2016. The report is available here.

Laws/Regulations on Foreign Direct Investment

The Kyrgyz Republic’s main legal framework for foreign direct investment remains
the “2003 Law on Investments.” The justice system in the Kyrgyz Republic is inefficient and lacks independence, and cases can take years to be resolved. The Ministry of Economy’s Investment Promotion Agency maintains the country’s main website for investment queries, www.invest.gov.kg.

Business Registration

The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The relative ease of registering a business is reflected in the improvement of the Kyrgyz Republic’s ranking in the World Bank’s “Doing Business” survey to 67th of 189.

In 2014, the Kyrgyz government established the Investment Promotion Agency (IPA). The IPA does not provide consulting services to individual businesses that would like to enter the market. The IPA supports investors by providing information via its website, brochures, and informational meetings, but does not yet assist companies attempting to navigate the Kyrgyz bureaucracy. The Agency’s website (http://invest.gov.kg/) contains information regarding current legislation and regulations affecting potential investors.

The Kyrgyz Republic defines medium and small enterprises (MSMEs) as physical entities that are involved in entrepreneurship activity without having formed a legal entity, or as commercial enterprises that have a gross turnover less than 3,000,000 KGS ($43,000) a year and that employ fewer than 35 people in industry, 75 people in construction, 35 people in transportation, 50 people in agriculture, 25 people in scientific research, or 30 people in trade. Though there is a legal framework designed to help MSMEs, including tax breaks, the government does little to support development of smaller enterprises.

Industrial Promotion

In its January 2013 Sustainable Development Strategy Roadmap, the government acknowledged that “attracting investment requires having transparent and well-functioning legislation that provides actual protection of rights of ownership and reduces interference from the state and eliminates corruption, and having a stable finance system with the ability to provide benefits to investors, and equal treatment for both foreign and domestic investors.” The government is working to lay the foundations for these key components.

Limits on Foreign Control and Right to Private Ownership and Establishment

While there are no official limits on foreign control, a large investor in a politically sensitive industry may find that the government imposes investor-specific requirements such as a high percentage of local workforce employment or a minimum number of local seats on a board of directors. Foreigners have the right to establish and own businesses. In 2015, U.S. investors did not allege any restrictions on market access. According to the law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control.

Privatization Program

In 2015, the Kyrgyz government privatized MegaCom, one of the country’s largest mobile telecommunications companies. There is ongoing deliberation on the privatization of other state-owned assets, such as the postal service and the capital’s international airport, but lack of interest by private partners has stalled any potential moves. Following years of non-transparent delays, the Parliament suddenly and swiftly approved MegaCom’s privatization in June 2015.

There are no restrictions on foreign investors participating in privatization programs. For example, the Kyrgyz government is seeking to attract foreign firms, in particular Turkish companies, to buy Manas (Bishkek) International Airport. The privatization process is not well defined and is subject to change.

Screening of FDI

Coca-Cola and Hyatt are the only major U.S. businesses in Kyrgyzstan. There is no known process to screen foreign investment.

Competition Law

The State Agency for Anti-monopoly Regulation of the Kyrgyz Republic conducts unified state antitrust price regulation in the economy. The main tasks of the State Agency are:

  • to develop and protect competition
  • to control compliance with legislation in the field of anti-trust, price regulation
  • to protect the legal rights of consumers against manifestations of monopoly and unfair competition
  • to ensure observance of legislation on advertising.

2. Conversion and Transfer PoliciesShare    

Foreign Exchange

Foreign exchange is widely available and rates are competitive. The local currency, the som, is freely convertible, and stable compared to other currencies in the region. As of April 7, 2016, the exchange rate was 68.9 som to the U.S. dollar. The National Bank of the Kyrgyz Republic conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day.
Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out

The government, specifically the National Bank, is encouraging greater usage of the som. In 2015, the Kyrgyz government required commercial banks to convert their U.S. dollar-denominated mortgages for civil servants into Kyrgyz som, and public officials have openly discussed limiting the dollar’s role in transactions going forward. In March 2016, parliament passed a ban on using foreign currency to pay for goods or services. The ban went into effect the next month. It is too early to tell any effects of the ban.

Remittance Policies

There are no known plans to change remittance policies. The country remains on the Financial Action Task Force (FATF) “gray list” and the Department of State’s Bureau of International Narcotics and Law Enforcement lists the Kyrgyz Republic as a “monitored” country with regard to money laundering and financial crimes. The State Department assessed Kyrgyzstan as "fiscally transparent" in 2015 for the purposes of U.S. government assistance programs.

There are no known limitations on remittances. The government does not restrict how investors can remit profits, but it does not have a parallel market that uses negotiable instruments. The Kyrgyz Republic does not manipulate its currency.

3. Expropriation and CompensationShare    

In April 2016, the government of the Kyrgyz Republic expropriated four Uzbek-owned resorts on Lake Issyk Kul and announced plans to do the same to several Kazakh-owned resorts in the same area. The resorts trace back to the Soviet Union, when the neighboring socialist republics of Uzbekistan and Kazakhstan built resorts to help boost the region’s tourism potential. It is unknown how the Kyrgyz Republic will legally transfer the properties, though press reports highlighted that several of the resorts owe contributions to the Kyrgyz Social Fund.

The government spent the better part of 2013 and 2014 renegotiating the agreement underpinning foreign investment in the Kumtor gold mine and many aspects of the dispute remain unresolved. Meanwhile, both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of the distinction between 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.

4. Dispute SettlementShare    

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

The formal legal system of the Kyrgyz SSR largely mirrored other union republics. The legal system has undergone a dramatic transformation since the breakup of the Soviet Union. The general principles of the reform encourage ideological and political pluralism, a socially oriented market economy, and the expansion of individual rights and freedoms. Major barriers to foreign investment derive from a lack of adequate implementation rather than gaps in existing laws.

The judicial system is technically independent, but political interference and corruption regularly besmirch its reputation and undermine its effectiveness. Resolution of an investment dispute within the Kyrgyz Republic depends on several factors, namely who the parties are and the amount of investment.

The key problem in the resolution of disputes is a weak and corrupted Kyrgyz judicial system that fails to act as an independent arbiter. Since most of these disputes are between foreign investors and the Kyrgyz Government, local courts serve as an executor of the authorities’ political agenda.

Bankruptcy

The Kyrgyz Republic has a written law governing bankruptcy procedures of legal persons and insolvent physical persons (Law of the Kyrgyz Republic “On Bankruptcy” September 22, 1997 and amended December 30, 1998) which covers industrial enterprises and banks, irrespective of the type of ownership; commercial companies; private entrepreneurs; foreign commercial entities. Bankruptcy proceedings are conducted by the court of arbitration competent for the district in which enterprise is located. The procedure of liquidation can be carried out without the involvement of the judicial bodies if all creditors agree on out-of-court proceedings. Chapter 10 of the law on bankruptcy provides for the possibility of an amicable settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank ranks the Kyrgyz Republic 126 in “Resolving Insolvency” in its annual “Ease of Doing Business” report.

Investment Disputes

A weak and corrupted judicial system fails to act as an independent arbiter in investment disputes. Since most of these disputes are between foreign investors and the Kyrgyz Government, local courts serve as the executors of the authorities’ political agenda. There is no known example in which the final verdict on an investment dispute between an investor and the government has favored the investor.

The most well-known investment dispute of the last 10 years has been ongoing since the early days of the country’s independence and centers around the Kumtor gold mine. Since the mine opened after independence, the Canadian operating company, Centerra Gold, has renegotiated the terms of their investment with the government more than three times at the request of the Kyrgyz Government. In December 2015, both sides tabled the talks without resolution. The pattern of possessive nationalism observed with the Kumtor mine is repeated at all foreign-owned/operated mining sites. Local populations near mine sites routinely protest, sometimes violently, and the government routinely revokes licenses at smaller sites and suspends work at various sites in response to these protests.

International Arbitration

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 initial contract. Establishing the terms for arbitration beforehand may prevent further complications in the event of a dispute. According to the Ministry of Justice, there are currently nine lawsuits against the Kyrgyz Republic in international courts. These cases seek a total of $925 million. The outcome of these cases is uncertain, as is whether the Kyrgyz Government would respect or enforce any final decision.

There is no known example in which the final verdict on an investment dispute between an investor and the government has favored the investor.

The Kyrgyz Republic has a Bilateral Investment Treaty with the United States. There have been no claims under the agreement.

The parties can agree to any judicial institution, including third-party courts within or outside of the Kyrgyz Republic, or domestic or international arbitration. If the parties fail to settle the dispute within three months of the date of the first written request, any investment dispute between an investor and the public authorities of the Kyrgyz Republic will be subject to settlement by the judicial bodies of the Kyrgyz Republic. Any of the parties may initiate a settlement by recourse to:

  • the International Centre for Settlement of Investment Disputes under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or;
  • arbitration or a provisional international arbitration tribunal (commercial court) established under the arbitration procedures of the UN Commission for International Trade Law (UNCITRAL)

ICSID Convention and New York Convention

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.

Duration of Dispute Resolution – Local Courts

Investment dispute parties may agree on any judicial institution in which to settle their dispute, including arbitration courts located inside and outside the Kyrgyz Republic. In the absence of such an agreement, the dispute is considered in the courts of the Kyrgyz Republic. Courts rarely issue verdicts in dispute resolution cases and are often corrupted by politicians or parties to the dispute. Almost all disputes are settled outside of court, if ever.

5. Performance Requirements and Investment IncentivesShare    

WTO/TRIMS

A World Trade Organization (WTO) member, the Kyrgyz Republic is compliant with WTO Trade Related Investment Measures (TRIMS) obligations. As a remote country that is loosely integrated with the world economy, the Kyrgyz Republic has little practical experience working under the guidelines of WTO and the country’s treaty obligations remain poorly understood by many within the government.

Investment Incentives

The Kyrgyz Government has reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors.

Research and Development

There are very few government financed or subsidized research and development programs in the Kyrgyz Republic. Almost all research and development is funded externally.

Performance Requirements

While there are no formal legal requirements for local employment, most major international investors are subject to tremendous public pressure to hire as many local employees as possible. New investors may find local employment quotas included in potential investment agreements, mandating numbers for boards of directors, senior management, and/or other employees. There are no known barriers to mobility of foreign investors and their employees or any conditions on permission to invest. The Kyrgyz Government does not enforce any “forced localization” policies.

Data Storage

There are no known instances of requiring foreign IT providers to turn over source code and/or provide access to surveillance. There is no legislation on maintaining data storage within the country.

6. Protection of Property RightsShare    

Real Property

The Kyrgyz Government identified property rights as one of the priority areas to strengthen investment climate in Kyrgyzstan (e.g., National Strategy for Sustainable development 2013-2017). The main guarantor of this right is the Constitution of KR (Article 12). No legislation officially defines "private property."

A survey conducted by local NGO “Institute for Constitutional Policy” (2014) revealed that despite significant legislative amendments, the rule of law is still weak in the Kyrgyz Republic and the state lacks capacity to properly enforce property rights. The drawn out judicial reform has not lived up to business’ expectations, as it continues to be the main target of corrupted court decisions.

Mortgages and liens are common in the Kyrgyz Republic. Both operate in line with relevant legislation. Applying for a mortgage is simple and home loans were in demand until the recent economic crisis stemmed remittances from Russia. The developed system of mortgages has been a major factor in the recent construction boom. When providing mortgages, banks request a reference from the State Registration Service that the property is not under lien. Banks do not have their own system to check this type of information.

The State Registration Service is the major operator of a recording system (database) on property under mortgage/lien commitments. However, the reliability of the recording system is questionable, as the Service itself is frequently subject to allegations of corruption.
The Kyrgyz Republic was first among its neighboring Central Asian states to introduce private property rights for land. According to government sources, there are no lands without a clear title.

There are a number of legal restrictions on the right of foreign persons to own land in the Kyrgyz Republic. The land rights of foreign persons are limited to the following:

  • Foreign persons may not own or use agricultural land.
  • Foreign persons may not own or use any land except residential land, which has been foreclosed under a mortgage loan agreement in accordance with Kyrgyz Pledge Law. Foreclosed agricultural land may belong to foreign banks and specialized financial institutions but only for the period of three years.
  • Foreign persons may use non-residential land transferred thereto by way of universal succession, except agricultural and mining use land, subject to permission of the Kyrgyz Government, for the period of up to 50 years.
  • Foreign persons who have acquired ownership of land by way of universal succession (inheritance, reorganization) must transfer such land to a Kyrgyz national or legal entity within one year from the date of acquiring such ownership

Intellectual Property Rights

Property right protections are slowly emerging. The State Service for Intellectual Property and Innovation under the Government of the Kyrgyz Republic (“Kyrgyzpatent”) is an authorized body of the Executive Branch that issues documents to certify intellectual property. Kyrgyzpatent establishes the Appeal Council that is the primary body to hear intellectual property related disputes. While the Kyrgyz Republic has a robust body of laws, regulations, and rules governing protection of intellectual property, and while the country is a signatory to several international treaties on the subject, enforcement remains problematic. The judicial system remains underdeveloped and lacks independence. Due to the structure of the system, the appeals process can be lengthy and prolonged. Court actions can force the sale of property to enforce payments and other contractual obligations. The government does not pay a sum as compensation for these actions.

The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. The Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. Counterfeit goods made primarily in China, however, are widely available. The Kyrgyz Republic is not on the Special 301 report nor is it listed on the U.S. Trade Representative’s Notorious Markets report.

The Kyrgyz Republic did not pass any new IP related laws or regulations in 2015. There are no pending IP bills listed on the Parliament’s website. Criminal liability for violation of IPR is listed in the Criminal Code. Unfortunately, enforcement is lax and according to sources, there have been no successful prosecution for IP violations in the history of the Kyrgyz Republic. There are no official statistics on seizure of counterfeit goods. However, the State Customs Service regularly writes alerts and notifications on the recent seizure of counterfeit goods on its official website. Most counterfeit goods transit via the massive Dordoi bazaar – Central Asia’s largest market -- from China en route to Russia and Kazakhstan. The Kyrgyz Republic is not known as a major producer of counterfeit goods.

Resources for Rights Holders

Contact at Mission:
Aigerim Zholomanova
Commercial Assistant
+996 312 551 241 ext. 4411
ZholomanovaAC@state.gov

Country/Economy Resources:
American Chamber of Commerce
Address: 191 Abdrakhmanov Street, Office #123
Phone: +996 312 623 389, 623 395
Fax: +996 312 623 406
E-mail: pa.amcham@gmail.com, memberservices@amcham.kg

7. Transparency of the Regulatory SystemShare    

The legal and regulatory system of the Kyrgyz Republic continues to develop slowly. 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.

The Investment Promotion Agency, under the Ministry of Economy, assists investors with bureaucratic procedures. This agency also consolidates information about potential investment projects in the Kyrgyz Republic. However, the efficacy of this office in assisting firms with setting up shop is limited since official bureaucratic procedures comprise only some of the hurdles to opening a business. An investment council, under the auspices of the president, exists to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for bribe solicitation in order to complete normal bureaucratic functions. As with many aspects of life in the Kyrgyz Republic, the laws are sound but the implementation and enforcement are weak.

8. Efficient Capital Markets and Portfolio InvestmentShare    

The National Bank of the Kyrgyz Republic is a nominally independent body and regularly intervenes in the market to mitigate the risk of exchange rate shocks to the national currency (the Kyrgyz som). The currency is freely convertible and Kyrgyz bonds are available for foreign ownership. According to the Kyrgyz National Statistical Committee, the Kyrgyz Republic's Consumer Price Index increased by 11 percent in 2015, 6.1 percent in 2014, and 4 percent in 2013. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have grown in the past few years.

There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange Kyrgyzstan), but all transactions are conducted through Kyrgyz Stock Exchange. In 2013, the total value of transactions amounted to 1.65 billion soms (approximately USD 33.3 million) compared to 1.04 billion soms (approximately USD 22 million) in 2012.

Money and Banking System, Hostile Takeovers

There are currently 25 functioning commercial banks in the Kyrgyz Republic, with approximately 300 branches throughout the country. There are ten foreign banks operating in the Kyrgyz Republic: Demir Bank, Bank of Asia, National Bank of Pakistan, Halyk Bank, FinanceCredit Bank, Optima Bank, and Kyrgyz-Swiss Bank are entirely foreign held. Other banks are partially foreign held, including Manas Bank and Kyrgyz Investment and Credit Bank (KICB). KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development, Economic Finance Corporation, the Aga Khan Fund for Economic Development and others. The National Bank of the Kyrgyz Republic took control of Asia Universal Bank (AUB) in April 2010 and reorganized it under the new name of Zalkar Bank, which in 2013 was sold to a Russian bank and renamed Rosinbank. Although no U.S. bank operates 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.

Outside investors rarely seek financing from domestic banks. Bank lending is heavily biased towards short-term loans, although mid-term loans are also offered. The micro-finance sector in the Kyrgyz Republic is robust, representing nearly half the market size of the banking sector. As of October 2013, the micro-finance loan stock was valued around $300 million. Agriculture accounted for half of the loans, followed by trade and consumer loans. The average interest rate in the banking sector was 22.45 percent, as opposed to the micro-finance sector where the average interest rate is 35 percent (more than 50 percent higher) due to the vast majority of the micro-finance loans being handled in rural areas outside of Bishkek. Over the last year, Parliament and the National Bank have worked together to better regulate and stabilize the micro-finance sector.

Since March 2008, new banks must have a minimum charter capital requirement of 600 million soms ($8.3 million). Banking laws also require that banks maintain a 10 percent reserve with the National Bank. A deposit insurance system exists for the benefit of individual investors. With the support of the Kyrgyz Government, accounting systems in banks and enterprises are being converted to international standards. In addition, international assistance programs contributed to rapid progress in reaching these standards via accounting training and certification.

9. Competition from State-Owned EnterprisesShare    

The Fund for State Property Management of the Kyrgyz Republic is the public executive authority representing the interests of the state as the owner of the state property. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. The list of SOEs is available, but not comprehensive. The Fund has its website and tries to maintain the open policy: http://www.fgi.gov.kg/ru/get/menu/ofonde.

Information on SOEs, such as assets and employees, is generally not publicly available. Income from SOEs goes to the government budget. The government tries to practice an open and transparent policy when it comes to contracts and biddings. However due to rampant corruption, there are common complaints that only individual government officials have access to government contracts and bidding processes. In 2015, local press reported SOEs using a combination of Cyrillic and Latin letters in prospective contract proposals in order to limit outsiders’ ability to find and bid on projects.

SOEs purchase goods and services from the private firms and usually place the calls for bids either on their websites or in public newspapers, as required. Private enterprises have the same access to financing as SOEs and are subject to the same tax burden. In some cases, SOEs have preferential access to land and raw materials. However, transparency initiatives attempt to hold the government accountable in such proceedings.

Corruption dominates most aspects of SOEs in the Kyrgyz Republic. According to the Center for International Private Enterprise:

“In Kyrgyzstan, state-owned companies play a significant role in the economy, especially in the banking, mining, and transportation sectors. According to the Index of Economic Freedom, government expenditure accounts for 38 percent of Kyrgyz domestic output. Cronyism and corruption within these companies presents a major obstacle to Kyrgyzstan’s market- economic transition. In many cases, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. The positions on boards of directors are frequently used as rewards for political support. This dynamic only reinforces a patronage system—the antithesis to democracy—resulting in poor economic performance and public service delivery.”

OECD Guidelines on Corporate Governance of SOEs

The Fund for State Property Management executes corporate governance of SOEs and appoints members of the SOE boards of directors. The board, in return, appoints an executive director. In 2014, the Ministry of Economy established a working group that developed a draft project on reform of the system of SOE management. It is currently under government review. The country does not adhere to the OECD Guidelines on Corporate Governance of SOEs.

Sovereign Wealth Funds

The Kyrgyz Republic's Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77 million shares of the company, which are currently valued at $464 million. The Fund was associated with the corrupt practices of deposed ex-President Kurmanbek Bakiev and the Bakiev family used it as their personal slush fund. Today, large percentages of the Fund are frozen due to several pending legal cases regarding Kumtor gold mine.

10. Responsible Business ConductShare    

There is a general awareness about responsible business conduct (RBC). The Kyrgyz Government does not factor RBC policies or practices into its procurement decisions. Kumtor, the largest gold mining company operating in the Kyrgyz Republic, regularly draws criticism for violating environmental regulations and thus damaging the living standards of the nearby villages. However, these accusations often are used for political purposes rather than legitimate RBC concerns. Few NGOs work to promote RBC.

Corporate social responsibility (CSR) is not a fully developed concept or practice. Most companies have not yet developed the capacity to coordinate with civil society on this level. The companies that generally demonstrate CSR are large, foreign-owned companies that participate in or lead industry-strengthening training sessions, work with local universities to develop internship programs and donate to national development projects. Many new large investors, particularly in natural resource extraction, find that there is a requirement to establish a sizeable “social development fund” as a prerequisite for doing business in the Kyrgyz Republic. Charitable donations are not tax deductible.

The Kyrgyz Republic is a member of the Extractive Industries Transparency Initiative (EITI), but is currently behind on several annual reports and missed the deadline to submit their 2013 report in time for an inspection. According to the last report published in 2013 (and covering 2011), EITI covers more than 95 percent of mining revenues in the Kyrgyz Republic.

11. Political ViolenceShare    

The Kyrgyz Republic experienced a year of relative political stability in 2015. The first peaceful, democratic turnover of presidential power in the nation’s history occurred with the inauguration of President Almazbek Atambaev in December 2011. The governing coalition changed peacefully in September 2012 and again in the spring of 2014 with no impact on foreign business or investment interests. In October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections. The government was politically stable, withstanding periodic protests organized by opposition politicians. Concerns about law enforcement abuses and human rights violations in the country remain.

Interethnic tensions persisted in the southern part of the country, but did not have a destabilizing effect on the government. In 2015, Daesh/ISIL efforts to recruit Kyrgyzstani fighters to Syria continued to generate headlines. 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 could potentially target U.S.-affiliated concerns. The United States has cooperated with the Kyrgyz Government tos improve border and internal security and efforts to stem the flow of fighters to Syrian are ongoing.

The biggest exception to this general state of stability is in the extractive resources industry. Over the last several years, various installations were the target of violent protests, some resulting in severe vandalism. The trouble caused by repeated protests prompted one large, international mining firm to sell its share of an exploration project in 2014 and leave the
Kyrgyz market entirely.

The Department of State urges U.S. citizens to consider carefully travel to the Batken region along the Kyrgyz Republic’s border with -Tajikistan. 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.

12. CorruptionShare    

Corruption remains a serious problem at all levels and in all sectors of Kyrgyz society and the economy. According to Transparency International’s Corruption Perception Index, in 2015 the Kyrgyz Republic ranked 123rd out of 168 countries surveyed. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem is deeply entrenched and difficult to fight. Moreover, many in the Kyrgyz Republic view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices.

The Kyrgyz Republic is a signatory of the UN Anticorruption Convention but not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Kyrgyz Government has announced a number of initiatives to fight corruption. Current President Almazbek Atambayev has established an anticorruption service within the State Committee on National Security. The service has taken action against a limited number of ministers and parliamentarians. The Kyrgyz Government encourages all companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials, but not all companies have effective internal controls. The Kyrgyz Republic has laws that criminalize giving and accepting a bribe, with penalties ranging from a small administrative fine to a prison sentence, but the government’s active enforcement of these laws is uneven. While, at times, senior government officials take anticorruption efforts seriously, a sustained effort would probably result in more consistent enforcement of the existing laws.

Businesses operating in the Kyrgyz Republic will encounter some or all of these practices. The Government of the Kyrgyz Republic issues special colored license plates to foreign business owners, which the police frequently target for regular stops. Foreign businesses may also find themselves the subject of frequent tax audits or a variety of inspectors consistently visiting their establishments. Each experience presents an opportunity to demand a bribe.

Corruption, including bribery, raises the costs and risks of doing business. Corruption in the Kyrgyz Republic has a corrosive impact on both market opportunities for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines rule of law.

It is important for U.S. companies, regardless of their size, to assess the business climate in the relevant sector in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including 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 Kyrgyz Republic and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

The Kyrgyz Republic ratified the UN Anticorruption Convention in September 2005.
The Kyrgyz Republic is not a party to the OECD Convention on Combatting Bribery.

Resources to Report Corruption

Hot-line of the Anti-corruption Service of the State Committee for National Security:

Bishkek,
Zhibek-Zholu street
+996 (312) 660020
aks.gknb@gmail.com

Contact at "watchdog" organization
Mukanova N.A., General Secretary
Anticorruption Business Council of the Kyrgyz Republic
Ministry of Economy
114Chui Avenue, Bishkek
+996 312 895 496
secretariat.adc@gmail.com
www.adc.kg

13. Bilateral Investment AgreementsShare    

Bilateral Taxation Treaties

The Kyrgyz Republic currently has 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.

In August 2015, the Kyrgyz Republic fully acceded to the Eurasian Economic Union (EAEU), joining Russia, Belarus, Kazakhstan, and Armenia in the trade bloc. Though regulations are still being finalized, free movement of labor, capital, and goods forms the basis of the EAEU.

The Kyrgyz Republic has a Bilateral Investment Treaty with the United States.

14. OPIC and Other Investment Insurance ProgramsShare    

OPIC recently financed part of the campus expansion of the American University of Central Asia in Bishkek. Multiple investment funds are leveraging potential OPIC financing, though none of the projects have begun work. In the event OPIC should pay an inconvertibility claim, the local currency (the som) has a floating exchange rate of 68.9 som to one U.S. dollar (as of April 7).

15. LaborShare    

There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens found lucrative job opportunities abroad, and the nation’s education system failed to keep pace with advancing educational needs within many sectors. 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 the Kyrgyz Ministry of Labor and Social Development, the unemployment rate was 2.2 percent as of January 2016, though independent estimates throughout 2015 place the rate closer to 10 percent. Additionally, approximately one million Kyrgyz citizens work abroad because of limited opportunities in the Kyrgyz Republic

There are no government policies that require hiring Kyrgyz nationals, though it is often added as a condition for investment, particularly in the mining sector. There are no restrictions on employers adjusting to fluctuating market, including hiring and firing workers at will. Many private companies use temporary or contract workers. The Labor Code does not provide any special conditions in order to attract investment. Labor unions are independent and are not subject to state bodies, employers, political parties, or other unions. In practice, labor unions are not very active when it comes to the protection of workers’ rights.

Workers have the right to form and join trade unions. The law allows unions to conduct their activities without interference, organize, and bargain collectively. Workers may strike, but the requirement to receive formal approval has made striking difficult and complicated. The law prohibits government employees from striking, but the prohibition does not apply to teachers or medical professionals. The law does not prohibit retaliation against striking workers. Labor disputes are settled by Commission for Labor Disputes (established within all organizations with 10 or more employees), by the authorized state body, or by courts of the Kyrgyz Republic. The employee has the right to choose one of these bodies to settle the dispute.

Safety and health conditions in factories are poor. The law establishes occupational health and safety standards, but the Kyrgyz Government generally did not enforce them. The State Labor Inspectorate is responsible for protecting workers and carrying out inspections for all types of labor problems, but its activities were limited, and business compliance was uneven. Workers in the informal economy had neither legal protection nor mandated safety standards. See more at: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper

In 2015, workers briefly went on strike at Kumtor after an expatriate manager posted a culturally insensitive photo and comment on his Facebook profile. Work at the mine resumed the next day. The Kyrgyz Government deported the expatriate manager for immigration related offences.

While the Labor Code of the country complies with all required international laws and treaties, there is a gap in protecting the rights of individuals employed by private companies. Many employees are hired based on basic or even oral agreements and lack knowledge of their rights. On February 9, 2015, the Ministry of Economy established a working group to amend the Labor Code with the goal of simplifying labor agreements and making them more common. The proposed amendments aimed to lower payment for overtime work and simplify firing processes. The bill was heavily criticized and eventually dropped.

16. Foreign Trade Zones/Free Ports/Trade FacilitationShare    

There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek (two), 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.

17. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical source

USG or international statistical source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

$6.537 billion

2014

$7.404 billion

World Bank

Foreign Direct Investment

Host Country Statistical source

USG or international statistical source

USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2014

N/A

2014

$12 million

BEA

Host country’s FDI in the United States ($M USD, stock positions)

2014

N/A

2014

$0

BEA

Total inbound stock of FDI as % host GDP

2014

N/A

2014

0%

N/A


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

3,235

100%

Total Outward

2

100%

Canada

913

28%

Tajikistan

2

91%

China

747

23%

Kazakhstan

0

4%

United Kingdom

354

11%

Turkey

0

3%

Russian Federation

237

7%

Russian Federation

0

1%

Kazakhstan

195

6%

Brit Virgin Island

0

0%

"0" reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

The Kyrgyz Republic has limited stock and bond markets for portfolio investors. The country is not listed on the IMF’s Coordinated Portfolio Investment Survey (CPIS) site. It is unlikely the country has any large portfolio investors.

18. Contact for More InformationShare    

Aigerim Zholomanova
Commercial Assistant
+996 312 597-000 ext. 7607
ZholomanovaAC@state.gov