Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has achieved considerable results in its efforts to attract foreign investment. As of January 1, 2020, the stock of foreign direct investment in Kazakhstan totaled USD 161.2 billion, including USD 36.5 billion from the United States, according to official statistics from the Kazakhstani government.
While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward its goal of diversifying the country’s economy by improving the investment climate. Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing BusinessReport.
The government maintains an active dialogue with foreign investors, through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate.
Kazakhstan joined the World Trade Organization (WTO) in 2015. In June 2017 Kazakhstan joined the Organization for Economic Co-operation and Development (OECD) Declaration on International Investment and Multinational Enterprises and became an associated member of the OECD Investment Committee.
Despite institutional and legal reforms, concerns remain about corruption, bureaucracy, arbitrary law enforcement, and limited access to a skilled workforce in certain regions. The government’s tendency to legislate preferences for domestic companies, to favor an import-substitution policy, to challenge contractual rights and the use of foreign labor, and to intervene in companies’ operations continues to concern foreign investors. Foreign firms cite the need for better rule of law, deeper investment in human capital, improved transport and logistics infrastructure, a more open and flexible trade policy, a more favorable work-permit regime and a more customer-friendly tax administration.
In July 2018 the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency. In April 2019 the government announced its intention to use the AIFC as a regional investment hub to attract foreign investment to Kazakhstan. The government recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan.
Kazakhstan maintains a stable macroeconomic framework, although weak banks inhibit the financial sector’s development (described further in next section), valuation and accounting practices are inconsistent, and large state-owned enterprises that dominate the economy face challenges in preparing complete financial reporting. Capital markets remain underdeveloped and illiquid, with small equity and debt markets dominated by state-owned companies and lacking in retail investors. Most domestic borrowers obtain credit from Kazakhstani banks, although foreign investors often find margins and collateral requirements onerous, and it is usually cheaper and easier for foreign investors to use retained earnings or borrow from their home country. The government actively seeks to attract foreign direct investment, including portfolio investment. Foreign clients may only trade via local brokerage companies or after registering at the Kazakhstan Stock Exchange (KASE) or at the AIFC.
KASE, in operation since 1993, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, foreign currencies, repurchase agreements (REPO) and derivatives, with 200 listed companies in total. Most of KASE’s trading is comprised of money market (87 percent) and foreign exchange (10 percent). As of March 31, 2020, stock market capitalization was USD 37.3 billion, while the corporate bond market was USD 31 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity, accumulated $26.1 billion as of March 31, 2020.
In 2018, the government launched the Astana International Financial Center (AIFC), a regional financial hub modeled after the Dubai International Financial Center. The AIFC has its own stock exchange (AIX), regulator, and court (see Part 4). The AIFC has partnered with the Shanghai Stock Exchange, NASDAQ, Goldman Sachs International, the Silk Road Fund, and others. AIX currently has 53 listings, including 24 traded on its platform.
Kazakhstan is bound by Article 8 of the International Monetary Fund’s Articles of Agreement, adopted in 1996, which prohibits government restrictions on currency conversions or the repatriation of investment profits. Money transfers associated with foreign investments, whether inside or outside of the country, are unrestricted; however, Kazakhstan’s currency legislation requires that a currency contract must be presented to the servicing bank if the transfer exceeds USD 10,000. Money transfers over USD 50,000 require the servicing bank to notify the transaction to the authorities, so the transferring bank may require the transferring parties, whether resident or non-resident, to provide information for that notification.
Money and Banking System
Kazakhstan has 27 commercial banks. As of March 1, 2019, the five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 43.6 billion, accounting for 62.2 percent of the total banking sector.
Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices at some banks and significant related-party exposures. Over the past several years the government has undertaken a number of measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities. In 2019, the NBK initiated an asset quality review (AQR) of 14 major banks jointly holding 87 percent of banking assets as of April 1, 2019. According to NBK officials, the AQR showed sufficient capitalization on average across the 14 banks and set out individual corrective measure plans for each of the banks to improve risk management. As of March 2020, the ratio of non-performing loans to banking assets was 8.9 percent, down from 31.2 percent in January 2014. The COVID-19 pandemic and the fall in global oil prices may pose additional risks to Kazakhstan’s banking sector.
Kazakhstan has a central bank system, led by the National Bank of Kazakhstan (NBK). In January 2020, parliament established the Agency for Regulation and Development after Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, stock market, microcredit organizations, debt collection agencies, and credit bureaus. The National Bank of Kazakhstan (NBK) retains its core central bank functions as well as management of the country’s sovereign wealth fund and pension system assets. The NBK and ARDFM as its successor is committed to move gradually to Basel III regulatory standard. As of May 2020, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard.
Currently foreign banks are allowed to operate in the country only through their local subsidiaries. Starting December 16, 2020, as a part of Kazakhstan’s WTO commitments, foreign banks will be allowed to operate via branches subject to compliance with regulatory norms prescribed by the NBK and ARDFM.
Foreigners may open bank accounts in local banks if they have a local tax registration number.
Foreign Exchange and Remittances
Foreign Exchange
There are no restrictions or limitations placed on foreign investors in converting, transferring, or repatriating funds associated with an investment (e.g. remittances of investment capital, earnings, loan or lease payments, or royalties). Funds associated with any form of investment may be freely converted into any world currency, though local markets may be limited to major world currencies.
As of July 2019, foreign company branches are treated as residents, except for branches of foreign banks and insurance companies or non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan. Foreign banks and insurance companies’ branches will be treated as residents from December 2020. With some exceptions, foreign currency transactions between residents are forbidden. There are no restrictions on foreign currency operations between residents and non-residents, unless specified otherwise by local foreign currency legislation. Companies registered with AIFC are not subject to currency and settlement restrictions.
Kazakhstan abandoned its currency peg in favor of a free-floating exchange rate and inflation-targeting monetary regime in August 2015, although the National Bank admits to intervening in foreign exchange markets to combat excess volatility. Kazakhstan maintains sufficient international reserves according to the IMF. As of March 2020, international reserves at the National Bank, including foreign currency and gold, and National Fund assets totaled USD 87.4 billion.
Remittance Policies
The U.S. Mission in Kazakhstan is not aware of any concerns about remittance policies or the availability of foreign exchange conversion for the remittance of profits. Local currency legislation permits non-residents to freely receive and transfer dividends, interest and other income on deposits, securities, loans, and other currency transactions with residents. However, such remittances would be subject to the reporting requirements described in the “Capital Markets and Portfolio Investment” Section above. There are no time limitations on remittances; and timelines to remit investment returns depend on internal procedures of the servicing bank. Residents seeking to transfer property or money to a non-resident in excess of USD 500,000 are required to register the contract with the NBK.
Sovereign Wealth Funds
The National Fund of the Republic of Kazakhstan was established to support the country’s social and economic development via accumulation of financial and other assets, as well as to reduce the country’s dependence on oil sector and external shocks. The Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farm lands, and investment income. The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as National Fund’s trustee and asset manager. The NBK selects external asset managers from internationally-recognized investment companies or banks to oversee a part of the National Fund’s assets. Information about external asset managers and assets they manage is confidential. As of March 2020, the National Fund’s assets were USD 57 billion or around 37 percent of GDP.
The government receives regular transfers from the National Fund for general state budget support, as well as special purpose transfers ordered by the President. The National Fund is required to retain a minimum balance of no less than 30 percent of GDP.
Kazakhstan is not a member of the IMF-hosted International Working Group of Sovereign Wealth Funds.
9. Corruption
Kazakhstan’s rating in Transparency International’s (TI) 2019 Corruption Perceptions Index is 34/100, ranking Kazakhstan 113 out of 180 countries rated – a relatively weak score, but the best in Central Asia. According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy. In its March 2019 report on the fourth round of monitoring under the Istanbul Action Plan, OECD stated a lack of progress on 9 of 29 recommendations, including: implementation of a holistic anti-corruption policy in the private sector, ensuring independence of the anti-corruption agency, detailed integrity rules for political officials, independence of the judiciary and judges, mandatory anti-corruption screening of all draft laws, bringing the Law on Access to Information in line with international standards, effective and dissuasive liability of legal entities for corruption crimes; and ensuring the effectiveness of investigative and prosecutorial practices to combat corruption crimes.
The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption, rather than fighting the consequences of corruption. The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifetime ban on employment in the civil service with mandatory forfeiture of title, rank, grade and state awards. The Law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures. The Law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders. The Law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries.
The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008. It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013. Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020. The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.
Despite provisions in laws, however, corruption allegations are noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector. The International Finance Corporation’s Enterprise Survey that gathers responses from thousands of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan. For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption
Transparency International Kazakhstan conducted a survey in 2019 to assess the corruption perception of 1,824 representatives of small businesses and individual entrepreneurs. A total of 76.1 percent of respondents reported that they can develop their business without corruption.
The legal framework controlling corruption has been eased and loopholes exist. In 2018 the president signed into law a set of criminal legislation amendments mitigating punishment for acts of corruption by officials, including decriminalizing official inaction, hindrance to business activity, and falsification of documents; significantly reducing the amounts of fines for taking bribes; and reinstituting a statute of limitation for corruption crimes. The largest loophole surrounds the first president and his family. The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search or interrogation. Journalists and advocates for fiscal transparency are reported to have faced frequent harassment, administrative pressure, and there are reports of disappearances and unaccounted deaths.
Resources to Report Corruption
Under the Law On Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption. Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.
Transparency International maintains a national chapter in Kazakhstan.
Contact at the government agency responsible for combating corruption:
Alik Shpekbayev
Chairman
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Astana
+7 (7172) 909002
a.shpekbaev@kyzmet.gov.kz
Contact at a “watchdog” organization:
Olga Shiyan
Executive Director
Civic Foundation “Transparency Kazakhstan”
Office 308/2
89 Dosmuhamedov str,
Business Center Caspi
Almaty 050012
+7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com
10. Political and Security Environment
There have been no reported incidents of politically-motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent. In June 2016, individuals described by the government as Salafist militants attacked a gun shop and a military unit, killing 8 and injuring 37 people in the Aktobe region of northwestern Kazakhstan.
Kazakhstan generally enjoys good relations with its neighbors. Although the presidential transition in neighboring Uzbekistan has opened the door to greater regional cooperation, including on border issues, Kazakhstan continues to exercise vigilance against possible penetration of its borders by extremist groups. The government also remains concerned about the potential return of foreign terrorist fighters from Syria and Iraq.
After close to three decades, President Nursultan Nazarbayev resigned as president March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession. On April 9, 2019, President Tokayev announced that Kazakhstan would hold early presidential elections June 9, 2019.
In the June 9 election, the first without First President Nazarbayev, President Tokayev was elected to a full term with 71 percent of the vote. The Organization for Security and Cooperation in Europe (OSCE) published a preliminary assessment of the election June 10, noting in its press release that “a lack of regard for fundamental rights, including detentions of peaceful protestors, and widespread voting irregularities on election day, showed scant respect for democratic standards.” In the March 2016 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 82 percent of the vote, while the business-friendly Ak Zhol party and the Communist People’s party each received 7 percent. All three parties supported Nazarbayev and his policies. The OSCE similarly critiqued the March 2016 election for its lack of adherence to OSCE standards for democratic elections.
Kyrgyz Republic
Executive Summary
The Kyrgyz Republic has undergone waves of political upheaval and severe economic downturns since its independence in 1991, resulting in an unfavorable investment climate for investors with low tolerance for risk of political instability. The violent arrest and detention of former President Atambaev by state security forces in August 2019 alarmed potential investors anticipating continued stability and positive investment prospects. Corruption continues to be a major constraint to business development, particularly in the state customs and border agencies, despite President Sooronbai Jeenbekov’s campaign to stamp out corruption in business regulation and to increase transparency in the public procurement process. The country’s judicial system is not fully independent and susceptible to external political influence. While the legal and regulatory framework is set up to be in accordance with international norms, poor implementation and weak enforcement, particularly with respect to intellectual property rights protection, is an endemic problem.
Kyrgyz government officials speak optimistically 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. The newly established Institute of the Business Ombudsman, intended to instill greater confidence in the business community, is charged with advocating for the protection of rights and freedoms of foreign and domestic business entities. Under the “Digitalization Kyrgyzstan” initiative for 2019-2023, the development of information and communication technology infrastructure is aimed at improving the regulatory framework for incentivizing innovation and protecting intellectual property.
Stifled progress in improvements to the business legal and regulatory framework deters foreign investors from entering the Kyrgyz market. The Kyrgyz economy continues to rely heavily on the mining and agricultural sectors. Kumtor Gold Company and the parent company Centerra Gold Inc. completed a new strategic agreement with the government in August 2019 after nearly two years of contentious disputes, further dampening the country’s investment image. The government retains a poor track record in international arbitration cases, and in the last five years, foreign investors have filed twenty different lawsuits against the Kyrgyz government.
The Kyrgyz Republic struggles to meet basic infrastructure needs. Disruptions in the supply of electricity remain a problem, especially outside the capital, Bishkek. Power plants, roads, and canals are dilapidated and in need of major capital investment. Chinese infrastructure projects, primarily implemented with non-market loans from the Export-Import Bank of China, tend to improve market access predominantly for Chinese companies.
The Kyrgyz Republic has yet to reap the economic benefits of membership within the Eurasian Economic Union (EAEU), following the country’s August 2015 accession into the customs union whose current members also include Russia, Kazakhstan, Armenia, and Belarus. Harmonized tariff schedules have left Kyrgyz producers and suppliers struggling to compete with cheaper import goods produced by other EAEU member states, in addition to non-member states that have signed Free Trade Agreements with the EAEU. An increase in non-tariff measures, to which the Kyrgyz government and businesses alike have struggled to adapt, create further barriers for Kyrgyz producers. The slow development of technical infrastructure to ensure compliance with EAEU sanitary and phytosanitary standards and quality control have precluded Kyrgyz goods from target markets within the customs union. Persistent reliance on Russia as a source of remittances, imports, and financial support subjects the economy to Russian influence and makes it vulnerable to external shocks to the Russian economy.
The Kyrgyz government remains very open to foreign direct investment, particularly from U.S. and European countries. Kyrgyz entrepreneurs increasingly are purchasing franchise licenses of major U.S.-based companies, particularly in the food service and retail sectors. The Kyrgyz Republic has also experienced a modest uptick in interest from U.S. corporations seeking to bid on infrastructure development projects funded by international financial institutions.
The COVID-19 pandemic significantly disrupted any positive momentum in the Kyrgyz Republic’s economy over the last year. Assuming that the economic downturn will last for at least the first half of 2020, the IMF assessed that real GDP growth will drop to 0.4 percent in 2020. Nearly all sectors face acute setbacks for recovery with the prolongation of emergency quarantine restrictions for an indefinite period. The closure of regional borders, particularly with China and Kazakhstan, caused mass supply chain disruptions, particularly for intermediary materials and equipment, necessary for agricultural, mining, and construction activities. The collapse of global oil prices coupled with high rates of unemployment among migrant workers, in addition to depreciation of the Kyrgyz som exchange rate against the U.S. dollar, have depressed remittance earnings. Local businesses are struggling to adapt to current conditions, but the domestic information technology sector may experience a boom as more local enterprises aim to transition to e-commerce and online platforms. Despite having accepted close to USD 500 million in concessional loans and grants from international donor organizations in response to COVID-19, the Kyrgyz Republic’s public debt in the long-term is expected to remain at 60 percent of GDP and the risk of debt distress will remain moderate.
The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have quadrupled in the last five years. In 2019, Moody’s Investors Services assigned the Kyrgyz Republic a sovereign credit rating of B2. The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic.
There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange The Kyrgyz Republic), but all transactions are conducted through the Kyrgyz Stock Exchange. In 2019, the total value of transactions amounted to USD 6.1 billion Kyrgyz soms (approximately USD 87 billion). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations. Foreign investors are able to acquire loans on the local market if the business is operating on the territory of the Kyrgyz Republic and collateral meets the requirements of local banks. The average interest rate for loans in USD is between 10-15 percent.
Money and Banking System
The National Bank of the Kyrgyz Republic (NBKR) is a nominally independent body whose mandate is to achieve and maintain price stability through monetary policy. The Bank is also tasked with maintaining the safety and reliability of the banking and payment systems. The NBKR licenses, regulates, and supervises credit institutions. The penetration level of the banking sector is 42 percent.
According to the IMF, the Kyrgyz banking system at present remains well capitalized with still sizeable, non-performing loans (NPLs). NPLs increased from 7.5 percent to 8.0 percent in 2019, with restructured loans in excess of 20 percent. Net capital adequacy ratio increased from 23.7 percent to 24.0 percent in 2019. Total assets in the Kyrgyz banking system in 2019 equaled approximately USD 3.6 billion. As of August 2019, the Kyrgyz Republic’s three largest banks by total assets were Kyrgyz Investment and Credit Bank (KICB; approximately USD 418 million), Optima Bank (approximately USD 520.7 million), and Aiyl Bank (approximately USD 434.5 million).
There are currently 23 commercial banks in the Kyrgyz Republic, with 323 operating branches throughout the country; the five largest banks comprise 51.7 percent of the total market. No U.S. bank operates in the Kyrgyz Republic and Kyrgyz banks do not maintain correspondent accounts from U.S. financial institutions. There are eight foreign banks operating in the Kyrgyz Republic: Demir Bank, National Bank of Pakistan, Halyk Bank, Optima Bank, Finca Bank, and Kompanion Bank are entirely foreign held. Other banks are partially foreign held, including KICB and BTA Bank, Kyrgyz-Swiss Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development (EBRD), Economic Finance Corporation, the Aga Khan Fund for Economic Development and others.
The micro-finance sector in the Kyrgyz Republic is robust, representing nearly 10 percent the market size of the banking sector. Trade accounted for 25.4 percent of the total loan portfolio of the banking sector, followed by agriculture (18.9 percent) and consumer loans (11.7 percent). The microfinance sector in the Kyrgyz Republic is rapidly growing. In 2019, around 140 microfinance companies, 95 credit unions, 220 pawnshops and 401 currency exchange offices operated in the Kyrgyz Republic. Over the last four years, the three largest microfinance companies (Bai-Tushum, FINCA, and Kompanion) transformed into banks with full banking licenses.
Foreign Exchange and Remittances
Foreign Exchange
Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. While the som is a floating currency, the NBKR periodically intervenes in the market to mitigate the risk of exchange rate shocks. Given significant currency fluctuations among Post-Soviet countries in 2019, the Kyrgyz som was one of the most stable currencies, with the dollar exchange rate dropping 0.3 percent over the year. In 2019, the NBKR conducted six foreign exchange interventions and in total, sold USD 143.5 million. The NBKR 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.
Remittance Policies
Remittances typically account for 25-30 percent of GDP. In 2019 net remittances reached $1.8 billion, a 16 percent reduction from 2018. In July 2019, the Central Bank of Russia lowered the cap on money transfers per month to the Kyrgyz Republic to 100,000 rubles (approximately USD 1,590 based on July exchange rates). The Financial Action Task Force (FATF) assessed that in 2019, the Kyrgyz Republic made “significant progress in addressing technical compliance deficiencies to combat money laundering and financial crimes.”
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 77.4 million shares of the company, which are currently valued at USD 404 million.
9. Corruption
Corruption remains a serious problem at all levels of Kyrgyz society and in all sectors of the economy. According to Transparency International’s 2019 Corruption Perception Index, the Kyrgyz Republic ranked 126 out of 176 countries rated, climbing from its position of 132 in 2016. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem has shown to be 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 is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The anticorruption service within the State Committee on National Security has taken action against a limited number of ministers and parliamentarians. Over the past year, instances of corruption-related arrests against public figures from the political opposition have increased.
In 2019, President Jeenbekov announced urgent measures to clean up state bodies and purge unscrupulous state actors, but a string of corruption scandals has fueled public criticism of the government’s ineffectiveness to combat public corruption. All companies are recommended to establish internal codes of conduct that, among other things, prohibit bribery of public officials, but such codes are unevenly applied and enforced. There are laws that criminalize giving and accepting of bribe, establish penalties ranging from a small administrative fine to a prison sentence, but the government’s active enforcement of these laws is uneven. In November 2019, Azattyk, the Kyrgyz affiliate of Radio Free Europe, together with the Center for the Study of Corruption and Organized Crime (OCCRP) and the independent online outlet Kloop.kg, published a series of investigations that exposed mass corruption within the highest levels of the Kyrgyz State Customs Service that resulted in the laundering and smuggling or illicit transfer of USD 700 million dollars out of the Kyrgyz Republic.
Public procurement remains an area prone to corruption. In December 2019, the Kyrgyz courts convicted and sentenced former Prime Minister Sapar Isakov and former chairman of National Energy Holding Aybek Kaliyev to prison on corruption charges for their role in awarding the USD 386 million modernization project of the Bishkek Central Heating Plant to the Chinese company TBEA without implementing proper tender procedures. The corruption investigation opened in February 2018, after massive technical failures at the Bishkek Central Heating Plant left the capital without heating and water during a severe cold snap the previous month. With support from international donors, the Kyrgyz government has since prioritized advancements in e-governance, with the aim of increasing transparency in public procurement.
Corruption, including bribery, raises the costs and risks of doing business in the Kyrgyz Republic. It has had 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
Hotline 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 114 Chui Avenue, Bishkek
+996 312 895 496
secretariat.adc@gmail.com
www.adc.kg
10. Political and Security Environment
The Kyrgyz Republic has a history of political upheaval that resurfaced in the summer of 2019, after years of relative stability. Since independence, the Kyrgyz Republic has had 30 different prime ministers, often necessitating a change in cabinet members with the introduction of each new head of government. In 2005, and again in 2010, mass protests against government corruption precipitated the ouster of the country’s elected president. From 2010, the country experienced a period of relative political stability, and in October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. With the historic election and inauguration of President Sooronbai Jeenbekov in 2017, the Kyrgyz Republic witnessed Central Asia’s first transition from one democratically elected president to another. Although President Jeenbekov was the hand-picked successor of Atambaev, the current and former leaders have since turned against each other.
On August 7, 2019, state security forces conducted a raid to arrest former President Atambaev at his residence on the outskirts of Bishkek. The arrest took place after Atambaev refused multiple summons to submit to police questioning in an ongoing corruption investigation concerning the ex-President’s role in the release of a political ally in 2013. Clashes between the police and the former President’s supporters lasted two days, resulting in the fatal shooting of one police officer and the wounding of 80 additional citizens. The ex-President remains in pre-trial detention and faces charges of murder, attempted murder, threatening or assaulting representatives of authorities, hostage taking, and forced seizures of power. In 2016, ISIS 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 (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to stem the flow of fighters to Syria are ongoing.
In 2016, ISIS 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 (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to stem the flow of fighters to Syria are ongoing.
Interethnic tensions persist in the southern part of the country, but remain relatively contained from the rest of the country. In Batken region, demarcation along portions of the Kyrgyz-Uzbek and Kyrgyz-Tajik borders are in dispute. These disputed areas occasionally experience skirmishes between border guards that have resulted in cross-fire violence, sometimes involving civilians.
In the recent past, the extractive resources companies have been the target of localized instability in 2018 and 2019, after relative calm in 2015 and 2016. The Kyrgyz government has used aggressive tactics for political or economic leverage in negotiations with international organizations. For example, in an apparent response to Centerra Gold’s acquisition of an American mining company – which the Kyrgyz Republic perceived as an attempt to dilute its influence over and benefits from the Kumtor Gold venture – the Kyrgyz government raided Kumtor Gold’s offices in 2016, enforced travel restrictions on all expatriate staff and their family members, and issued an injunction to prevent repatriation of company assets. Protestors have targeted various installations, at times resorting to vandalism and violence. In 2019, the majority Chinese company Zhong Ji Mining suspended operations at the Solton-Sary gold mine following violent clashes with hundreds of local residents who blamed the company for environmental degradation. In December 2019, hundreds of protestors demanded local authorities of the Naryn Free Economic Trade Zone to cancel the land lease of a Chinese-Kyrgyz enterprise that was developing a major customs and trade logistics complex. Chinese investment projects continue to be treated with more significant scrutiny and pushback by local residents, relative to Russian, Korean, Japanese, and Western investment initiatives.
Tajikistan
Executive Summary
Tajikistan is a challenging place to do business but could present high-risk, high-reward opportunities for foreign investors who have experience in the region, a long-term investment horizon, and the patience and resources to conduct significant research and due diligence. At the most senior levels, the Tajik government consistently expresses interest in attracting more U.S. investment, but the poorest of the Central Asian countries harbors few U.S. investors and remains a largely uncompetitive investment destination.
Tajik President Rahmon publicly emphasizes the need to foster private-sector-led growth, and attracting investment is prioritized in the government’s 2016-2030 National Development Strategy and in-progress 2021-2024 Economic Development Strategy. Strategy documents notwithstanding, bureaucratic and financial hurdles, widespread corruption, a largely dysfunctional banking sector, non-transparent tax system, and countless business inspections greatly hinder investors. The absence of private investment, along with the government’s commitment to dedicate significant financial resources to the construction of the Roghun Dam hydropower plant, creates pressure on the Tax Committee to enforce or reinterpret tax regulations arbitrarily in order to meet ever-increasing revenue targets.
Tajikistan is saturated in opaque loans connected to China’s Belt and Road Initiative, and Chinese investments account for more than three-quarters of the country’s total Foreign Direct Investment. Tajikistan is also reportedly considering joining the Russian-led Eurasian Economic Union. Should it apply for and receive membership, U.S. firms could experience higher trade tariffs. Finally, despite Tajikistan’s 2013 accession to the World Trade Organization, the Tajik government has imposed both blanket and targeted trade policies to protect private interests without notifying its partners, as occurred with bans on imported chicken meat in 2017 and exports of mining concentrate in 2019.
The Tajik economy faces endemic challenges. Consumption has been a major driver of Tajikistan’s economic growth, but it is reliant on migrant remittance flows from Russia, where about one million labor migrants reside. The novel coronavirus pandemic is projected to severely reduce remittances this year and precipitate a two percent GDP contraction in Tajikistan. Falling remittances also lead to shortages of foreign exchange and put downward pressure on the country’s reserves as it defends the national currency. Tajikistan’s banking sector is plagued by politically-directed, non-performing loans, high interest rates, and the absence of correspondent banking accounts in the West.
Despite these challenges and risks to potential investors, Tajikistan is pursuing greater trade links with its neighbors and has made modest progress to improve its investment climate over the past year. The World Bank cited Tajikistan as a top reformer on its Doing Business 2020 report and is also providing technical assistance towards tax reform. Authorities made steps towards greater compliance on intellectual property rights protections this year, and Tajikistan was recognized for significant progress towards transparency in the extractives sector. Should the government continue an economic reform path, opportunities in energy, agribusiness, food processing, tourism, textiles, and mining could prove promising.
Foreign portfolio investment is not a priority for the Tajik government. Tajikistan lacks a securities market. According to government statistics, portfolio investment in Tajikistan totaled USD 502.5 million at the end of 2019. This includes the USD 500 million Eurobond the National Bank of Tajikistan issued in September 2017. The National Bank of Tajikistan has made efforts to develop a system to encourage and facilitate portfolio investments, including credit rating mechanisms implemented by Moody’s and S&P. Apart from these initial steps, however, Tajikistan has not established policies to facilitate the free flow of financial resources into product and factor markets.
Tajikistan does not place any restrictions on payments and transfers for current international transactions, per IMF Article VIII. It regards transfers from all international sources as revenue, however, and taxes them accordingly.
Commercial banks apply market terms for credits, but are also under considerable pressure by governing elites and their family and friends to provide favorable loans for commercially questionable projects.
The private sector offers access to several different credit instruments. Foreign investors can get credit on the local market, but those operating in Tajikistan avoid local credit because of comparatively high interest rates.
Money and Banking System
According to the latest National Bank of Tajikistan report from December 2019, 75 credit institutions, including 17 banks, including one Islamic bank, 22 microcredit deposit organizations, six microcredit organizations, and 30 microcredit funds, function in Tajikistan. Tajikistan has 328 bank branches, a 4 percent reduction since 2018. Although the National Bank of Tajikistan reports 26.1 percent of commercial loans are non-performing, other estimates range as high as 60 percent.
Tajikistan’s banking system has still not recovered from the 2015 financial crisis. AgroInvestBank and TojikSodirotbank, two of Tajikistan’s largest, are in fact collapsed banks awaiting liquidation. Tajikistan’s banking sector has assets of USD 2.2724 billion as of December 2019, which is USD 130 million more than in 2018. Total liabilities in 2019 were unchanged from 2018, reaching USD 1.6 billion. The National Bank of Tajikistan is the country’s central bank (www.nbt.tj). Foreign banks can establish operations but are subject to National Bank of Tajikistan regulations. United States commercial banks discontinued correspondent banking relations with Tajik commercial banks in 2012.
To establish a bank account, foreigners must submit a letter of application, a passport copy, and Tajik government-issued taxpayer identification number.
Foreign Exchange and Remittances
Foreign Exchange
Tajikistan places no legal limits on commercial or non-commercial money transfers, and investors may freely convert funds associated with any form of investment into any world currency. However, businesses often find it difficult to conduct large currency transactions due to the limited amount of foreign currency available on the domestic financial market. Investors are free to import currency, but once they deposit it in a Tajik bank account it may be difficult to withdraw.
In December 2015, the National Bank of Tajikistan reorganized foreign currency operations and shut down all private foreign exchange offices in Tajikistan. Since that time, only commercial bank exchange offices may exchange money and transactions require customers to register with an identity document. In December 2019, the National Bank of Tajikistan launched a national money transfer center that centralizes the receipt of all remittances from abroad.
The government’s policy supports a stable exchange rate but remains susceptible to changes in the Russian ruble. As global oil markets caused the Russian ruble to devaluate in March 2020, the National Bank adjusted the official rate from TJS 9.68 per U.S. dollar to TJS 10.2 per U.S. dollar, a 5.4 percent depreciation. Defending the somoni’s rate to the dollar puts pressure on Tajikistan’s foreign currency and gold reserves, leaving the government with little capacity for systematic currency interventions.
Remittance Policies
The National Bank of Tajikistan mandated that commercial banks disburse remittances in local currency since early 2016. There are no official time or quantity limitations on the inflow or outflow of funds for remittances. Tajikistan’s tax code classifies all inflows as revenue and taxes them accordingly; however, the Tajik government does not tax remittances from labor migrants.
Sovereign Wealth Funds
Tajikistan does not have a sovereign wealth fund. The country does have a “Special Economic Reforms Fund,” but, according to official statistics, it is empty.
9. Corruption
Tajikistan has enacted anti-corruption legislation, but enforcement is politically-motivated, and generally ineffective in combating corruption of public officials. Tajikistan’s parliament approved new amendments to the criminal code in February 2016. Now, individuals convicted of crimes related to bribery may be released in return for payment of fines (roughly USD 25 for each day they would have served in prison had they been convicted under the previous criminal code).
Tajikistan’s anti-corruption laws officially extend to family members of officials and political parties. Tajikistan’s laws provide conditions to counter conflict of interest in awarding contracts.
The Tajik government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials. Private companies do not use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials.
Tajikistan became a signatory to the UN’s Anticorruption Convention in 2006. Tajikistan is not a party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.
Tajik authorities do not provide protection to NGOs involved in investigating corruption.
U.S. firms have identified corruption as an obstacle to investment and have reported instances of corruption in government procurement, award of licenses and concessions, dispute settlements, regulations, customs, and taxation.
Resources to Report Corruption
Sulaimon Sultonzoda Said, Head
The Agency for State Financial Control and Fight with Corruption
78 Rudaki Avenue, Dushanbe
992 37 221-48-10; 992 27 234-3052
info@anticorruption.tj; agenti@anticorruption.tj
(The agency requests that contact be made via a form on their website – www.anticorruption.tj)
Contact at a “watchdog” organization (international, regional, local or nongovernmental organization operating in the country/economy that monitors corruption, such as Transparency International):
United Nations Development Program
39 Aini Street, Dushanbe
+992 44 600-56-00 registry.tj@undp.org
10. Political and Security Environment
Tajikistan’s civil war lasted from 1992 to 1997 and resulted in the deaths of 50,000 people. Apart from a minor uprising in September 2015, however, political violence following the end of the civil war has been rare.
Tajikistan is governed by an authoritarian ruler who has consolidated power by silencing opposition voices and ending multi-party democracy. As part of its security efforts, the Tajik government has placed numerous restrictions on religious, media, and civil freedoms.
The state, as an extension of the regime, furthers the interests of the ruling elite, often to the detriment of the business community. Democratic reform is viewed by many elites as a threat to important political and financial interests.
Government institutions are often unwilling or unable to protect human rights, the judiciary is not independent, and the court system does not present Tajiks with a fair or effective forum in which to seek protection. Law enforcement institutions often overuse their authority to monitor, question or detain a wide spectrum of individuals, and the State Committee on National Security (GKNB) exercises a wide degree of influence in all aspects of government.
Uzbekistan
Executive Summary
With over 34 million citizens – the largest population in Central Asia, rich reserves of natural resources, and relatively well-developed infrastructure, Uzbekistan has the potential to become one of the strongest economies in the post-Soviet area. Uzbekistan has demonstrated stable economic development in recent years, reporting 5.6% GDP growth in 2019. The country’s leadership continues to implement large-scale economic reform policies targeted at boosting growth through modernization of state-owned monopolies and creating a supportive climate for private and foreign direct investment. During the reporting period, policy priorities were focused on improving Uzbekistan’s investment attractiveness including through adoption of a new currency regulation law to guarantee freedom of current cross-border and capital movement transactions; a new law on investment activities to guarantee foreign investors’ rights; and, a new tax code featuring lower and more equitable tax rates and simplified reporting requirements.
The policy of liberalization reforms, initiated by the government in 2016, is paying off: the total volume of foreign direct investment (FDI) attracted to Uzbekistan has grown from about $1.6 billion in 2018 to $4.2 billion in 2019. Uzbekistan was named as one of the top 20 “global improvers” in the World Bank’s 2020 Doing Business report, and the 2019 Country of the Year award winner by The Economist magazine. Over 10,600 companies with foreign capital were operating in Uzbekistan as of February 1, 2020; approximately 3,000 of them were created in 2019. FDIs and private investments are critical for sustaining Uzbekistan’s economic development; however, the government continues to channel investments into export-oriented and import substituting industries. According to Uzbekistan’s official statistics, the total volume of capital investments exceeded $21.5 billion in 2019. Financing sources included $4.2 billion FDIs and $5.6 billion as foreign loans. Major industries include mining, oil, and gas extractives, electricity generation, construction, agriculture, textiles, transportation, metallurgy, non-metal/non-mineral production, and chemical production.
In November 2019, President Mirziyoyev created the Council of Foreign Investors, a body where executives and representatives of foreign companies, banks, investment companies, international financial institutions and foreign government financial organizations will be given the opportunity to advise the GOU on measures it could take to improve the investment climate. In February 2019, Uzbekistan for the first time placed five- and ten-year Eurobonds worth $1 billion in the London Stock Exchange. This success opened the country to foreign fixed income investors and set a benchmark for future foreign bond issuances by Uzbekistan-based companies.
At the same time, the government’s poor progress in reducing the domination of state-owned monopolies in the economy, continued non-transparent public procurement practices, and cases of government agencies’ and state-owned enterprises’ inconsistent compliance with contract commitments have negatively impacted Uzbekistan’s investment climate. Furthermore, private businesses have expressed concerns about local government development policies failing to adhere to recently adopted legislation on the protection of private property. Small businesses have reported expropriation of their property in favor of well-connected companies or development projects supported by regional or municipal authorities. Enforcement of legislation on protection of intellectual property rights also remains insufficient.
Prior to 2017, the government focused on investors capable of providing technology transfers and employment in local industries, and had not prioritized attraction of portfolio investments. In 2017, the GOU announced its plans to improve the capital market and use stock market instruments to meet its economic development goals. The government created a new Agency for the Development of Capital Markets (CMDA) in January 2019 as the institution responsible for development and regulation of the securities market and protection of the rights and legitimate interests of investors in securities market. CMDA is currently implementing a capital markets development strategy for 2020-2025. According to CMDA officials, the goal of the strategy is to make the national capital market big enough to attract not only institutional investors, but to become a key driver of domestic wealth creation. The U.S. Government is supporting this strategy through a technical assistance program led by the Department of the Treasury.
Uzbekistan has its own stock market, which supports trades through the Republican Stock Exchange “Tashkent,” Uzbekistan’s main securities trading platform and only corporate securities exchange (https://www.uzse.uz). The stock exchange mainly hosts equity and secondary market transactions with shares of state-owned enterprises. In most cases, government agencies determine who can buy and sell shares and at what prices, and it is often impossible to locate accurate financial reports for traded companies.
The GOU is continuing to liberalize banking sector regulations to facilitate free flows of financial resources into the market. The law adopted on March 20, 2019 (ZRU-531) has considerably simplified repatriation of capital invested in Uzbekistan’s industrial assets, securities and stock market profits. According to the new rules, foreign investors that have resident entities in Uzbekistan can convert their dividends and other incomes to foreign currencies and transfer them to their accounts in foreign banks. Non-resident entities that buy and sell shares of local companies can open bank accounts in Uzbekistan to accumulate their revenues.
Uzbekistan formally accepted IMF Article VIII in October 2003, but due to excessive protectionist measures of the government, businesses had limited access to foreign currency, which stimulated the grey economy and the creation of multiple exchange rate systems. Effective September 5, 2017, the GOU eliminated the difference between the artificially low official rate and the black-market exchange rate and allowed unlimited non-cash foreign exchange transactions for businesses. The Law on Currency Regulation (ZRU-573), which fully liberalized currency operations, current cross-border and capital movement transactions, received final approved on October 22, 2019.
Under the law, foreign investors and private sector businesses can have access to various credit instruments on the local market, but the still-overregulated financial system yields unreliable credit terms. Access to foreign banks is limited and is usually only granted through their joint ventures with local banks. Commercial banks, to a limited degree, can use credit lines from international financial institutions to finance small and medium sized businesses.
Money and Banking System
As of March 2020, 30 commercial banks operate in Uzbekistan. Five commercial banks are state-owned, thirteen banks are registered as joint-stock financial organizations (eight of which are partly state-owned), six banks have foreign capital, and six banks are private. Commercial banks have 854 branches and about 1,100 retail offices throughout the country. State-owned banks hold 87% of banking sector capital and 84% of banking sector assets, leaving privately owned banks as relatively small niche players. The nonbanking sector is represented by 56 microcredit organizations and 61 pawn shops.
According to assessments of international rating agencies, including Fitch and Moody’s, the banking sector of Uzbekistan is stable and poses limited near-term risks, primarily due to high concentration and domination of the public sector, which controls over 80% of assets in the banking system. The average rate of capital adequacy within the system is 23.4%, and the current liquidity rate is 98.1%. The growing volume of state-led investments in the economy supports the stability of larger commercial banks, which often operate as agents of the government in implementing its development strategy. Privately owned commercial banks are relatively small niche players. The government and the Central Bank of Uzbekistan (CBU) still closely monitor commercial banks.
Official information on non-performing assets is not publicly available. According to the IMF’s 2019 Article IV Consultation report, the share of nonperforming loans out of total gross loans is about 1.3-1.4%. A majority of Uzbekistan’s commercial banks have earned “stable” ratings from international rating agencies.
In February 2020, the banking sector’s capitalization was about $5.5 billion, and the value of total bank assets in the whole country was equivalent to $28.9 billion. The three largest state-owned banks – the National Bank of Uzbekistan, Asaka Bank, and Uzpromstroybank – hold 50% of the banking sector’s capital ($2.7 billion) and 49.1% of the assets ($14.4 billion).
Uzbekistan maintains a central bank system. The Central Bank of Uzbekistan (CBU) is the state issuing and reserve bank and central monetary authority. The bank is accountable to the Supreme Council of Uzbekistan and is independent of the executive bodies (the bank’s organization chart is available here: http://www.cbu.uz/en/).
In general, any banking activity in Uzbekistan is subject to licensing and regulation by the Central Bank of Uzbekistan. Foreign banks often feel pressured to establish joint ventures with local financial institutions. Currently there are six small banks with foreign capital operating in the market, and six foreign banks have accredited representative offices in Uzbekistan, but do not provide direct services to local businesses and individuals. Information about the status of Uzbekistan’s correspondent banking relationships is not publicly available.
Foreigners and foreign investors can establish bank accounts in local banks without restrictions. They also have access to local credit, although the terms and interest rates do not represent a competitive or realistic source of financing.
Foreign Exchange and Remittances
Foreign Exchange
Uzbekistan adopted Article VIII of the IMF’s Articles of Agreement in October 2003, but full implementation of its obligations under this article began only in September 2017. In accordance with new legislation (ZRU 531 of March 2019 and ZRU-573 of October 2019), all businesses, including foreign investors, are guaranteed the ability to convert their dividends and other incomes in local currencies to foreign currencies and transfer to foreign bank accounts for current cross-border, dividend payments, or capital repatriation transactions without limitations, provided they have paid all taxes and other financial obligations in compliance with local legislation. Uzbekistan authorities may stop the repatriation of a foreign investor’s funds in cases of insolvency and bankruptcy, criminal acts by the foreign investor, or when so directed by arbitration or a court decision.
The exchange rate is determined by the CBU, which insists that it is based on free market forces (9,514 soum per U.S dollar as of March 3, 2020). After the almost 50% devaluation of the national currency in September 2017, the exchange rate has been relatively stable, supported by strong FX reserves ($29.4 billion by February 1, 2020). The CBU reported it had made $3.6 billion interventions in 2019 in the forex market to support the local currency.
Remittance Policies
President Mirziyoyev launched foreign exchange liberalization reform on September 2017 by issuing a decree “On Priority Measures for Liberalization of Monetary Policy.” The Law on Currency Regulation (ZRU-573), adopted on October 22, 2019, has liberalized currency exchange operations, current cross-border, and capital movement transactions. Business entities can purchase foreign currency in commercial banks without restrictions for current international transactions, including import of goods, works and services, repatriation of profits, repayment of loans, payment of travel expenses and other transfers of a non-trade nature.
Banking regulations mandate that the currency conversion process should take no longer than one week. In 2019 businesses reported that they observed no delays with conversion and remittance of their investment returns, including dividends; return on investment, interest and principal on private foreign debt; lease payments; royalties; and management fees.
Sovereign Wealth Funds
The Fund for Reconstruction and Development of Uzbekistan (UFRD) serves as a sovereign wealth fund. Uzbekistan’s Cabinet of Ministers, Ministry of Finance, and the five largest state-owned banks were instrumental in establishing the UFRD, and all those institutions have membership on its Board of Directors.
The fund does not follow the voluntary code of good practices known as the Santiago Principles, and Uzbekistan does not participate in the IMF-hosted International Working Group on sovereign wealth funds. The GOU established the UFRD in 2006, using it to sterilize and accumulate foreign exchange revenues, but officially the goal of the UFRD is to provide government-guaranteed loans and equity investments to strategic sectors of the domestic economy.
The UFRD does not invest, but instead provides debt financing to SOEs for modernization and technical upgrade projects in sectors that are strategically important for Uzbekistan’s economy. All UFRD loans require government approval.
9. Corruption
Uzbekistan’s legislation and Criminal Code both prohibit corruption. President Mirziyoyev has declared combatting widespread corruption one of his top priorities. On January 3, 2017, he approved the law “On Combating Corruption.” The law is intended to raise the efficiency of anti-corruption measures through the consolidation of efforts of government bodies and civil society in preventing and combating cases of corruption, attempted corruption, and conflict of interest, ensuring punishment for such crimes. On May 27, 2019, Presidential Decree UP-5729 launched the State Anti-Corruption Program for 2019-2021 and created the Interagency Commission for Combating Corruption. The program is focused on strengthening the independence of the judiciary system, developing a fair and transparent public service system requiring civil servants to declare their incomes and establishing mechanisms to prevent conflicts of interest, facilitating civil society and media participation in combating corruption, and other measures.
Formally, the anti-corruption legislation extends to all government officials, their family members, and members of all political parties of the country. However, Uzbekistan has not yet introduced asset declaration requirements for government officials or their family members, although legislation with such a requirement was drafted in October 2019 and is expected to be enforced from January 2020 onwards. Currently, the Prosecutor General’s Office of Uzbekistan (PGO) is the main government arm tasked with fighting corruption. Since Mirziyoyev took office in September 2016, the government has prosecuted a number of officials under anti-corruption laws, and punishment has varied from a fine to imprisonment with confiscation of property. According to official statistics, 1,200 corruption-related crimes were registered in 2018 and 1,071 in 2019.
The process of awarding GOU contracts continues to lack transparency. According to a presidential decree issued on January 10, 2019, all government procurements must now go through a clearance process within the Ministry of Economy. Procurement contracts involving public funds or performed by state enterprises with values of over $100,000 need additional clearances from other relevant government agencies.
The law “On Combating Corruption” prescribes a range of measures for preventing corruption, including through raising public awareness and introduction of transparent rules for public-private interactions. The law, however, does not specifically encourage companies to establish relevant internal codes of conduct.
Currently only a few local companies created by or with foreign investors have effective internal ethics programs.
Uzbekistan is a member of the OECD Anti-Corruption Network (ACN) for Eastern Europe and Central Asia. One of the latest OECD reports on anti-corruption reforms in Uzbekistan (March 21, 2019) says that, although Uzbekistan has already undertaken a number of key anti-corruption reforms, the GOU now needs to systematize its anti-corruption policy by making it strategic in nature. Uzbekistan is ranked 153 out of 180 rated countries in Transparency International’s 2019 Corruption Perceptions Index.
There are very few officially registered local NGOs available to investigate corruption cases and Embassy Tashkent is not aware of any genuine NGOs that are presently involved in investigating corruption. The law “On Combating Corruption” encourages more active involvement of NGOs and civil society in investigation and prevention of crimes related with corruption.
U.S. businesses have cited corruption and lack of transparency in bureaucratic processes, including public procurements and licensing, as among the main obstacles to foreign direct investment in Uzbekistan.
Resources to Report Corruption
The government agencies that are responsible for combating corruption are the Prosecutor General’s Office and the Ministry of Justice. Currently, no international or local nongovernmental watchdog organizations have permission to monitor corruption in Uzbekistan.
Contact information for the office of Uzbekistan’s Prosecutor General:
Uzbekistan does not have a history of politically motivated violence or civil disturbance. There have not been any examples of damage to projects or installations over the past ten years. Uzbekistani authorities maintain a high level of alert and aggressive security measures to thwart terrorist attacks. The environment in Uzbekistan is not growing increasingly politicized or insecure.