HomeReportsInvestment Climate Statements...Custom Report - 5c00cb1019 hide Investment Climate Statements Custom Report Excerpts: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan Bureau of Economic and Business Affairs Sort by Country Sort by Section In this section / Kazakhstan Executive Summary 1. Openness To, and Restrictions Upon, Foreign Investment 2. Bilateral Investment Agreements and Taxation Treaties 3. Legal Regime 4. Industrial Policies 5. Protection of Property Rights 6. Financial Sector 7. State-Owned Enterprises 8. Responsible Business Conduct 9. Corruption 10. Political and Security Environment 11. Labor Policies and Practices 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 14. Contact for More Information Kyrgyz Republic Executive Summary 1. Openness To, and Restrictions Upon, Foreign Investment 3. Legal Regime 4. Industrial Policies 5. Protection of Property Rights 6. Financial Sector 7. State-Owned Enterprises 8. Responsible Business Conduct 9. Corruption 10. Political and Security Environment 11. Labor Policies and Practices 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 14. Contact for More Information Tajikistan Executive Summary 1. Openness To, and Restrictions Upon, Foreign Investment 3. Legal Regime 4. Industrial Policies 5. Protection of Property Rights 6. Financial Sector 7. State-Owned Enterprises 8. Responsible Business Conduct 9. Corruption 10. Political and Security Environment 11. Labor Policies and Practices 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 14. Contact for More Information Turkmenistan Executive Summary 1. Openness To, and Restrictions Upon, Foreign Investment 2. Bilateral Investment Agreements and Taxation Treaties 3. Legal Regime 4. Industrial Policies 5. Protection of Property Rights 6. Financial Sector 7. State-Owned Enterprises 8. Responsible Business Conduct 9. Corruption 10. Political and Security Environment 11. Labor Policies and Practices 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 14. Contact for More Information Uzbekistan Executive Summary 1. Openness To, and Restrictions Upon, Foreign Investment 2. Bilateral Investment Agreements and Taxation Treaties 3. Legal Regime 4. Industrial Policies 5. Protection of Property Rights 6. Financial Sector 7. State-Owned Enterprises 8. Responsible Business Conduct 9. Corruption 10. Political and Security Environment 11. Labor Policies and Practices 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 14. Contact for More Information Kazakhstan Executive Summary 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 Business Report. 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. Table 1 : Key Metrics and Rankings Measure Year Index/Rank Website Address TI Corruption Perceptions Index 2019 113 of 180 https://www.transparency.org/cpi2019 World Bank’s Doing Business Report “Ease of Doing Business” 2020 25 of 190 http://www.doingbusiness.org/rankings Global Innovation Index 2019 79 of 129 https://www.globalinnovationindex.org/ U.S. FDI in partner country (M USD, stock positions) 2012 $12,512 http://apps.bea.gov/ international/factsheet/ World Bank GNI per capita 2018 $8,070 https://data.worldbank.org/ indicator/ny.gnp.pcap.cd 1. Openness To, and Restrictions Upon, Foreign Investment Policies Towards Foreign Direct Investment Kazakhstan has attracted significant foreign investment since independence. According to official statistics, as of January 1, 2020, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 161.2 billion, primarily in the oil and gas sector. International financial institutions consider Kazakhstan to be an attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan. In June 2017 Kazakhstan joined the OECD Declaration on International Investment and Multinational Enterprises and became an associate member of the OECD Investment Committee. In its Strategic Plan of Development for the current period (through 2025), the government stated that raising the living standards of Kazakhstan’s citizens to the level of OECD countries is one of the plan’s strategic goals. In August 2017 the government adopted a new 2018-2022 National Investment Strategy, developed in cooperation with the World Bank, which outlined new coordinating measures on investment climate improvements, privatization plans, and economic diversification policies. The strategy aims to increase annual FDI inflows as a percentage of GDP from 13.2 percent in 2018 to 19 percent in 2022. The government of Kazakhstan has incrementally improved the business climate for foreign investors, and national legislation does not discriminate against foreign investors. Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment. Over the last couple of years, the government has undertaken a number of structural changes aimed at improving how the government attracts foreign investment. In April 2019 the Prime Minister announced the creation of the Coordination Council for Attracting Foreign Investment, which the Prime Minister will chair. He will also act as Investment Ombudsman. In December 2018 the Investment Committee was transferred to the Ministry of Foreign Affairs, which is now in charge of attracting and facilitating activities of foreign investors. The Investment Committee at the Ministry of Foreign Affairs takes responsibility for investment climate policy issues and works with potential and current investors, while the Ministry of National Economy interacts on investment climate matters with international organizations like the OECD, WTO, and the United Nations Conference on Trade and Development (UNCTAD). Each regional municipality designates a representative to work with investors, and Kazakhstani foreign diplomatic missions are charged with attracting foreign investments. Specially designated front offices in Kazakhstan’s overseas embassies promote Kazakhstan as a destination for foreign investment. In addition, the Astana International Financial Center (AIFC, see details in Section 3) operates as a regional investment hub, with tax, legal, and other benefits. In 2019, the government founded Kazakhstan’s Direct Investment Fund, which is located at the AIFC and expected to attract private investments for diversifying Kazakhstan’s economy. The state company KazakhInvest is also located in the AIFC and offers investors a single-window for government services. The government maintains a dialogue with foreign investors through the Foreign Investors’ Council chaired by the President, as well as through the Council for Improving the Investment Climate chaired by the Prime Minister. The COVID-19 pandemic and unprecedented low oil prices changed the country’s economic development plans. In March 2020, the government approved a USD 13.7 billion stimulus package, mostly oriented at income smoothing, supporting local businesses and implementing an import-substitution policy. Limits on Foreign Control and Right to Private Ownership and Establishment By law, foreign and domestic private firms may establish and own business enterprises. While no sectors of the economy are legally closed to investors, restrictions on foreign ownership exist, including a 20 percent ceiling on foreign ownership of media outlets, a 49 percent limit on domestic and international air transportation services, and a 49 percent limit on telecommunication services. The December 2017 Code on Subsoil and Subsoil Use (the Code) mandates the share of the national company Kazatomprom be no less than 51 percent in new uranium producing joint ventures. As a result of its WTO accession, Kazakhstan formally removed this limit for telecommunication companies, except for the country’s main telecommunications operator, KazakhTeleCom. Still, to acquire more than 49 percent of shares in a telecommunication company, foreign investors must obtain a government waiver. No constraints limit the participation of foreign capital in the banking and insurance sectors. Starting from January 2020 the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s WTO commitments. In addition, foreign citizens and companies are restricted from participating in private security businesses. The law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land. Foreign investors have complained about the irregular application of laws and regulations and interpret such behavior as efforts to extract bribes. The enforcement process, widely viewed as opaque and arbitrary, is not publicly transparent. Some investors report harassment by the tax authorities via unannounced audits, inspections, and other methods. The authorities have used criminal charges in civil disputes as a pressure tactic. Foreign Investment in the Energy & Mining Industries Despite substantial investment in Kazakhstan’s energy sector, companies remain concerned about the risk of the government legislating or otherwise advocating for preferences for domestic companies, and creating mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions. Recent developments range from a major reduction to a full annulment of work permits for some categories of foreign workforce. (For more details, please see Part 5, Performance and Data Localization Requirements.) In April 2008 Kazakhstan introduced a customs duty on crude oil and gas condensate exports. In general, oil-related revenue in Kazakhstan goes to the National Fund, a sovereign wealth fund that is financed by direct taxes paid by petroleum industry companies, other fees paid by the oil industry, revenues from privatization of mining and manufacturing assets and from the disposal of agricultural land. In contrast, the customs duty on crude oil and gas condensate exports is an indirect tax that goes to the government’s budget. Companies that pay taxes on mineral and crude oil exports are exempt from that export duty. The government adopted a 2016 resolution that pegged the export customs duty to global oil prices – as the global oil price drops and approaches USD 25 per barrel, the duty rate approaches zero. The Code defines “strategic deposits and areas” and restricts the government’s preemptive right to acquire exploration and production contracts to these areas, which helps to reduce significantly the approvals required for non-strategic objects. The government approves and publishes the list of strategic deposits on its website. The list has not changed since its approval on June 28, 2018: http://www.government.kz/ru/postanovleniya/postanovleniya-pravitelstva-rk-za-iyun-2018-goda/1015356-ob-utverzhdenii-perechnya-strategicheskikh-uchastkov-nedr.html. The Code entitles the government to terminate a contract unilaterally “if actions of a subsoil user with a strategic deposit result in changes to Kazakhstan’s economic interests in a manner that threatens national security.” The Article does not define “economic interests.” The Code, if properly implemented, appears to be a step forward in improving the investment climate, including the streamlining of procedures to obtain exploration licenses and to convert exploration licenses into production licenses. The Code, however, appears to retain burdensome government oversight over mining companies’ operations. The Ministry of Energy announced in April 2018 that Kazakhstan is ready to launch a CO2 emissions trading system. It is unclear, however, when actual quota trading will begin. In January 2018, the government adopted a National Allocation Plan for 2018-2020, and in February 2018 the Ministry of Energy announced the creation of an online CO2 emissions reporting and monitoring system. The system is not operational, and it is likely to be launched after the new Environmental Code is passed into law; the draft Code is currently in the lower chamber of parliament. Some companies have expressed concern that Kazakhstan’s trading system will suffer from insufficient liquidity, particularly as power consumption and oil and commodity production levels increase. The successor of the Energy Ministry for environmental issues, the Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019. Other Investment Policy Reviews Kazakhstan announced in 2011 its desire to join the Organization for Economic Co-operation and Development. To meet OECD requirements, the government will need to continue to reform its institutions and amend its investment legislation. The OECD presented its second Investment Policy Review of Kazakhstan in June 2017, available at: https://www.oecd.org/countries/kazakhstan/oecd-investment-policy-reviews-kazakhstan-2017-9789264269606-en.htm The OECD review recommended Kazakhstan undertake corporate governance reforms at state-owned enterprises (SOEs), implement a more efficient tax system, further liberalize its trade policy, and introduce responsible business conduct principles and standards. OECD also said it is carefully monitoring the country’s privatization program that aims to decrease the SOE share in the economy to 15 percent of GDP by 2020. In 2019 the OECD and the government launched a two-year project on improving the legal environment for business in Kazakhstan. Business Facilitation The 2020 World Bank’s Doing Business Report ranked Kazakhstan 25 out of 190 countries in the “Ease of Doing Business” category, and 22 out of 190 in the “Starting a Business” category. The report noted Kazakhstan made starting a business easier by registering companies for value added tax at the time of incorporation. The report noted Kazakhstan’s progress in the categories of dealing with construction permits, registering property, getting credit, and resolving insolvency. Online registration of any business is possible through the website https://egov.kz/cms/en In addition to a standard package of documents required for local businesses, non-residents should submit electronic copies of their IDs and any certification of their companies from the country of origin. Both documents should be translated and notarized. Foreign investors also have access to a “single window” service, which simplifies many business procedures. Investors may learn more about these services here: https://invest.gov.kz/invest-guide/business-starting/registration/ . According to the World Bank, it takes four procedures and five days to establish a foreign-owned limited liability company (LLC) in Almaty. This is faster than the average for Eastern Europe and Central Asia and OECD high income countries. A foreign-owned company registered in Kazakhstan is considered a domestic company for Kazakhstan currency regulation purposes. Under the Law on Currency Regulation and Currency Control, residents may open bank accounts in foreign currency in Kazakhstani banks without any restrictions. In 2019-2020, the government undertook some measures facilitating business operations for investors. The General Prosecutor’s Office adopted an order in January 2020 that would decriminalize the tax errors of prompt taxpayers. In July 2019 the government adopted the Road Map for further attraction of foreign investments. In order to facilitate the work of foreign investors, the government recommended using the law of the Astana International Financial Center (AIFC) as the applicable law for investment contracts with Kazakhstan and planned other measures to showcase the AIFC as an investment hub, including tax preferences, liberalization of visa and migration rules, and the creation of additional international transportation and media links. Outward Investment The government neither incentivizes nor restricts outward investment. 2. Bilateral Investment Agreements and Taxation Treaties The United States-Kazakhstan Bilateral Investment Treaty came into force in 1994, and the United States-Kazakhstan Treaty on the Avoidance of Double Taxation came into force in 1996. Since independence, Kazakhstan has signed treaties on the avoidance of double taxation with 53 countries at: http://kgd.gov.kz/ru/content/konvencii-ob-izbezhanii-dvoynogo-nalogooblozheniya-i-predotvrashchenii-ukloneniya-ot , and bilateral investment protection agreements with 47 at: http://www.mfa.kz/ru/content-view/soglasenia-o-poosrenii-i-vzaimnoj-zasite-investicij-2 Kazakhstan is also party to the Eurasian Economic Union Mutual Investment Protection Agreement, which came into force in 2016. Some foreign investors allege Kazakhstani tax authorities are reluctant to refer double taxation questions to the appropriate resolution bodies. Among other tax issues that concern U.S. investors is the criminalization of tax errors and VAT refund issues. Eurasian Economic Integration and WTO Kazakhstan joined the WTO in November 2015. Kazakhstan entered into a Customs Union with Russia and Belarus on July 1, 2010 and was a founding member of the Eurasian Economic Union (EAEU) created on May 29, 2014 among Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia. The EAEU is governed by the Eurasian Economic Commission, a supra-national body headquartered in Moscow, and is expected to integrate further the economies of its member states, and to provide for the free movement of services, capital, and labor within their common territory. Kazakhstan’s trade policy has been heavily influenced by EAEU regulations. While Kazakhstan asserts the EAEU agreements comply with WTO standards, since joining the Customs Union Kazakhstan doubled its average import tariff and introduced annual tariff-rate quotas (TRQs) on poultry, beef, and pork. Per its WTO commitments, Kazakhstan will lower 3,512 import tariff rates to an average of 6.1 percent by December 2020. As a part of this commitment, Kazakhstan applies a lower-than-EAEU tariff rate on food products, automobiles, airplanes, railway wagons, lumber, alcoholic beverages, pharmaceuticals, freezers, and jewelry. After December 2020, Kazakhstan will have a three-year break prior to starting tariff adjustment negotiations with its EAEU partners. Kazakhstan is a signatory to the Free Trade Agreement with CIS countries, and as a member of the EAEU, is party to the EAEU-Vietnam Free Trade Agreement and the Interim Agreement on formation of a free trade zone with Iran. 3. Legal Regime Transparency of the Regulatory System Kazakhstani law sets out basic principles for fostering competition on a non-discriminatory basis. Kazakhstan is a unitary state, and national legislation accepted by the Parliament and President are equally effective for all regions of the country. The government, ministries, and local executive administrations in the regions (“Akimats”) issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the EAEU, and decrees of the Eurasian Economic Commission are mandatory and have preemptive force over national legislation. Publicly-listed companies indicate that they adhere to international financial reporting standards, but accounting and valuation practices are not always consistent with international best practices. The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz under the Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications. Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains opaque. All laws and decrees of the President and the government are available in Kazakh and Russian on the website of the Ministry of Justice: http://adilet.zan.kz/rus . Implementation and interpretation of commercial legislation is reported to sometimes create confusion among foreign and domestic businesses alike. In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant problems for foreign investors. After active intervention by the international investment community through the Prime Minister’s Council for Improving the Investment Climate, the government canceled the most onerous rules. The non-transparent application of laws remains a major obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways for the sake of their own interests. Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments. Penalties are often assessed for periods prior to the change in policy. For example, foreign companies report that local and national authorities arbitrarily impose high environmental fines, saying the fines are assessed to generate revenue for local and national authorities rather than for environmental protection. Government officials have acknowledged the system of environmental fines requires reform. In response, the government submitted a draft of a new Environmental Code (Eco Code) to Parliament, where it is currently under review in the lower chamber. Oil companies complain that the emission payment rates for pollutants when emitted from gas flaring are at least 20 times higher than when the same pollutants are emitted from other stationary sources. In February 2020, the Ecology Minister reported that fines for unauthorized emissions of hazardous substances would be raised tenfold. In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies. Initial implementation of this plan has already improved accountability. For example, in addition to the Audit Committee that monitors government agencies’ performance, ministers and regional governors now hold annual meetings with local communities. President Tokayev, elected in June 2019, has affirmed his commitment to the reforms initiated by former President Nazarbayev. Public financial reporting, including debt obligations, explicit liabilities, are published by the Ministry of Finance on their site: http://www.minfin.gov.kz/ . However, authorities have indicated that contingent liabilities, such as exposures to state-owned enterprises, their cross -holdings, and exposures to banks, are not fully captured there. International Regulatory Considerations Kazakhstan is part of the Eurasian Economic Union, and EAEU regulations and decisions supersede the national regulatory system. In its economic policy Kazakhstan declares its adherence to both WTO and OECD standards. Kazakhstan became a member of the WTO in 2015. It notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted). Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements. Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments. By the end of 2018, Kazakhstan notified the WTO Trade Facilitation Committee that it has fulfilled its implementation commitments for Category A at 57 percent, for Category B at 19 percent, and for Category C at 24 percent. Legal System and Judicial Independence Kazakhstan’s Civil Code establishes general commercial and contract law principles. Under the constitution, the judicial system is independent of the executive branch, although the government interferes in judiciary matters. According to Freedom House’s Nations in Transit report for 2018, the executive branch dominates de facto the judicial branch. Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system. Judicial outcomes are perceived as subject to political influence and interference. Regulations or enforcement actions can be appealed and adjudicated in the national court system. Monetary judgments are assessed in the domestic currency. Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts will enforce arbitration clauses in contracts. Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases. The Astana International Financial Center, which opened in July 2018, includes its own arbitration center and court based on British Common Law and is independent of the Kazakhstani judiciary. The court is led by former Chief Justice of England and Wales, Lord Harry Woolf, and several other Commonwealth judges have been appointed. The government advises foreign investors to use the capacities of the AIFC arbitration center and the AIFC court more actively. Provisions on using the AIFC law as applicable law are recommended for model investment contracts between a foreign investor and the government. Laws and Regulations on Foreign Direct Investment The following legislation affects foreign investment in Kazakhstan: the Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; and the Law on Currency Regulation and Currency Control. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. Inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, have been reported to create significant obstacles to business in Kazakhstan. The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs. The Code reinstates a single investment regime for domestic and foreign investors, in principal, codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in Part 4, Industrial Policies. The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration. The government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/invest-guide/ A revised Law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the monitoring of transactions in foreign currency and facilitates the process of de-dollarization. In particular, the law will treat branches of foreign companies in Kazakhstan as residents and will enable the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK approved a list of companies that will keep their non-resident status; the majority of these companies are from extractive industries (see also Part 6, Financial Sector). The legal and regulatory framework offered by the AIFC to businesses registering on that territory differs substantially from that of Kazakhstan, although the Center is quite new, and experience is limited. A more detailed analysis of the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/ and http://www.ftseglobalmarkets.com/news/astana-international-financial-center-can-it-become-a-regional-finance-hub.html Competition and Anti-Trust Laws The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. The Committees for Regulating Natural Monopolies and Protection of Competition under the Ministry of National Economy are responsible for reviewing transactions for competition-related concerns. Expropriation and Compensation The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases, but fails to provide clear criteria for expropriation or require prompt and adequate compensation at fair market value. Post is aware of cases when owners of developed businesses had to sell their businesses to companies affiliated with high-ranking and powerful individuals. Dispute Settlement ICSID Convention and New York Convention Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the rules of the UN Commission on International Trade Law Arbitration, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan. Investor-State Dispute Settlement The government is a signatory to bilateral investment agreements with 47 countries and 1 multilateral investment agreement with EAEU partners. These agreements recognize international arbitration of investment disputes. The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994. In July 2017, a U.S. investor initiated arbitration proceedings against Kazakhstan under the BIT, accusing the government of indirectly expropriating its ownership stake to explore and develop three hydrocarbon fields. Kazakhstan does recognize arbitral awards by law. Four cases against Kazakhstan have been under review by ICSID as of March 2, 2020. In October 2018, ICSID ordered Kazakhstan to compensate a foreign company for USD 30 million in investments in oil transshipment and storage facilities. In 2015, this company appealed to ICSID for Kazakhstan’s breach of its bilateral investment treaty and Energy Charter Treaty. In March 2016, a foreign gold explorer and producer sought compensation for breaches of its BIT and the 1994 Foreign Investment Law of Kazakhstan. The Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes may be settled by negotiation, litigation or international arbitration. Investment disputes between the government and investors fall to the Nur-Sultan City Court; disputes between the government and large investors fall under the competence of a special investment panel at the Supreme Court of Kazakhstan. The Supreme Court is currently preparing changes to regulation so that any disputes between the government and investors, including large ones, will be in hands of the Nur-Sultan City Court, while the Supreme Court will be a cassational instance. A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production-sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence. To encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors. Kazakhstani law provides for government compensation for violations of contracts guaranteed by the government. Yet, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts necessary to facilitate an investment activity (e.g., the issuance of a license or granting of a land plot). The resolution of disputes arising from such cases may require litigation or arbitration. International Commercial Arbitration and Foreign Courts The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties. The Law on Arbitration defines rules and principles of domestic arbitration. As of April 2020, Kazakhstan had 17 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan. Please see: https://palata.org/about/ . The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on International Commercial Arbitration. Judgements of foreign arbitrations are recognized and enforceable under local courts. Local courts recognize and enforce court rulings of CIS countries. Judgement of other foreign state courts are recognized and enforceable by local courts when Kazakhstan has a bilateral agreement on mutual judicial assistance with the respective country or applies a principle of reciprocity. When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor. By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts. According to the European Bank for Reconstruction and Development’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and Civil Code provisions with which they are more familiar, rather than the relevant provisions of commercial legislation. Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources. Many investors therefore elect to handle investment disputes privately, in an extrajudicial way. In February 2018, a U.S. company initiated arbitration against the Kazakhstani government for failure to pay approximately USD 75 million for the return of two hydropower plants, operated under a 20-year concession agreement. In April 2018 the government responded by denying liability and seeking over USD 480 million in counterclaims. The final evidentiary hearing took place July 22-26, 2019. As of June, 2020, the parties continue to await the arbitrator’s decision. Bankruptcy Regulations Kazakhstan’s 2014 Bankruptcy and Rehabilitation Law (The Bankruptcy Law) protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions’ decisions affecting their rights. Bankruptcy is not criminalized, unless the court determines the bankruptcy premeditated. The Bankruptcy Law improves the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements. Amendments to the law accepted in 2019 introduced a number of changes. Among them are a more specific definition of premeditated bankruptcy, the requirement to prove sustained insolvency when filing a bankruptcy claim, the potential for individual entrepreneurs to apply for a rehabilitation procedure to reinstate their solvency, and an option to be liquidated without filing bankruptcy in the absence of income, property, and business operations. 4. Industrial Policies Investment Incentives The government’s primary industrial development strategies, such as the Concepts for Industrial and Innovative Development 2020-2025 and the National Investment Strategy for 2018-2022, aim to diversify the economy from its overdependence on extractive industries. The Entrepreneurial Code and Tax Code provide tax preferences, customs duty exemptions, investment subsidies, and in-kind grants as incentives for foreign and domestic investment in priority sectors. Priority sectors include agriculture, metallurgy, extraction of metallic ore, chemical and petrochemical industry, oil processing, food production, machine manufacturing, and renewable energy. Firms in priority sectors receive tax and customs duty waivers, in-kind grants, investment subsidies, and simplified procedures for work permits. The government’s preference system applies to new and existing enterprises. The duration and scope of preferences depends on the priority sector and the size of investment. All information on priority sectors and preferences is available at: https://invest.gov.kz/doing-business-here/regulated-sectors/ . The Investment Committee at the Ministry of Foreign Affairs makes decisions on each incentive on a case-by-case basis. The law also allows the government to rescind incentives, collect back payments, and revoke an investor’s operating license if an investor fails to fulfill contractual obligations. Potential investors can apply for preferences through the government’s single window portal; these are special offices for serving investors, located in the capital and at district service centers in every region of Kazakhstan. Submission for investment preferences requires a number of documents, including a comprehensive state appraisal of a proposed investment project. More information is available here: https://invest.gov.kz/invest-guide/ and at https://irm.invest.gov.kz/en/support/ A governmental guarantee or joint government financing are normally used for large infrastructure projects. To facilitate the work of foreign investors, especially in targeted, non-extractive industries, the government has approved visa-free travel for citizens of 73 countries, including the United States, Germany, Japan, United Arab Emirates, France, Italy, and Spain. Residents of these countries may stay in Kazakhstan without visas for up to 30 days. The government has temporary suspended these rules due to the COVID-19 pandemic. Since January 2019, foreigners may obtain business, tourist, and medical treatment visas to Kazakhstan online at: www.vmp.gov.kz . Electronic tourist visas are available for citizens of 117 counties; business and medical treatment visas can be issued electronically for citizens of 23 countries. This system is applicable only for visitors who have letters of invitation and enter Kazakhstan through the Nur-Sultan or Almaty airports. Businesses registered in the AIFC have a relaxed entry visa regime, allowing them to obtain entry visas upon arrival at the airport and to obtain five-year visas for employees. Starting from 2020, the government introduced a more liberal regime for visa regulation violations. Now, foreign visitors are permitted to only pay administrative fines for first and second violations. The government is currently considering a bill on changes to tax legislation and further improvement of the investment climate. The bill is expected to introduce new measures to facilitate business activity, including expanded access to investment tax credits, lowered thresholds for tax preferences for investments in the textile industry, measures designed to stimulate public-private partnership development, and procedures for non-resident foreign investors to register businesses in Kazakhstan remotely. Foreign Trade Zones/Free Ports/Trade Facilitation The Law on Special Economic Zones allows foreign companies to establish enterprises in special economic zones (SEZs), simplifies permit procedures for foreign labor, and establishes a special customs zone regime not governed by Eurasian Economic Union rules. A system of tax preferences exists for foreign and domestic enterprises engaged in prescribed economic activities in Kazakhstan’s thirteen SEZs. In April 2019, President Tokayev signed amendments which extend the rights of SEZ managing companies and set up a single center to coordinate the activities of all SEZs and industrial zones in Kazakhstan. Performance and Data Localization Requirements The government requires businesses to employ local labor and use domestic content, though the country’s WTO accession commitments provide for abolition of most local content requirements over time. In 2015, Kazakhstan adopted legislative amendments to alter existing local content requirements to meet accession requirements. Pursuant to these amendments, subsoil use contracts concluded after January 1, 2015 no longer contain local content requirements, and any local content requirements in contracts signed before 2015 will phase out on January 1, 2021. Kazakhstan’s WTO accession terms require that Kazakhstan relax limits on foreign nationals by increasing the “quota” for foreign nationals to 50 percent (from 30 percent for company executives and from 10 percent for engineering and technical personnel) by January 1, 2021. Despite these commitments, the government, particularly at the regional level, continues to advocate for international businesses to increase their use of local content. The USD 36.8 billion investment into the Tengiz oilfield by Tengizchevroil includes an agreement that 32 percent of total investment will be used to procure local content. The Ministry of Energy announced in March 2017 that foreign companies providing services for the oil and gas sector would need to create joint ventures with local companies to continue to receive contracts at the country’s largest oilfields. Although these recommendations are not legally binding, companies report feeling obliged to abide by them. Some companies reported these forced joint ventures or consortia led to the creation of domestic monopolies, rather than to the stimulation of a healthy domestic market of oil service providers. For example, the Ministry of Energy and the Karachaganak Petroleum Operating Consortium reportedly agreed that a Kazakhstani design research company would carry out at least 50 percent of the design work at the Karachaganak expansion project. The government regulates foreign labor at the macro and micro levels. Foreign workers must obtain work permits, which have historically been difficult and expensive to obtain. Amendments to the Expatriate Workforce Quota and Work Permit Rules: (a) eliminate special conditions for obtaining a work permit for foreign labor (e.g. requirements to train local personnel or create additional vacancies); (b) eliminate the requirement that companies conduct a search for candidates on the internal market prior to applying for a work permit; (c) reduce the timeframe for issuance or denial of work permit from 15 to 7 days; (d) eliminate the required permission of local authorities for the appointment of CEOs and deputies of Kazakhstani legal entities that are 100 percent owned by foreign companies; and (e) expand the list of individuals requiring no permission from local authorities (including non-Kazakhstani citizens working in national holding companies as heads of structural divisions and non-Kazakhstani citizens who are members of the board of directors of national holding companies). The Ministry of Energy, Ministry of Industry and Infrastructure Development, and Sovereign Welfare Fund Samruk-Kazyna monitor firms compliance with local content obligations, and there are various enforcement tools for companies that do not meet performance requirements. Following the June 2019 violence at Chevron-operated Tengiz oilfield that reportedly resulted from discontent with wage discrepancy between local and foreign workers with similar qualifications, the Ministry of Labor and Social Protection has sought to revisit the definition of administrative liability and administrative violation to make state control over employers with foreign workers more effective. The foreign labor quota approved by the government for 2020 reduced the number of work permits for employees of category 3 (specialists) by 37 percent and for category 4 (qualified workers) by 23 percent. The largest decreases are in administration; real estate; wholesale and retail; construction; professional, scientific and technological activities; and accommodation and catering. To replace the gap in the foreign workforce, the government is introducing an obligation to replace foreign workers with skilled Kazakhstani labor. Foreign investors may in theory participate in government and quasi-government procurement tenders, however, they should have production facilities in Kazakhstan and should go through a process of being recognized as a pre-qualified bidder. In 2019, the government enacted new procurement rules by which only pre-qualified suppliers will be allowed to bid for government contracts. A key requirement for being recognized as pre-qualified bidder is that the company’s product should be made in Kazakhstan and be added to a register of trusted products. While this requirement is applied to some selected sectors at the government procurement (e.g. construction, IT, textile), it has been practiced since 2016 for procurement at quasi-sovereign companies under the National Welfare Fund Samruk-Kazyna. In addition, the National Chamber of Entrepreneurs Atameken introduced in 2018 an industrial certificate which serves as an extra (and costly) tool to prove a company’s financial and production capabilities to participate in tenders. The industrial certificate also acts as an indirect confirmation of a company’s status as a local producer. Thus, a foreign investor who plans to bid for government and quasi-government contracts should obtain an industrial certificate. In 2019, the government introduced significant recycling fees on the importation of combines and tractors. Although major Western brands were granted a waiver for the fees, the government is expected to revisit the exception. The government has suggested that foreign producers start local production of their equipment and become eligible for preferential treatment. 5. Protection of Property Rights Real Property Private entities, both foreign and domestic, have the right to establish and own business enterprises, buy and sell business interests, and engage in all forms of commercial activity. Secured interests in property (fixed and non-fixed) are recognized under the Civil Code and the Land Code. All property and lease rights for real estate must be registered with the Ministry of Justice through its local service centers. According to the World Bank’s Doing Business Report, Kazakhstan ranks 24 out of 190 countries in ease of registering property. Under Kazakhstan’s constitution, land and other natural resources may be owned or leased by Kazakhstani citizens. The Land Code: (a) allows citizens and Kazakhstani companies to own agricultural and urban land, including commercial and non-commercial buildings, complexes, and dwellings; (b) permits foreigners to own land to build industrial and non-industrial facilities, including dwellings, with the exception of land located in border zones; (c) authorizes the government to monitor proper use of leased agricultural lands, the results of which may affect the status of land-lease contracts; (d) forbids private ownership of: land used for national defense and national security purposes, specially protected nature reserves, forests, reservoirs, glaciers, swamps, designated public areas within urban or rural settlements, except land plots occupied by private building and premises, main railways and public roads, land reserved for future national parks, subsoil use and power facilities, and social infrastructure. The government maintains the land inventory and constantly updates its electronic data base, though the inventory data is not exhaustive. The government has also set up rules for withdrawing land plots that have been improperly or never used. In 2015, the government proposed Land Code amendments that would allow foreigners to rent agricultural lands for up to 25 years. Mass protests in the spring of 2016 led the government to introduce a moratorium on these provisions until December 31, 2021. The moratorium is also effective on other related articles of the Land Code that regulate private ownership rights on agricultural lands. Intellectual Property Rights The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement. Kazakhstan was not included in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List. To facilitate its accession to the World Trade Organization (WTO) and attract foreign investment, Kazakhstan continues to improve its legal regime for protecting IPR. The Civil Code and various laws protect U.S. IPR. Kazakhstan has ratified 18 of the 24 treaties endorsed by the World Intellectual Property Organization (WIPO): http://www.wipo.int/members/en/details.jsp?country_id=97 . The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, select inventions, and integrated circuits topographies. The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that rights holders had registered their copyrighted material with Kazakhstan’s IPR Committee. Despite these efforts, U.S. companies and associated business groups have alleged that 73 percent of software used in Kazakhstan is pirated, including in government ministries, and have criticized the government’s enforcement efforts. To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation that would streamline IPR registration and enforcement. The law set up a more convenient, one-tier system of IPR registration and provided rights holders the opportunity for pre-trial dispute settlement through the Appeals Council at the Ministry of Justice. In addition, the law included IPR protection as one of the government procurement principles that should be strictly followed by government organizations. The Ministry of Justice is working with the World Bank on developing new IPR legislation based on OECD norms, including patent protection of IT products. Kazakhstani authorities conduct nationwide campaigns called “Counterfeit”, “Hi-Tech” and “Anti-Fraud” that are aimed at detecting and ceasing IPR infringements and increasing public awareness about IP issues. The Ministry of Justice and law enforcement agencies regularly report the results of their inspections. In 2019, they conducted 276 inspections and initiated 236 cases on violations of trade mark use, resulting in USD 32,900 in penalties. In addition, authorities reportedly seized over 44,000 units of counterfeit goods worth around USD 52,570. Customs officials seized counterfeited goods at border crossing worth around USD 14.4 million. IPR violations are prosecuted regularly. The Ministry of Internal Affairs reported 31 criminal copyright violations in 2019. Of these 31 cases, three cases were closed, five were resolved by the conciliation of parties, and the rest remain in litigation. Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain about inadequate IPR protection. Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement. 6. Financial Sector Capital Markets and Portfolio Investment 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. 7. State-Owned Enterprises According to the Ministry of Finance, as of January 1, 2020, the government owns 3,661 state-owned enterprises (SOEs), including all forms of SOEs from small veterinary inspection offices, departments on anti-monopoly policy or hospitals in regions to large national companies, controlling energy, transport, agricultural finance and product development. In 2019, President Tokayev introduced a moratorium on establishing new parastatal companies that will be effective until the end of 2021. A bill on improving the business climate approved by the Majilis, the lower Chamber of Parliament, in April 2020 makes it more difficult to establish new parastatal companies. Despite these positive developments, the share of SOEs in the economy is still large. According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; their net income was approximately USD 2 billion. The preferential status of parastatal companies remains unchanged; parastatals enjoy greater access to subsidies and government support. The lists of SOEs is available at: http://www.minfin.gov.kz/irj/portal/anonymous?NavigationTarget=ROLES://portal_content/mf/kz.ecc.roles/kz.ecc.anonymous/kz.ecc.anonymous/kz.ecc.anonym_activities/activities/statistics_fldr The National Welfare Fund Samruk-Kazyna (SK) is Kazakhstan’s largest national holding company, and manages key SOEs in the oil and gas, energy, mining, transportation, and communication sectors. At the end of 2018, SK had 317 subsidiaries and employed around 300,000 people. By some estimates, SK controls around half of Kazakhstan’s economy, and is the nation’s largest buyer of goods and services. In 2018, SK reported USD 74.3 billion in assets and USD 3.3 billion in consolidated net profit. Created in 2008, SK’s official purpose is to facilitate economic diversification and to increase effective corporate governance. In 2018, First President Nazarbayev approved SK’s new strategy, which declared the effective management of its companies, restructuring and diversification of assets and investment projects, and compliance with the principles of sustainable development as its priority goals. To follow this new strategy, early in 2020, SK removed the Prime Minister from the Board and elected four independent directors, one of which became the Chairman of the Board. Kazakhstani government participation in the Board is limited to three individuals: the Aide to the President, the Minister of National Economy and the CEO of Samruk-Kazyna. SK Portfolio companies are required to have corporate governance standards and independent boards. Despite these moves, the government maintains significant influence in SK. First President Nazarbayev is the life-long Chairman of the Managing Council of SK, and can make decisions on SK activity. SK has special rights not afforded to other companies, such as the ability to conclude large transactions among members of its holding companies without public notification. SK has the pre-emptive right to buy strategic facilities and bankrupt assets, and is exempt from government procurement procedures. Critically, the government can transfer state-owned property to SK, easing the transfer of state property to private owners. More information is available at http://sk.kz/ . In addition to SK, the government created the national managing holding company Baiterek in 2013 to provide financial and investment support to non-extractive industries, drive economic diversification, and improve corporate governance in government subsidiaries. Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank, the National Mortgage Company, the National Agency for Technological Development, the Distressed Asset Fund, and other financial and development institutions. Unlike SK, the Prime Minister remains the Chairman of the Board, assisted by several cabinet ministers and independent directors. In 2019, Baiterek had USD 13.8 billion in assets and earned USD 104.5 million in net profit. At the end of 2018, Baiterek held a 48 percent share of the country’s market of long-term crediting of the non-extractive sectors. Please see https://www.baiterek.gov.kz/en Other SOEs include KazAgro, which manages state agricultural holdings such as the state wheat purchasing agent National Food Contract Corporation, farm equipment subsidy provider KazAgroFinance, and the Agrarian Credit Corporation, an agricultural insurance company (http://www.kazagro.kz/ ). The national holding company Zerde is charged with creating modern information and communication infrastructure, using new technologies, and stimulating investments in the communication sector (http://zerde.gov.kz/ ). Officially, private enterprises compete with public enterprises under the same terms and conditions. In some cases, SOEs enjoy better access to natural resources, credit, and licenses than private entities. In its 2017 Investment Review, the OECD recommended Kazakhstani authorities identify new ways to ensure that all corporate governance standards applicable to private companies apply to SOEs. Samruk-Kazyna adopted a new Corporate Governance Code in 2015. The Code, which applies to all SK subsidiaries, specified the role of the government as ultimate shareholder, underlined the role of the Board of directors and risk management, and called for transparency and accountability. Privatization Program As part of its overall plan to reduce the share of Kazakhstan’s SOEs to the OECD average of 15 percent of the economy, the government is conducting a large-scale privatization campaign. By law and in practice, foreign investors may participate in privatization projects. The public bidding process is established in law. Government reports on this campaign are available at: https://privatization.gosreestr.kz/ As of April 2020, 499 out of 873 organizations planned for privatization have been sold for 315.8 billion tenge, or USD 734.5 million. The government sells small, state-owned and municipal enterprises through electronic auctions. SK plans to offer institutional investors non-controlling shares in following national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors: state oil company KazMunayGas, uranium mining company KazAtomProm, national airline Air Astana, national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk, and Qazaq Air. Samruk-Kazyna sold 15 percent of its stake in KazAtomProm in a dual-listed IPO on the London Exchange and the Astana International Stock Exchange in 2018. Information on privatization of SK assets is available here: https://sk.kz/investors/privatization/information-on-assets-and-facilities/?lang=en 8. Responsible Business Conduct Entrepreneurs, the government, and non-governmental organizations are aware of the expectations of responsible business conduct (RBC). Kazakhstan continues to make steady progress toward meeting the OECD Guidelines for International Investment and Multinational Enterprises, and the government promotes the concept of RBC. The OECD National Point of Contact is the Ministry of National Economy. A legal framework for RBC was introduced in 2015. The Entrepreneurial Code has a special section on social responsibility, which is defined as a voluntary contribution for the development of social, environmental, and other spheres. The Code says that the state creates conditions for RBC but specifies that it cannot force entrepreneurs to perform socially responsible actions. The Code considers donations to charity one of the key forms of social responsibility and envisions a tax deduction for charitable giving, though no such rule exists. In April 2015, the National Tripartite Commission on Social Partnership and Regulation of Social and Labor Relations adopted the National Concept on Social Corporate Responsibility, developed by the National Chamber of Entrepreneurs “Atameken” and the corporate fund Eurasia-Central Asia. The non-binding document covers human rights, environmental protection, consumer interests, RBC, corporate governance, and community development. First President Nazarbayev has repeatedly asked foreign investors and local businesses to implement corporate social responsibility (CSR) projects, to provide occupational safety, pay salaries on time, and invest in human capital. The president presents annual awards for achievements in CSR. Foreign investors report that local government officials regularly pressure them to provide social investments to achieve local political objectives. Local officials attempt to exert as much control as possible over the selection and allocation of funding for such projects. The government has signed on to the Extractive Industries Transparency Initiative (EITI). Kazakhstan produces EITI reports disclosing revenues from the extraction of its natural resources. Companies disclose what they pay in taxes and other payments, and the government discloses revenue received; these two sets of figures are then compared and reconciled. Starting in August 2019, the EITI Board has been reviewing whether Kazakhstan has made meaningful progress in implementing EITI standards since its first validation in 2017. The EITI Board is particularly concerned with disclosure of information by state-owned companies, such as KazMunayGas and its subsidiaries, oil supplies, revenues of Kazakhstan Temir Zholy from transportation of mineral resources, and free access of NGOs to EITI process in Kazakhstan. Starting in 2019, members of EITI, including Kazakhstan, are required to disclose subsoil use contracts, signed after January 1, 2021. In June 2019, the Ministry of Industry and Infrastructure Development disclosed for the first time beneficial ownership data on its website. The data include names of beneficial owners and their level of ownership under new licenses only. 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 firstname.lastname@example.org 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 email@example.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. 11. Labor Policies and Practices The July 2017 EBRD Kazakhstan Diagnostic Paper singles out skills mismatches across sectors as the fifth most important constraint that is holding back private sector growth in Kazakhstan. The gaps create real operational challenges such as high recruitment and training costs, lower productivity and constraints on innovation and new product development, according to the EBRD. The existing skills mismatches are not a result of lack of access in education, but rather failure to acquire job-relevant skills and competencies, the EBRD report reads. The 2019 OECD report on Monitoring Skills Development through Occupational Standards in Kazakhstan echoes the EBRD findings – despite improvements in educational attainment and labor market participation, Kazakhstan faces challenges with respect to skill relevance and availability, especially among large and middle-sized companies. Strengthening vocational education and training is critical, because skilled manual workers, with medium and high qualifications, represent 40 percent of the total workforce need, according to the OECD. Many large investors rely on foreign workers and engineers to fill the void. Kazakhstan approved a quota for 29,300 foreign workers for 2020. As of February 1, 2020, Labor Ministry had issued 19,100 work permits. Chinese workers received over 27 percent of all permits, with the rest going to foreign workers from Turkey, U.K., India, Uzbekistan, and others. The Kazakhstani government has made it a priority to ensure that Kazakhstani citizens are well represented in foreign enterprise workforces. In 2009, the government instituted a comprehensive policy for local content, particularly for companies in extractive industries. The government is particularly keen to see Kazakhstanis hired into the managerial and executive ranks of foreign enterprises. In November 2015, the government amended the legislation on migration and employment that resulted in new rules for foreign labor starting January 2017 (please see details in Part 5, Performance and Data Localization Requirements). U.S. companies are advised to contact Kazakhstan-based law and accounting firms and the U.S. Commercial Service in Almaty for current information on work permits. AIFC-registered entities may employ a foreign workforce without any work permits. Kazakhstan joined the International Labor Organization (ILO) in 1993, and has ratified 24 out of 189 ILO conventions, including eight fundamental conventions pertaining to minimum employment age, prohibition on the use of forced labor and the worst forms of child labor, and prohibition on discrimination in employment, as well as conventions on equal pay and collective bargaining. In March 2019, Kazakhstan’s Federation of Trade Unions proposed that the Kazakhstani government join five more ILO technical conventions on social security (minimum standards), minimum wage fixing, collective bargaining, part-time work, and safety and health in agriculture, but the country has not ratified any new ILO conventions since then. In September 2017, the ILO expressed concern over Kazakhstan’s compliance with the Freedom of Association and Protection of the Right to Organize Convention and the Right to Organize and Collective Bargaining Convention by calling on the government to amend the relevant legislation in order to: (1) enable workers to form and join trade unions of their own choosing, (2) allow labor unions to benefit from joint projects with international organizations, and (3) allow financial assistance to labor unions from international organizations. The Constitution and National Labor Code guarantee basic workers’ rights, including occupational safety and health, the right to organize, and the right to strike. Amendments to the Labor Code since July 2018 leave many labor-related issues, including dismissals and layoffs, to the discretion of employers. It imposes tighter collective bargaining restrictions on employees involved in labor disputes. According to the Ministry of Labor and Social Protection, 33.4 percent of all working enterprises have collective agreements. Kazakhstan’s three independent labor unions – the Federation of Trade Unions of the Republic of Kazakhstan (FTU), Commonwealth of Trade Unions of Kazakhstan Amanat, and Kazakhstan Confederation of Labor (KCL) – had over three million members, or 40 percent of Kazakhstan’s workforce, as of March 1, 2020. Article 46 of the Labor Code gives the employer the right to change work conditions due to fluctuating market conditions with proper and timely notifications to employees. Article 52 of the Labor Code gives the employer the right to cancel an employment contract in case of a decline in production that may lead to the deterioration of economic and financial conditions of the company. Article 131 of the Labor Code allows for severance of payment of average monthly wages for two months in case of layoffs for economic reasons. The Ministry of Labor and Social Protection is responsible for offering alternative job openings within state programs of the so-called Employment Road Map, alternative professional training, or temporary jobs to workers laid off for economic reasons. The 2017-2021 Productive Employment and Mass Entrepreneurship National Program, run by the Ministry of Labor and Social Protection, aims at connecting workers with permanent jobs. The program provides micro-loans and grants, and equips workers with basic entrepreneurial skills. Chapter 15 of the Labor Code describes a mechanism for resolution of individual labor disputes via direct negotiations with an employer, mediation commission, and court. Chapter 16 of the Labor Code identifies a mechanism for resolution of collective labor disputes via direct negotiations with an employer, mediation commission, labor arbitration, and court. Labor unrest presents a risk where unemployment is high and where the bargaining power of limited skilled labor is relatively high, but authorities have been quick to intervene with controls and mitigating measures. In June 2019, a violence broke out at the Chevron-operated Tengiz oilfield, in which large mobs of Kazakh men attacked dozens of their colleagues from countries like Jordan and the United Arab Emirates. The unrest had ostensibly been triggered by an interpersonal conflict, though it was widely acknowledged that festering resentment about pay and working conditions underlaid the violence. Another conflict that took place on August 12, 2019, in the Zhairem settlement of the Karaganda region reportedly had similar grounds — fifty Zhairem residents trespassed the site of the Zhairem enrichment plant, owned by KazZinc (i.e. Glencore International AG), and started a brawl with Turkish workers. The altercation resulted in the minor injuries of six Turkish workers. The regional police brought charges for hooliganism and property theft against seven Zhairem residents. In September 2019, several strikes over living standards hit the Chinese-run companies in the Mangystau region. At least 165 workers of Mobil Service Group Ltd that provides transportation services for Oil Construction Company LLP in the Kalamkas field and Karazhanbasmunai JSC in the Karazhanbas field in the Mangystau region went on strike on September 20, 2019 to demand a 100 percent increase of wages and to complain about getting paid up to ten times less than their western and Chinese colleagues. The labor dispute was resolved after MSG management agreed to raise wages by 50 percent. Approximately 24 workers of the Sinopec-run Karakudykmunay and Buzachi Operating companies went on strike on September 23, 2019, demanding a 100 percent wage increase. Over 150 workers wrote letters to the company’s management and to the ruling Nur Otan party prior to the strike. Another strike over low wages reportedly took place at Buzachi Operating on October 31, 2019, which was later dismissed by the company’s management, stating that it was a regular staff meeting. On September 30, 2019, a local newspaper published on its website a video message (https://www.lada.kz/aktau_news/society/73745-rabochie-esche-odnoy-kompanii-v-mangistau-trebovali-povysheniya-zarabotnoy-platy.html ) to President Tokayev allegedly recorded by Emir Oil workers, requesting a 50 percent increase in wages. Kazakh-Malaysian oil company, Emir Oil Ltd, dismissed this information, stating that the company had been negotiating with workers and gradually implementing a pay increase since March 2019. Security workers of KMG-Security, a subsidiary of KazMunayGas National Company (KMG NC), held a strike demanding a wage increase and improved working conditions in the oil town of Zhanaozen in the Mangystau region on January 27, 2020. Their requests have been addressed by KMG NC. The government is particularly sensitive to any signs of unrest in Zhanaozen, after a seven-month strike of oil workers in the town culminated in riots that killed 15 and injured over 100 in December 2011. Workers’ rights to strike are limited by several conditions. It may take over 40 days to initiate the strike in accordance with the law, representatives of labor unions report. Workers can strike if all arbitration measures defined by law have been exhausted. Strike votes must be taken in a meeting where at least half of workers are present, and strikers are required to give five days’ notice to their employer, include a list of complaints, and tell the employer the proposed date, time and place of the strike. Courts have the power to declare a strike illegal at the request of an employer or the General Prosecutor’s office. Employers may fire striking workers after a court declares a strike illegal. The Criminal Code enables the government to target labor organizers whose strikes are deemed illegal. The Labor Union Law generally restricts workers’ freedom of association. Under the law, any local (and potentially independent) labor union must be affiliated with larger unions, and the right to freely establish and join independent organizations without prior authorization is restricted. On the basis of this law, in 2016 authorities did not allow the registration of one independent labor union and ordered its liquidation. In 2018, the U.S. government initiated a review of Kazakhstan’s compliance with the Generalized System of Preferences following a petition by the AFL-CIO, based on the country’s alleged failure to afford internationally-recognized workers’ rights. The AFL-CIO petition highlights the Law on Unions and also raises concerns about the use of Article 404 of the Criminal Code, which appears to prohibit unregistered organizations. The amendments were signed into law by President Tokayev on May 4, 2020. The law removes the requirement of affiliation with a large labor union for local labor unions. Other changes include softening restrictions on strikes. Workers employed in the railway, transport and communications, civil aviation, healthcare, and public utilities sectors may strike, if they maintain minimum services for the population, that is, provided there is no harm caused to other people. The law also reduces the penalty for calls to continue strikes declared illegal by a court. If such calls do not result in a material violation of rights and interests of other people, they will be classified as criminal misconduct, and penalty will be limited to fines or hours of community service. The previous law classified such calls as criminal offences, and the penalties included restriction on freedom of movement or imprisonment. Please see details at the Human Rights Report at: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/. The official unemployment rate in Kazakhstan has regularly been near five percent in recent years. In 2019, Kazakhstan’s unemployment rate stood at 4.8 percent, and youth unemployment rate was 3.7 percent. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs The Overseas Private Investment Corporation (OPIC) and the government of Kazakhstan signed an Investment Incentive Agreement in 1992, and OPIC has been active in Kazakhstan since 1994. In January 2018, OPIC signed a Memorandum of Understanding with KazakhInvest JSC to support U.S. investment in Kazakhstan and improve collaboration between the two countries. The U.S. Development Finance Corporation (DFC), the successor of OPIC, seeks commercially viable projects in Kazakhstan’s private sector and offers a full range of investment insurance and debt/equity stakes. Kazakhstan is also a member of the Multilateral Investment Guarantee Agency, which is part of the World Bank Group and provides political risk insurance for foreign investments in developing countries. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 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 ) 2018 174,675 2018 179,340 https://data.worldbank.org/ country/kazakhstan 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) Jan 1, 2020 36,541 2012 12,512 BEA data available at http://bea.gov/international/ direct_investment_multinational_ companies_comprehensive_data.htm Host country’s FDI in the United States (M USD , stock positions) Jan 1, 2020 177 2016 -3 BEA data available at http://bea.gov/international/ direct_investment_multinational_ companies_comprehensive_data.htm Total inbound stock of FDI as % host GDP 2018 91.8% 2018 87.5% https://unctad.org/en/Pages/DIAE/ World%20Investment%20Report/ Country-Fact-Sheets.aspx *The Statistic Committee and The National Bank of Kazakhstan Table 3: Sources and Destination of FDI Direct Investment from/in Counterpart Economy Data (2018) From Top Five Sources/To Top Five Destinations (US Dollars, Millions) Inward Direct Investment Outward Direct Investment Total Inward 149,008 100% Total Outward 16,798 100% Netherlands 63,219 42% Netherlands 11,002 65% United States 31,229 21% United Kingdom 3,381 20% France 13,214 9% Russian Federation 1,320 8% China P.R: Main land 8,269 6% Bahamas,The 794 5% Japan 5,906 4% Cayman Islands 605 4% “0” reflects amounts rounded to +/- USD 500,000. Table 4: Sources of Portfolio Investment Portfolio Investment Assets (Dec 31, 2018) Top Five Partners (Millions, US Dollars) Total Equity Securities Total Debt Securities All Countries 60,675 100% All Countries 10,626 100% All Countries 50,049 100% United States 30,015 49.5% United States 5,949 56% United States 24,066 48.1% France 3,737 6.2% Japan 843 8% Japan 3,599 7.2% United Kingdom 3,647 6% United Kingdom 829 7.8% France 3,387 6.7% Japan 3,599 5.9% Switzerland 357 3.4% South Korea 3,048 6.1% South Korea 3,049 5% France 350 3.3% United Kingdom 2,818 5.6% 14. Contact for More Information Economic Section at the U.S. Embassy in Nur-Sultan 3, Qoshkarbayev Str., Astana +7 7172 70 21 00 InvestmentClimateKZ@state.gov Country/Economy resources: American Chamber of Commerce (AmCham) in Kazakhstan www.amcham.kz 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. Table 1: Key Metrics and Rankings Measure Year Index/Rank Website Address TI Corruption Perceptions Index 2019 126 of 180 http://www.transparency.org/ research/cpi/overview World Bank’s Doing Business Report 2019 80 of 190 http://www.doingbusiness.org/ en/rankings Global Innovation Index 2019 90 of 129 https://www.globalinnovationindex.org/ analysis-indicator U.S. FDI in partner country ($M USD, historical stock positions) 2018 27 http://apps.bea.gov/international/ factsheet/ World Bank GNI per capita (USD) 2018 $1,221 http://data.worldbank.org/indicator/ NY.GNP.PCAP.CD 1. Openness To, and Restrictions Upon, Foreign Investment Policies Towards 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 economic development. While the government has implemented laws to entice foreign investment, application of these laws, however, inconsistent application and onerous bureaucracy continue to deter foreign investors. In particular, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, pose significant impediments to attracting foreign investment. Since 1993, the United States has a bilateral investment treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment. The Kyrgyz Republic has an Investment and Trade Promotion and Protection Agency of the Kyrgyz Republic under the Ministry of Economy (IPPA). The IPPA serves as a vehicle for maintaining an ongoing dialogue with foreign investors and advocates for investing in the Kyrgyz Republic. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment and support investors in the Kyrgyz Republic, including private investment and public-private partnerships, as well as assist local exporters to promote Kyrgyz goods to external markets, and develop Free Economic Zones (FEZ). The IPPA has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The IPPA often coordinates with international donor organizations on hosting round- tables discussions, exchanges, and capacity building workshops in the field of economic development. In August 2019, the Supervisory Board of the Institute of the Business Ombudsman appointed former UK Ambassador to the Kyrgyz Republic, Robin Ord-Smith, as Business Ombudsman. The Institute of Business Ombudsman was created in January 2019 is a non-state body, funded by external donor sources, to protect the rights, freedoms and legitimate interests of business entities, both local and foreign. The selection of a foreigner to head the Institute sends a positive signal to business associations and foreign investors of the country’s commitment to improving transparency mechanisms for regulating business activities. The government has established several committees and councils to coordinate cooperation between the business associations and government bodies. Since 2017, the Business and Entrepreneurship Development Council regularly convenes MPs, business community representatives from various sectors of the economy to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic. The Committee on Development of Industry and Entrepreneurship under the President of the Kyrgyz Republic serves as a platform for entrepreneurs to turn to in case if their grievances are not addressed by the government. The respective presidential decree to establish the Committee under the National Council on Sustainable Development of the Kyrgyz Republic was signed on December 24, 2019 with the Provisions and the following amendment to include Vice-Prime-Minister on economic development, Business Ombudsman and heads of business associations. Once this structure fully launches, there will be platforms to raise investment climate and other business concerns at the offices of the President, Parliament and Prime Minister. The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including the American Chamber of Commerce in the Kyrgyz Republic (AmCham), and the International Business Council (IBC), among others. The Ministry of Economy, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy. Limits on Foreign Control and Right to Private Ownership and Establishment While there are still 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, and there have been no allegations on market access restrictions from U.S. investors since 2016. By law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control. In the last two years, there were no known cases of sector-specific restrictions, limitations or requirements applied to foreign ownership and control. In April 2017, amendments to the “Law on Mass Media” to limit foreign ownership of television (excluding radio and print media) broadcasters to 35 percent, was signed by the President and entered into force in June 2017. Post is unaware of any formal investment screening processes in the Kyrgyz Republic. Other Investment Policy Reviews In 2016, the International Finance Corporation (IFC), a member of the World Bank Group, released a report on the Kyrgyz investment climate in January 2016. The report is available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/259411467997285741/investment-climate-in-kyrgyz-republic-views-of-foreign-investors-results-of-the-survey-of-foreign-investors-operating-and-non-operating here. The Investment Policy Review (IPR) of The Kyrgyz Republic for 2016 by UNCTAD is available at https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1436 . Business Facilitation Starting a business in the Kyrgyz Republic has become easier in the elimination of the minimum capital requirement for business registration, abolishment of certain registration fees, and reduced registration time. 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 Kyrgyz Republic ranked in the top quintile of the World Bank’s 2019 Doing Business report (42nd out of 190 countries surveyed) in “Starting a Business.” From May 2, 2018 to May 1, 2019, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business. Outward Investment Post is not aware of host government efforts to promote outward investment from the Kyrgyz Republic, nor of any instances in which the government sought to restrict domestic investors from investing abroad. 3. Legal Regime Transparency of the Regulatory System Despite receiving technical assistance from donors to develop law and regulations are consistent with international best practices, the legal and regulatory system of the Kyrgyz Republic remains underdeveloped. Implementation of regulations and court orders relating to commercial transactions remains inconsistent. In some case, court decisions, which appear to contradict established procedures, have been implemented expeditiously with outside influence. However, heavy bureaucracy, lack of accessibility among government officials responsible for investment promotion hinder the conduct of business. There have been no known cases of U.S. investors being discriminated against during the reporting period. After the former president Bakiyev was deposed in 2010, the interim government established observation councils in ministries, state agencies, and state committees. These bodies are typically comprised of representatives from non-state actors, including former workers of these entities, business associations, rights organizations, the media, and independent experts in respective areas. The objective of these councils is to provide citizen oversight of policy formulation and execution, though their efficacy remains in question. Rule-making authority is vested in the Kyrgyz Parliament, which features robust committees that oversees legislation and regulations affecting several areas of the economy, including: the Committee on Economic and Fiscal Policy; the Committee on Fuel, Energy, and Subsoil Management; the Committee on Transport, Communications, Architecture, and Construction; and the Committee on Budget and Finance. The Office of the Prosecutor General is the supreme legal and regulatory enforcement body in the Kyrgyz Republic. The State Service on Financial Market Regulation and Supervision (Financial Intelligence) and the State Service on Combating Economic Crimes (Financial Police) both play important regulatory roles. Accounting procedures tend to adhere to internationally recognized accounting rules, such as the International Financial Reporting Standards (IFRS), and audits are conducted regularly, often in compliance with agreements with international financial institutions (IFIs). Audit results of state organizations tend to be publicly available, unlike those of private organizations. Draft bills or regulations are posted on Parliament’s web site and are typically open to public comment for 30 days prior to consideration by Parliament and its committees. Parliament often holds public hearings on draft legislation, and is open to the participation of representatives of civil society organizations and the business community in relevant hearing. The IPPA, under the Ministry of Economy, assists investors with regulatory compliance. 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. Investment councils, under the auspices of the Office of the President, Prime-Minister and Parliament respectively, exist 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 often in the Kyrgyz Republic, the legal and regulatory framework is largely sound but implementation and enforcement are weak. In July 2016, the Kyrgyz government issued a decree to restructure several state regulatory bodies. The decree abolished the State Agency for Geology and Resource Management, replacing it with the State Committee for Industry, Energy and Subsoil Use, and dissolved the State Agency for Communications and Centre for e-Governance, merging its functions into the State Committee of Informational Technology and Communications. The decree also expanded the Ministry of Agriculture’s functions to include food industry development. It has assigned state oversight functions of multiple areas including exploitation of mineral resources to the State Inspection for Environment and Technical Security. Also in July 2016, then-President Almazbek Atambaev approved several reforms aimed at streamlining law enforcement bodies. Among other things, the reforms dissolved the State Drug Control Service and transferred it into the structure of the Ministry of Interior, and transferred authority to investigate economic crimes from the State Committee on National Security to the State Service of Combating Economic Crimes (Financial Police). International Regulatory Considerations In August 2015, the Kyrgyz Republic acceded to the Eurasian Economic Union (EAEU), whose current members also include Russia, Kazakhstan, Armenia, and Belarus. The Kyrgyz Republic continues to harmonize its laws to comply with regulations set by the Eurasian Economic Commission, the executive body of the EAEU. However, the Kyrgyz Republic has yet to secure the benefits of increased bilateral trade with EAEU member countries, citing unilaterally-imposed trade barriers restricting the flow of Kyrgyz exports. Numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, preventing local exporters from fully accessing the wider EAEU market. The United States and other international partners provided substantial technical assistance to the Kyrgyz Republic in support of its accession to the WTO in 1998, and the country’s regulatory system reflects many international norms and best practices. The Law on the Fundamentals of Technical Regulation in the Kyrgyz Republic, which provides for standardization principles under the WTO Technical Barriers to Trade Agreement, entered into force in 2004. To Post’s knowledge, the Kyrgyz government notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). In 2016, the Kyrgyz Republic ratified the WTO Trade Facilitation Agreement. Legal System and Judicial Independence The general principles of the reformed legal system of the Kyrgyz Republic, 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 weak Kyrgyz judicial system often fails to act as an independent arbiter in the resolution of disputes. Since most disputes are lodged by foreign investors against the Kyrgyz Government, local courts serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system. International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic (ICA). mediation services for public-private disputes remain a protracted and often impartial process in the Kyrgyz Republic. Laws and Regulations on Foreign Direct Investment The Kyrgyz Republic’s main legal framework for foreign direct investment remainsthe “2003 Law on Investments.” with multiple amendments up until 2018. The justice system in the Kyrgyz Republic is inefficient and lacks independence, and cases can take years to be resolved. The Kyrgyz Republic does not have a business registration website. The Investment Promotion and Protection Agency of the Kyrgyz Republic (IPPA) maintains the country’s main website for investment queries, https://invest.gov.kg/ . Competition and Anti-Trust Laws 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. To Post’s knowledge, there have been no developments in any significant competition cases over the past year. Expropriation and Compensation According to the Law on Investments in the Kyrgyz Republic, investments shall not be subject to expropriation, except as provided by Kyrgyz laws when such expropriation is in the public interests and is carried out on a non-discriminatory basis and pursuant to a proper legal procedure with the payment of timely, appropriate and feasible reparation of damages, including lost profit. In April 2016, the government expropriated four Uzbek-owned resorts on Lake Issyk-Kul on the grounds of the claimant’s failure to make payment to the Kyrgyz Social Fund. Post has no information on whether fair market value compensation was offered following expropriation. (Note: The Kyrgyz Law on Investment specifies that the amount of reparation shall be equivalent to the fair market price of the expropriated investment, and that the reparation must be feasible and shall be payable in a freely convertible currency within the term agreed on by the parties. End Note.) In December 2017, the Kyrgyz Government returned the resorts to the claimant and extended the temporary rental of the lands on the basis that the claimant withdrew its claim filed to international arbitration, improved infrastructure at the resorts, and guaranteed that 80 percent of labor force will be Kyrgyz citizens. On August 27, 2019, the Kyrgyz government finalized the terms of the Strategic Agreement with Canada-based gold mining company Centerra Gold Inc. Negotiations were concluded following a protracted investor dispute over the Kumtor gold mine. In 2016, a Kyrgyz court issued an interim ruling that prevented Kumtor Gold Company, the wholly owned subsidiary of Centerra, from transferring property or assets, declaring or paying dividends, or making loans to its parent company. Citing this action by the Kyrgyz judicial system, Centerra suspended all dividend payments to shareholders. After the parties signed a new agreement in September 2017, which required Centerra to support rural and environmental funds, in June 2018 current Prime-Minister Abylgaziev’s government demanded that the agreement with Kumtor be revised to increase environmental payments. According to the new strategic agreement, Centerra’s obligation to the State’s Regional Development and Nature funds will increase from USD 87 million to USD 150 million. Both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. In January 2019 President Jeenbekov called the issuing of mining licenses the most corrupt in the government. 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. Dispute Settlement 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. Investor-State Dispute Settlement The Code of Arbitration Procedure specifies that, if an international treaty of the Kyrgyz Republic establishes the rules of court procedure, other than those, provided by the legislation of the Kyrgyz Republic, rules of the international treaty shall apply. The U.S.-Kyrgyz BIT outlines procedures by which parties may consent to binding arbitration. Post is unaware of any claims made by U.S. investors under the agreement since it entered into force. In January 2019, the local media outlet Tazabek.kg, citing the Kyrgyz Center for Legal Representation, reported that between 2014-2018, twenty lawsuits were filed against the Kyrgyz Republic totaling over USD 2.2 billion in claims. Eleven international arbitration disputes totaling over USD 1.5 billion in claims have been settled to date. The most well-known investment dispute centers around the Kumtor gold mine. Since the mine began commercial production in 1997, the Canadian company, Centerra Gold, whose local subsidiary Kumtor Gold operates the mine, 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. In 2016, Kyrgyz law enforcement officials raided the Bishkek headquarters of Kumtor Gold on accusations of financial irregularities, and prevented expatriate officials from exiting the country. A local court issued an injunction to preclude the company from making financial transfers to Centerra, and later fined Kumtor nearly USD 98 million for alleged environmental damages. Shortly afterward, Centerra elevated its dispute with state corporation KyrgyzAltyn over environmental, dividend, and land use claims to a court of international arbitration. In September 2017, based on an agreement with the Kyrgyz Government, Centerra agreed to a ten-fold increase of annual environmental damage payments from USD 300,000 to USD 3 million, a one-off payment of USD 50 million into a fund to support the Kyrgyz economy, and an adjustment to Kumtor’s management structure requiring that Kyrgyz citizens fill several key management positions. In August 2019, following Centerra’s withdrawal of all claims and acquiescence to increase revenue payments to USD 150 million for contribution to the State’s Regional Development and Nature funds, the parties signed a new strategic agreement. Stans Energy Corporation, a Toronto-based resource development company focused on mining rare earth metals, was involved in a long running, high profile investment dispute with the Kyrgyz Republic. Between 2013-2014, the Kyrgyz government revoked Stans Energy’s mining licenses for two mining deposits, including the Kutessay II rare earth mine, claiming the company had bribed Kyrgyz officials to obtain licensing rights. In 2015 and 2017, the mining company unsuccessfully filed multiple lawsuits in arbitration courts in Canada and Moscow. In August 2019, the UN Commission for International Law and Trade (UNCITRAL) concluded arbitration proceedings, ruling in favor of Stans Energy and awarding it USD 24 million in compensation for improper expropriation. The company has yet to receive compensation and the Kyrgyz government has sought to undo this ruling. International Commercial Arbitration and Foreign Courts Code of Arbitration Procedures allows for international and domestic arbitration of disputes. 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 UNCITRAL. Recognition and enforcement of international arbitration awards in the Kyrgyz Republic is carried out in accordance with the New York Convention and Kyrgyz laws. However, there are a number of features related to the recognition and enforcement of arbitration awards. In particular, Kyrgyz law expands a list of the grounds for refusal of recognition and enforcement of foreign arbitration awards in comparison with a list of the grounds referred to in the New York Convention. Bankruptcy Regulations 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 with multiple amendments in December 30, 1998, July 1999, September 2000, June 2002, March and August 2005, January and July 2006, June 2007, July 2009, April 2015, June, July and December 2016, May 2017, and December 31, 2019) 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 or peaceful settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank ranked the Kyrgyz Republic 82 out of 190 countries in “Resolving Insolvency” in its 2019 Doing Business report. 4. Industrial Policies 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. The Ministry of Economy and IPPA often express the government’s willingness to discuss potential incentives, including access to land, with specific foreign investors. Foreign Trade Zones/Free Ports/Trade Facilitation There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek, Naryn, Karakol (Issyk-Kul province), Leylek (Batken province) and Maimak (Talas province). 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. Additional information on FEZs can be found at http://invest.gov.kg/en/why-kyrgyzstan/free-economic-zones/ Performance and Data Localization Requirements While there are no formal legal requirements for local employment, most major international investors are subject to tremendous public pressure to support threshold local employment. New investors may find local employment quotas included in potential investment agreements, mandating numbers for boards of directors, senior management, and/or other employees. The Kyrgyz Government does not enforce any “forced localization” policies. There are no known government/authority-imposed conditions on permission to invest. The U.S.-Kyrgyz Bilateral Investment Treaty ensures that investments are guaranteed freedom from performance requirements, including requirements to use local products or to exports local goods. Foreign investors may freely transmit customer or other business related data outside the country’s territory upon their own need as long as it does not contradict with local law on investments. There are no known instances of requiring foreign IT providers to turn over source code and/or provide access to encryption. There is no legislation on maintaining data storage within the country. 5. Protection of Property Rights Real Property In the National Development Strategy for 2018-2040, the Kyrgyz Government identified property rights as one of the priority areas for strengthening investment climate in the Kyrgyz Republic. Inviolability of property rights is also written in the Kyrgyz Constitution and the Civil Code. The Kyrgyz Republic was first among its neighboring Central Asian states to introduce private property rights for land ownership. According to government sources, there are no lands without a clear title. According to the World Bank, the Kyrgyz Republic is among the easiest countries in which to register property, ranking 8th out of 190 countries (just like in 2017 and 2018) in the Bank’s 2019 Doing Business report. Mortgages and liens are common in the Kyrgyz Republic and operate according to relevant legislation. The State Registration Service is the major operator of a recording system (database) on property under mortgage/lien commitments. When providing mortgages, local banks must request a reference from the State Registration Service that confirms the property is not under lien. However, several have questioned the reliability of the recording system, and the Service itself is frequently subject to allegations of corruption. 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 Intellectual property right protections are slowly emerging. The State Service for Intellectual Property and Innovation under the Government of the Kyrgyz Republic (“Kyrgyzpatent”) is the 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. However, 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. The Kyrgyz Republic was not included in the 2019 Special 301 report but was listed on the 2019 U.S. Trade Representative’s Notorious Markets report, due to the availability of counterfeit goods sold at the massive Dordoi bazaar – Central Asia’s largest market. Counterfeit goods imported from China are also re-exported to Russia and Kazakhstan. No specific action has been taken against Dordoi market. The Kyrgyz Republic did not pass any new IPR related laws or regulations in 2019. IPR-related codes, laws and regulations of the Kyrgyz Republic are listed on Kyrgyzpatent’s website. 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. The Kyrgyz Republic is not known as a major producer of counterfeit goods. However, the State Customs Service regularly writes alerts and notifications on the recent seizure of counterfeit goods on its official website. However there is no central database of official statistics on the seizure of counterfeit goods. IPPA has a whole chapter on its website dedicated to IP. Resources for Rights Holders Contact at Mission: Munara Niiazova Commercial Assistant +996 312 59 76 07 NiiazovaME@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: firstname.lastname@example.org, email@example.com For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ 6. Financial Sector Capital Markets and Portfolio Investment 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. 7. State-Owned Enterprises There are approximately 106 SOEs in the Kyrgyz Republic that play a significant role in the local economy. The State Property Management Fund of the Kyrgyz Republic (www.fgi.gov/kg) is the public executive authority representing the interests of the state. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. Information on allocations to and earnings from SOEs is included in budget execution reports and is published (in Russian) on the Kyrgyz Treasury’s website. Information as of 2017 on assets, earnings, profitability, working capital, and other financial indicators is available on the State Property Management Fund’s website (http://finance.page.kg/index.php?act=svod_profit ) The State Property Management Fund also reviews the budgets for the largest SOEs, while the Accounting Chamber reviews the accounts of all SOEs and publishes audit reports on their website (www.esep.kg). Broadly, the country does not fully adhere to the OECD Guidelines on Corporate Governance of SOEs. Cronyism and corruption within SOEs as a major obstacle to the Kyrgyz Republic’s economic development. The Heritage Foundation’s 2017 Index of Economic Freedom report noted, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. Positions on boards of directors are frequently used as rewards for political support, and the dynamic has reinforced the patronage system and resulted in poor economic performance and public service delivery. The Foundation also assessed that rule of law remains weak and the state lacks the capacity to enforce contracts and sufficiently protect property rights. The government has attempted to improve transparency on contracts and bidding processes. Due to widespread corruption, there are common complaints that only individual government officials have access to government contracts and bidding processes. 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. In 2019, the Kyrgyz government established the National Managing Company JSC, a central holding company, to manage all 106 SOEs. The National Managing Company is wholly-owned by the Kyrgyz Government with a charter capital of USD 1.3 million. The intention of the centralized management system is to support poor-performing SOEs by facilitating more effective decision-making aimed at attracting management talent, additional resources, and investments in strategic SOE enterprises. Based on government assessments, as of November 2019, 51 companies out of 106 SOEs and 22 JSCs out of 52 were operating at a loss. Privatization Program The Kyrgyz government periodically auctions rights to subsoil usage and broadcasts tender announcements, including disseminating information to diplomatic missions, in order to attract foreign investors. There are no restrictions on foreign investors participating in privatization programs. The privatization process is not well defined and is subject to change. 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. The Kyrgyz government is no longer actively pursuing sale of its 100 percent stake in Megacom, the country’s largest telecommunications company. In 2015, the Kyrgyz government agreed to privatize AlfaTelecom (operating as MegaCom). In February 2017, the government authorities arrested the head of Parliament’s leading opposition faction, charging him with corruption based on allegations that he received a bribe from a Russian businessman in connection with the sale of a MegaCom stake in 2010. After years of delays, the Kyrgyz government announced it would auction its 100 percent stake in MegaCom in July 2017. To date, the Kyrgyz government has been unable to divest itself of the telecommunications firm. Foreign investors – both companies and individuals – are generally able to participate in public auctions of state owned properties unless specifically prohibited in the terms and conditions. There are, however, some land legislation restrictions concerning the property rights of foreigners. Information about terms and conditions of SOE sales are posted on the State Property Management Fund’s website (www.fgi.gov.kg ). 8. Responsible Business Conduct 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 Gold Company, the largest gold mining company operating in the Kyrgyz Republic, often draws criticism for violating environmental regulations and thus damaging the living standards of the nearby villages. On numerous occasions between 2017-2019, local residents staged rallies to protest against small gold mining operations owned and operated by Chinese mining companies based on claims of their detrimental impact on the environment. However, these accusations often are used for political purposes rather than legitimate RBC concerns. Few NGOs work to promote RBC in the country. 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). According to the online license register of the State Committee on Industry, Energy, and Subsoil Use, the Kyrgyz Republic currently has 2413 active extractive licenses, and EITI covers more than 95 percent of mining revenues in the Kyrgyz Republic. Due to the EITI International Board’s 2017 findings that the GOKR made inadequate progress in implementation of the EITI Standard, the EITI Board suspended the country and required the country to complete corrective actions. On December 25, 2018, the Kyrgyz government adopted an amendment to implement recommended EITI transparency initiatives. The validation assessment report on the Kyrgyz Republic’s implementation of EITI requirements are expected to be announced by June 2020. 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 firstname.lastname@example.org 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 email@example.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. 11. Labor Policies and Practices There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens find lucrative job opportunities abroad, and the nation’s education system has largely 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. However, reports indicate there is a shortage of highly qualified local candidates in IT, mining, energy, and manufacturing, forcing international organizations to rely on expatriates for these skills. Literacy in the Kyrgyz Republic is approximately 97 percent. The official unemployment rate is approximately seven percent, though experts estimate the number of actual unemployed individuals exceeds this figure. 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 generally poor. The law establishes occupational health and safety standards, but to a large extent the Kyrgyz government did not enforce them. Despite the moratorium on all business inspections from January 1, 2019 until January 1, 2021, the State Labor Inspectorate is responsible for protecting workers and carrying out inspections in the event that worker safety and well-being is compromised. Due to staffing problems within the State Labor Inspectorate and inadequate transportation resources to conduct on-site inspections, activities are limited and business compliance is 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 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. In January 2017, amendments to the Labor Code of the Kyrgyz Republic entered into force that strengthened labor rights and protections for people under the age of 18. The law now prohibits people under the age of 18 from being sent on business trips, engaging in overtime work, night shifts, and working on days off or official holidays. However, child labor laws are not uniformly enforced. The U.S. Embassy is unaware of the Kyrgyz government’s efforts to implement OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas or OECD or UN Guiding Principles on Business and Human Rights. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs The United States signed a bilateral OPIC (predecessor to DFC) agreement with the Kyrgyz Republic in 1992. OPIC recently financed part of the campus expansion of the American University of Central Asia in Bishkek and the University of Central Asia in Naryn. Bank lending and international donor financing remain the primary mechanisms by which businesses in the Kyrgyz Republic seek to fund expansion projects. Few investment funds exist and operate in the Kyrgyz Republic. There are no new DFC-funded projects in the Kyrgyz Republic to date but the lower-middle income country is considered a priority for DFC funding opportunities. The DFC currently supports two portfolio loan guarantees with two local banks to increase lending to Kyrgyz businesses. DFC products have the potential to facilitate social and commercial infrastructure developments, expand small and medium enterprise lending and assist the development of private equity funds in the Kyrgyz Republic, which are currently few in number. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 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) 2019 $8,453 2018 $8,093 www.worldbank.org/en/country Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other U.S. FDI in partner country ($M USD, stock positions) 2019 5.5 2018 27 BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Host country’s FDI in the United States ($M USD, stock positions) 2019 1.5 2018 0 BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Total inbound stock of FDI as % host GDP N/A N/A 2018 48.4 UNCTAD data available at https://unctad.org/en/Pages/DIAE/ World%20Investment%20Report/ Country-Fact-Sheets.aspx *Source for Host Country Data: National Statistics Committee of the Kyrgyz Republic; http://www.stat.kg Table 3: Sources and Destination of FDI Direct Investment from/in Counterpart Economy Data From Top Five Sources/To Top Five Destinations (2018, US Dollars, Millions) Inward Direct Investment Outward Direct Investment Total Inward 4915 100% Total Outward 11 100% China 1,345 27% China 6 57% Russian Federation 1,064 22% Tajikistan 2 16% Canada 1,059 22% Kazakhstan 2 14% United Kingdom 333 7% Russian Federation 1 11% Kazakhstan 183 4% Turkey 0 1% “0” reflects amounts rounded to +/- USD 500,000. Table 4: Sources of Portfolio Investment Data not available. 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. 14. Contact for More Information Dong-Thu Caohuu Economic Officer U.S. Embassy in the Kyrgyz Republic 171 Prospekt Mira Bishkek, Kyrgyz Republic 720016 +996-312-597-000 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. Table 1: Key Metrics and Rankings Measure Year Index/Rank Website Address TI Corruption Perceptions Index 2019 153 of 180 http://www.transparency.org/ research/cpi/overview World Bank’s Doing Business Report 2020 106 of 190 http://www.doingbusiness.org/en/rankings Global Innovation Index 2019 100 of 129 https://www.globalinnovationindex.org/ analysis-indicator U.S. FDI in partner country ($M USD, historical stock positions) 2017 $41 http://apps.bea.gov/international/factsheet/ World Bank GNI per capita 2018 $1,010 http://data.worldbank.org/ indicator/NY.GNP.PCAP.CD 1. Openness To, and Restrictions Upon, Foreign Investment Policies Towards Foreign Direct Investment The Tajik government is consistent in its calls for greater U.S. investment. Despite this, Tajikistan has traditionally courted state-led investment and external loans from larger regional neighbors, including China, Russia, and, to a lesser extent, Iran. In 2019, Chinese foreign investment rose six percent to USD 62.3 million, accounting for almost 76 percent of the USD 346 million of 2019 foreign direct investment (FDI). Russia (USD 33.1 million) was the second largest source of FDI last year, followed by the United Kingdom (USD 13.9 million), and Turkey (USD 13.5 million). Following increased outreach to Gulf States, Qatar has invested USD 384.5 million in a high-rise luxury apartment complex and the region’s largest mosque and is investigating opportunities in banking and infrastructure. Tajikistan’s Investment Law (Article 7) guarantees equal rights for both local and foreign investors. According to this law, foreigners can invest by jointly owning shares in existing companies with other Tajik companies or Tajik citizens; by creating fully foreign-owned companies; or by concluding agreements with legal entities or citizens of Tajikistan that provide for other forms of foreign investment activity. Foreign firms may acquire assets, including shares and other securities, as well as land leasing and mineral usage rights. Foreign firms may also exercise all property rights to which they are entitled, either independently or shared with other Tajik companies and citizens of Tajikistan. Most of Tajikistan’s current international agreements provide most-favored-nation status. Tajikistan’s legal code does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment. To receive permission and licenses for operation, however, a foreign investor must navigate a complicated, cumbersome, and often corrupt bureaucratic system. Several Tajik government agencies are responsible for investment promotion, but they frequently have competing interests. The Committee on Investments and State Property Management (https://www.investcom.tj/ ) facilitates FDI. In addition, state-owned enterprise Tajinvest under the Committee on Investments and State Property Management is responsible for attracting investment into Tajikistan https://www.tajinvest.tj . Tajikistan has established several formal mechanisms to maintain open channels of communication with existing and potential investors. With donor support, the government established a Consultative Council on the Improvement of the Investment Climate in 2007. This annual council provides a formal venue for dialogue with donors, international financial institutions, and members of the private sector (http://investmentcouncil.tj/en ). In January 2015, the government established a National Entrepreneurship Day, annually celebrated in October. Nevertheless, investors continue to claim that many of their complaints to the government go unheeded. Limits on Foreign Control and Right to Private Ownership and Establishment Tajikistan’s legislation provides a right for all forms of foreign and domestic ownership to establish business enterprises and engage in remunerative activity. There are no limits on foreign ownership or control of firms and no sector-specific restrictions that discriminate against market access. Local law considers all land and subsoil resources to belong exclusively to the state, although initial efforts to establish a private land market are underway. Tajikistan’s legislation allows for 100 percent foreign ownership of local companies. In the context of jointly-owned companies, local partners generally seek to possess a controlling share (51 percent or more) at the initial stage of business development and in some cases may seek to increase their stake over time. All sectors of Tajikistan’s economy are open to foreign participation with the exception of aviation, defense, security, and law enforcement, which require special government permission for the operation of such types of businesses or services. Tajikistan does not restrict foreign investment; it does not mandate local stakeholder equity positions or local partnership. In some cases, the government requires specific licenses. There are no mandatory IP/technology transfer requirements. Tajikistan’s government maintains an investment screening mechanism for inbound foreign investments involving government interests, including investments into Free Economic Zones, issuing approval or rejection statements in particular for investments requiring government financial support or state guarantees. The Committee on Investments and State Property Management is responsible for filing and coordinating foreign investment project proposals as they pass through the review pipeline. The government takes particular interest in determining whether the proposed project may impact the county’s national security and/or economic performance. Investors must submit their proposals for screening to all relevant government agencies. This process can be lengthy and cumbersome. The Committee on Investments and State Property Management circulates the investor’s proposal among the relevant government offices and ministries with instructions to review and then provide a formal opinion. If a ministry objects to the proposed investment activity, it submits an official note to the Committee on Investments and State Property Management. Screening proposals often involve background checks on the company, the person(s) representing the company, and identification of a financial source to comply with anti-money laundering regulations. U.S. businesses have not identified screening mechanisms as a barrier to investment. The purpose of the investment screening process is to ensure that a proposed project does not violate Tajik laws. The review process could reject the proposal and the Tajik government may flag it as “incomplete.” Applicants may appeal the government’s decision by submitting a claim to the Tajik Economic Court. Other Investment Policy Reviews The United Nations Conference on Trade and Development (UNCTAD) presented a draft Investment Policy Review of Tajikistan in November 2015 to stakeholders from the government, local and international private sector, and civil society and development partners. The final report was published on August 10, 2016 (http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1596 ) Tajikistan has not conducted a WTO Trade Policy Review, and a WTO Trade Policy Review scheduled for 2020 has yet to take place. Some international and local consulting companies in the recent years produced ratings, guides and reports on investment and business in Tajikistan: 2019 Moodys Rating: https://www.moodys.com/credit-ratings/Tajikistan-Government-of-credit-rating-806356895 2017 RSM Guide to Doing Business: (https://www.rsm.global/tajikistan/insights/corporate-literature/guide-doing-business-tajikistan 2017 Tajik Chamber of Commerce: http://tpp.tj/business-guide2017/rus/content_rus.html 2016 Deloitte Investment and Tax Guide (https://www2.deloitte.com/kz/en/pages/tajikistan/articles/doing-business-tajikistan.html ) Business Facilitation Although the Tajik government has simplified the business registration process by adopting a single-window registration system, that process still requires significant legal and human resources, government connections, and time. The Tax Committee is the primary agency responsible for business registration (www.andoz.tj ). In addition to obtaining the state registration through a single-window, a company must also register with the Social Protection Agency (www.nafaka.tj ); Statistics Agency under the President of Tajikistan (www.stat.tj ); Ministry of Labor, Migration, and Employment (www.mehnat.tj ); Sanitary-Epidemiological Service at the Ministry of Health (www.moh.tj ); as well as with local authorities, municipal services, and other agencies. According to the country’s regulations, registering a business should take less than five business days; in reality, it may take several days or even months due to the inappropriate or illegal actions of registering agencies. The Tajik government must notarize all businesses. The Committee on Investments and State Property Management is the key agency that collects information and project proposals from investors. However, numerous other agencies are involved in the investment coordination process, making it cumbersome. According to the Tajik Tax Code, there are three types of enterprises: 1. Small-scale businesses with turnover up to USD 100,000 during a 12 months period. 2. Medium-scale businesses with annual turnover from USD 100,000 to USD 2.5 million, and 3. Large-scale companies from USD 2.5 million annual turnover. The international donor community, in coordination with the government, funds a number of projects that stimulate development of small and medium enterprises in Tajikistan. Outward Investment The Tajik government does not promote outward investments. Private companies from Tajikistan have invested in Kazakhstan, Uzbekistan, Kyrgyzstan, Turkey, Russia, the United Kingdom, the United States, and the UAE, primarily in trade, food processing, real estate, and business development. The Tajik government does not restrict domestic investors from investing abroad. 3. Legal Regime Transparency of the Regulatory System Tajikistan’s regulatory system lacks transparency. Executive documents – presidential decrees, laws, government orders, instructions, ministerial memos, and regulations – are often inaccessible to the public. Businesspeople and investors must purchase access to Adliya, a commercial legal database, to obtain updated legal and regulatory information. Each ministry has its own set of unpublished regulations and these may contradict the laws and/or regulations of other ministries. The Tajik government rarely publishes proposed laws and regulations in draft form for public comment. Although the Tajik government solicited public comment on the 2013 Tax Code, it did not modify the draft law based on the input received. The World Bank is assisting the government with ongoing tax reform, and the government will provide for a period of public comment before the finalization of a draft tax code. TajikStandard, the government agency responsible for certifying goods and services, calibrating and accrediting testing laboratories, and supervising compliance with state standards, lacks experts and appropriate equipment. TajikStandard does not publish its fees for licenses and certificates, or its regulatory requirements. The World Bank funded Public Financial Management Modernization Project helps the Ministry of Finance adopt International Public Sector Accounting Standards (IPSAS). National energy utility company Barqi-Tojik, Dushanbe municipality water and sewage, utility Dushanbevodokanal, and the national rural water utility Khojagii Manziliyu Kommunali received World Bank assistance to fully adopt and apply International Financial Reporting Standards (IFRS). The 2011 Accounting Law requires all Public Interest Entities, including major State-Owned Enterprises, to apply International Financial Reporting Standards (IFRS), but the transition period continues. The Tajik central government is the highest rule-making and regulatory authority. On a case-by-case basis, the central government will delegate some regulatory functions to regional or district levels. The Office of General Prosecutor, Anti-Corruption Agency, the Tax Committee, and the State National Security Committee oversee government and administrative procedures. The Tajik government did not announce any regulatory system and enforcement reforms in 2019. Government agencies submit proposed draft regulations to government commissions. Once cleared, draft regulations receive final review by the relevant ministries and the Executive Office of President. Legally, the public has the right to review and monitor the enforcement process. In practice, however, Tajikistan does not regularly enforce regulations. The Tajik government does not review regulations based on scientific or data-driven assessments. Tajikistan archives its laws, regulations, and policies at www.mmk.tj . Although the government has taken steps to improve its fiscal transparency, publicly-available budget documents fall short of internationally-accepted standards. International assessments recommend that Tajikistan breakdown data by ministry and include information about debt held by State-Owned Enterprises. International Regulatory Considerations Tajikistan is a member of the CIS (Commonwealth of Independent States). Government officials claim they are still studying the prospect of membership in the Eurasian Economic Union. The regulatory system that governs Tajikistan’s cotton sector incorporate CIS and U.S. technical norms. Tajikistan is a WTO member and must notify all draft technical regulations to the WTO Committee on Technical Barriers to Trade. Legal System and Judicial Independence Tajikistan has a civil legal system. The parties to a contract can seek enforcement by submitting their claims to Tajikistan’s Economic Court. Tajikistan has written laws on commercial activities and contracts. Tajikistan’s economic courts review economic/commercial disputes. Legally, the judicial system is independent. In practice, the executive branch interferes in judiciary matters. The current judicial process is neither fair nor reliable. Outcomes tend to favor the government’s executive branch. Legally, regulation and enforcement actions are appealable, and the national court system adjudicates appeals. In practice, national courts typically carry out executive preferences, leaving business and commercial interests vulnerable to government interference. Laws and Regulations on Foreign Direct Investment Several government websites provide information on laws/regulations: Presidency – www.president.tj Parliament – www.parlament.tj/ru Government media – www.jumhuriyat.tj Tax Committee – www.andoz.tj Ministry of Finance – www.minfin.tj National Bank of Tajikistan – www.nbt.tj The Tajik government regulates investments through a number of laws, inter alia, the Law on Investment Agreement, Law on Concessions, Law on Resources, Law on Legal Status of Foreigners, Law on Free Economic Zones, Law on Investments, Concept of State Policy on Investments and Protection of Investments, Law on Natural Resources Tenders, and Law on Privatization of Housing. The government also established the New Coordination Council of Inspection Agencies. According to the proposed draft decree, an initial risk assessment will now guide all inspections. Historically, inspections lack justification and are a means to extract fines and revenue from the private sector. The government’s Action Plan for the Improvement of Investment Climate of the Industrial Sector, Support of Production Entrepreneurship, and Development of National Production for 2016-2018 was approved July 27, 2016 and extended to 2020. The Tajik government does not offer a “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors. Competition and Anti-Trust Laws The Antimonopoly Service (http://www.ams.tj ) is responsible for regulating prices for products of monopolistic enterprises, preventing and eliminating monopolistic activity, and monitoring potential monopolistic abuse and unfair competition. Expropriation and Compensation The Tajik government can legally expropriate property under the terms of Tajikistan’s Law on Investments, Law on Privatization, civil code, and criminal code. The laws authorize expropriation if the Tajik government identifies procedural violations in privatizations of state-owned assets or determines a property has been used for anti-government or criminal activities, as defined in the criminal code. Under the Law on Joint Stock Companies, the government may request that a court cancel the private purchase of shares in SOEs if it determines that there was a violation to the procedure within the original sale. Tajikistan has a history of expropriating land because the properties involved were illegally privatized following Tajikistan’s independence. Following an investigation by government anti-corruption, anti-monopoly, and other law enforcement agencies, the Committee for Investments and State Property Management can issue a finding that the asset was illegally privatized, and request that the Tajik court system order its return to government control. Domestic law requires owners be reimbursed for expropriated property, but the amount of the compensation is usually well below the property’s fair market value. In several cases, Tajik officials have used government regulatory agencies to pressure businesses and individuals into ceding properties and business assets. The Tajik government has not shown any pattern of discrimination against U.S. persons by way of illegal expropriation. All privately owned operations are vulnerable to expropriation actions. The Tajik government may threaten to impose inflated and baseless taxation charges on companies, and use this as leverage to negotiate the transfer of some share of a company to the government. In cases of expropriations, claimants and others have generally had no access to due process. Dispute Settlement ICSID Convention and New York Convention Tajikistan is not a member state of the International Centre for the Settlement of Investment Disputes (ICSID) Convention. Tajikistan became the 147th country to sign and ratify the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Tajikistan acceded to the Convention on August 14, 2012, and it entered into force on November 12, 2012 – 90 days after depositing the signed text at the UN and in accordance with Article XII (2) of the Convention. Nonetheless, Tajik courts have overturned arbitral awards in favor of connected officials. Tajikistan signed the Convention with a number of reservations regarding types of arbitration agreements and decisions that Tajikistan can recognize and implement. One of the reservations established that Tajikistan does not apply the provisions of the Convention to disputes with immovable property; Norway had previously established a similar reservation. Another reservation established that Tajikistan apply the Convention only to disagreements and decisions “arising after the entry into force of the Convention and to decisions made in the territories of third countries.” Investor-State Dispute Settlement In 2011, Tajikistan joined the Cape Town Convention on International Interests and Mobile Equipment. The Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, together usually referred to as the Cape Town Treaty, is an international treaty intended to standardize transactions involving movable property, particularly aircraft and aircraft engines. The treaty creates international standards for registration of ownership, security interests (liens), leases, and conditional sales contracts, and various legal remedies for default in financing agreements, including repossession and the effect of a particular states’ bankruptcy laws. Disputes involving foreign investors have primarily centered on the implementation of tax incentives. In the last ten years, numerous foreign investors have reported difficulty utilizing promised value-added tax exemptions on imported items to Embassy officials. Tajik procedures require businesses to submit in January of the calendar year a list of goods to be imported, the exemption then expires at the end of December in that same year. It takes an average of 430 days to obtain a resolution on a commercial dispute/contract enforcement proceeding in Tajikistan: 40 for filing and service, 120 for trial and judgment, and 270 for enforcement of the decision. International Commercial Arbitration and Foreign Courts Tajik law recognizes the role of local courts in dispute resolution and arbitration but in reality there is no reputable arbitration institution for resolving disputes domestically among individuals and businesses. In practice, however, these courts are primarily used to resolve disputes over agricultural plot demarcations as part of the land reform process, and do not serve as venues to resolve non-agricultural commercial disputes. Tajikistan has signed bilateral agreements with several countries on arbitration and investment disputes, but local domestic courts do not always properly enforce or recognize awards. Bankruptcy Regulations Under Tajikistan’s Law on Bankruptcy (2003), both creditors and debtors may file for an insolvent firm’s liquidation. The debtor may reject overly burdensome contracts, and choose whether to continue contracts supplying essential goods or services, or avoid preferential or undervalued transactions. The law does not provide for the possibility of the debtor obtaining credit after the commencement of insolvency proceedings. Creditors have the right to demand the debtor return creditors’ property if that property was assigned to the debtor less than four months prior to the institution of bankruptcy proceedings. Tajik law does not criminalize bankruptcy. 4. Industrial Policies Investment Incentives According to statements by President Rahmon, there are 240 tax, regulatory, and legal incentives for businesses. According to IFC Business Regulation and Investment Policy project, there are 97 incentives for investments. In practice, businesses and investors cannot access or utilize most of these incentives. The Tajik government has officially expressed an interest in attracting FDI but has taken little practical action to do so. In recent years the Tajik government has issued state guarantees for joint projects, principally with Chinese investments. In 2016, Tajikistan’s government approved an ambitious National Development Strategy 2016-2030, which highlights the critical role of private sector investment. According to this strategy, the Tajik government plans to attract as much as USD 55 billion in FDI by 2030. Given the country’s business and tax environment, however, this plan appears to be more aspirational than realistic. The Committee on Investments and State Property Management’s website lists government-promoted investment opportunities (https://www.investcom.tj/ ). Foreign Trade Zones/Free Ports/Trade Facilitation The Tajik government has established five Free Economic Zones (http://www.fez.tj ) which offer reduced taxes and customs fees to both foreign and domestic businesses. To be eligible for preferential tax treatment, manufacturing companies must invest a minimum of USD 500,000, trading companies USD 50,000, and service and consulting companies USD 10,000. The newest Free Economic Zone was created in March, 2019, in Kulob. Performance and Data Localization Requirements Although the government does not practice forced data localization, there are opaque workforce requirements. According to the Tajik Law on Investment Agreements, the President sets an annual foreign labor quota at the national level and individual companies negotiate company quotas for foreign labor with the Ministry of Labor. New investments negotiate five-year labor quotas and renegotiate annually once the five-year period ends. In June 2015, the Minister of Labor, Migration and Employment announced that for large-scale projects implemented in Tajikistan, which are signed between the Tajik government and either a company registered in another country or a government of another country, at least 80 percent of the workforce must be locally hired. Depending on the qualifications of the local labor force, Tajik authorities may increase this requirement to 90 percent. Tajik legislation permits foreigners to hold senior management and directorial positions. It is possible to obtain visas and residence/work permits, but applicants are required to provide documentary support, and most permits cannot exceed one year. According to Article 3 of government resolution #529, foreign worker permission procedures, investors and depositors with more than USD 500,000 in investments do not require work permits for one year from the date of state registration. Relevant ministries must review and approve all investment proposals. The Tajik government requires all telecommunication service providers to install surveillance equipment. Russia provides the equipment and technology as a part of the Collective Security Treaty Organization agreement. Since 2017, Tajikistan’s Telecommunication agency sends all internet traffic through its unified communication center. The government does not impede the transmission of customer or other business-related data outside the economy/country’s territory unless the data violates anti-terrorist and anti-extremist laws and policies. 5. Protection of Property Rights Real Property The Tajik government uses a cadaster system to record, protect, and facilitate acquisition and disposition of property, but it needs improvement. Even when secured interests in property do exist, enforcement remains an issue. Investors should be aware that establishing title might be a more involved process than in Western countries because title histories can be difficult to find. Since 2007, the U.S. government has provided significant, sustained, and focused support to the Tajik government on market-driven land reforms. Most recently, Tajikistan’s Land Market Development Activity (LMDA), a USD 9.7 million project, successfully launched “one-stop shops” for land registration throughout Khatlon, cutting wait times in half. The activity also supports the launch of a new automated registration system designed to centralize records, streamline procedures, and further simplify land registration. In 2019 the activity facilitated Tajikistan’s first land auction and the government has since conducted several other land auctions. The Tajik government is replicating the one-stop-shop model throughout the country and has established a training center for Land Registration Department employees. The government passed mortgage legislation in March 2008 that allows parties to use immovable property as collateral. The government also adopted revised land code amendments in August 2012. According to domestic law, all land belongs exclusively to the state; individuals or entities may be granted first or second-tier land-use rights. The government restricts foreigners’ first-tier land-use rights to 50 years, while Tajik individuals and entities may have indefinite first-tier land-use rights. Foreigners may request second-tier land-use rights from the government similar to the first-tier rights of Tajik individuals and entities, for periods of up to 50 years. Tajik first-tier land-use rights holders may also grant foreigners lease agreements for up to 20 years. Ownership of rural land-use rights can be particularly opaque, since many nominally privatized former collective farms continue to operate as a single entity. Many of the new owners do not know where their land is and do not exercise their property rights. Officially, Tajik authorities clearly demarcate land by title and affiliation to state-ownership or for private use. Tajik law does not allow the sale of land. All land is the property of the state. If leaseholders do not use land in accordance with the purpose of the lease, then authorities can revert it to other owners. Intellectual Property Rights Tajikistan is a signatory to several international conventions that protect intellectual property rights (IPR), including the World International Property Organization (WIPO) Convention. Tajikistan has signed 17 WIPO administered treaties. The Tajik government is actively working to improve IPR protection. President Rahmon’s 2018 decree mandating that the government use licensed software led to the September 2019 creation of an interagency working group — chaired by the Ministry of Economic Development and Trade, with participation from the Ministries of Foreign Affairs, Internal Affairs, and Culture, as well as the Customs Service and the Department for the Protection of State Secrets — to develop processes to enforce IPR. Additionally, the working group proposed amendments to several IPR-related laws and has a presidential mandate to report progress on its 2020 Action Plan to the Deputy Prime Minister. Notwithstanding the gains Tajikistan has made in the past couple years, numerous challenges remain. Tajikistan is a party to many international IPR agreements, and IP protection provisions exist in the Constitution as well as the country’s criminal and civil codes. Despite these protections, infringement is widespread and enforcement remains weak. The government lacks the technical capacity to effectively protect patents, copyrights, trademarks, and other intellectual property. The Ministry of Economic Development and Trade, the Ministry of Interior, and the Ministry of Culture have regulatory authority. The IPR Unit at the Ministry of Interior was established in 2006 and reorganized in 2011 under the new Unit to Combat IP Crimes. Article 156 of the criminal code allows for seizures of counterfeit goods. For the first time since 2012, the Ministry of Internal Affairs shared information about enforcement actions with the Embassy. At present, IP does not represent a sizeable portion of the Tajik economy, although over 90 percent of software and other media products sold in Tajikistan are unlicensed copies, and many “brand name” consumer goods are counterfeit. The Tajik government has limited human, technical, and financial resources to monitor the implementation of TRIPS. It has adopted several laws within the TRIPS framework: – Law of the Republic of Tajikistan on Trademarks and Service Marks Law of the Republic of Tajikistan on Trademarks and Service Marks Law of the Republic of Tajikistan on Inventions Law of the Republic of Tajikistan on Copyrights and Related Rights Law of the Republic of Tajikistan on Industrial Designs Law of the Republic of Tajikistan on Geographical Indications Law of the Republic of Tajikistan on the Legal Protection of Topographies Integrated Circuits Law of the Republic of Tajikistan on Secret Inventions Law of the Republic of Tajikistan on the Protection of Plant Varieties Law of the Republic of Tajikistan on Competition and Restriction of Monopolistic Activity on Commodity Markets. All other IPR related laws, regulations, and treaties in Tajikistan are accessible here: http://www.ncpi.tj/index.php/ru/pravila/zakony http://www.wipo.int/wipolex/en/profile.jsp?code=TJ As part of its WTO accession process, Tajikistan amended Article 441 of its customs code to provide ex officio authority to its customs officers to seize and destroy counterfeit goods. The Department on Disclosing and Seizing of Counterfeit Products within the Customs Service of Tajikistan has the responsibility to detect IPR-related violations. Currently, the Customs Service has only three IPR products registered in its customs registry. Tajikistan’s Law on Quality and Safety of Products requires IPR violators to pay all expenses for storage, transportation, and destruction of counterfeit goods. To register a patent or trademark with the National Center for Patents and Information (NCPI), applicants must submit an application with all relevant information on the IP and pay a fee. The NCPI (www.ncpi.tj ) will search its records for conflicts and, if none is found, register the IP within 30 days from the time the application is received. In general, the issuance of a trademark might take four to seven months, while obtaining a patent for an invention could take up to two years. Tajikistan was removed from the USTR Special 301 Watch List in 2019 and is not included in the Notorious Markets List. For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ . Resources for Rights Holders U.S. Embassy Economic Section Dushanbe-ICS@state.gov American Chamber of Commerce in Tajikistan +992 (93) 577 23 23 +992 (93) 577 29 29 Director@amcham.tj Info@amcham.tj Public list of local lawyers: https://tj.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/ 6. Financial Sector Capital Markets and Portfolio Investment 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. 7. State-Owned Enterprises World Bank and IMF reports indicate there are 920 state-owned enterprises (SOEs) (up from 583 in 2004) which 24 percent of the labor force, use 50 percent of all available credit, and account for 17 percent of the country’s economic output. SOEs are active in travel, transportation, energy, mining, metal manufacturing/products, food processing/packaging, agriculture, construction, heavy equipment, services, finance, and information and communication sectors. The government divested itself of smaller SOEs in successive waves of privatization, but retained ownership of the largest Soviet-era enterprises and any sector deemed to be a natural monopoly. The government appoints directors and boards to SOEs but the absence of clear governance and internal control procedures means the government retains full control. Tajik SOEs do not adhere to the Organisation for Economic Co-operation and Development (OECD) Guidelines on Corporate Governance for SOEs. When SOEs are involved in investment disputes, it is highly likely that domestic courts will find in the SOE’s favor. Court processes are generally non-transparent and discriminatory. The Committee for Investments and State Property Management maintains a database of all SOEs in Tajikistan, but does not make this information publicly available. Major SOEs include: Travel: Tajik Air, Dushanbe International Airport, Kulob Airport, Qurghonteppa Airport, Khujand Airport, and Tajik Air Navigation; Automotive & Ground Transportation: Tajik Railways; Energy & Mining: Barqi Tojik, TajikTransGas, Oil, Gas, and Coal, and VostokRedMet; Metal Manufacturing & Products: Tajik Aluminum Holding Company (TALCO), and several TALCO subsidiary companies; Agricultural, Construction, Building & Heavy Equipment: Tajik Cement; Food Processing & Packaging: Konservniy Combinat Isfara; Services: Dushanbe Water and Sewer, Vodokanal Khujand, and ZhKX (water utility company); Finance: AmonatBonk (state savings bank), TajikSarmoyaguzor (state investments), TajikSugurta (state insurance); Information and Communication: Tajik Telecom, Tajik Postal Service, and TeleRadioCom In sectors that are open to private sector and foreign competition, SOEs receive a larger percentage of government contracts/business than their private sector competitors. In practice, private companies cannot compete successfully with SOEs unless they have good government connections. SOEs purchase goods and services from, and supply them to, private sector and foreign firms through the Tajik government’s tender process. Tajikistan has undertaken a commitment, as part of its WTO accession protocol, to initiate accession to the Government Procurement Agreement (GPA). At present, however, GPA does not cover Tajik SOEs. Per government policy, private enterprises cannot compete with SOEs under the same terms and conditions with respect to market share (since the government continually increases the role and number of SOEs in any market), products/services, and incentives. Private enterprises do not have the same access to financing as SOEs as most lending from state-owned banks is politically directed. Local tax law makes SOEs subject to the same tax burden and tax rebate policies as their private sector competitors, but the Tajik government favors SOEs and regularly writes off tax arrears for SOEs. Privatization Program The Tajik government conducted privatization on an ad-hoc basis in the 1990s, and then again in the early 2000s. Following a World Bank recommendation, the government has begun a plan to split national electrical utility Barqi-Tojik into three public/private partnerships, responsible for generation, transmission, and distribution but progress has been slow. Foreign investors are able to participate in Tajikistan’s privatization programs. There is a public bidding process, but the privatization process is not transparent. Privatized properties have been subject to re-nationalization, often because Tajik authorities claim on illegal privatization process. In January, 2020 Tajikistan’s lower house of parliament approved amendments to the state privatization law that remove the Roghun energy project and TALCO aluminum company from the list of state facilities precluded from foreign investment. 8. Responsible Business Conduct The Tajik government officially protects consumer rights through its Law on Consumer Protection. Citizens may file lawsuits against violators of consumer rights with the court system. Tajikistan’s state labor union is responsible for safeguarding labor and employment rights. In practice, no enforcement is in place. The Tajik government does not fairly enforce domestic law to protect individuals from adverse business impacts. The Tajik government lacks corporate governance, accounting, or executive compensation standards to protect shareholders. The Tajik government does not encourage public disclosure of these issues or enforce corporate governance practices. There are no independent NGOs, investment funds, worker organizations/unions, or business associations in Tajikistan that promote or monitor responsible business conduct. The Tajik government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. In February 2020, the Extractive Industries Transparency Initiative (EITI) recognized significant progress implementing the EITI Standard in Tajikistan and lifted the country’s suspension, which had been in place since 2016. 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 firstname.lastname@example.org; email@example.com (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 firstname.lastname@example.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. 11. Labor Policies and Practices As of November 2019, the official unemployment rate in Tajikistan was 2.1 percent, but this does not include the roughly one million citizens (12.5 percent of the population) that seasonally migrate in search of work in other countries – primarily to Russia. According to information provided by the Ministry of Labor, Migration, and Employment, Tajikistan’s labor force is comprised of 5.2 million workers. Due to demographic growth, the World Bank estimates that demand for jobs exceeds job growth by a ratio of two to one. Unskilled labor is widely available, but skilled labor is in short supply, since many Tajiks with marketable skills choose to emigrate due to limited domestic employment opportunities. Corruption in secondary schools and universities means degrees may not accurately reflect an applicant’s level of professional training or competency. Due to its weak education system, Tajikistan’s domestic labor force is generally becoming less skilled, and is ill equipped to provide international standards of customer service and management. Foreign businesses and NGOs report difficulty recruiting qualified staff for their organizations in all specialties. The Ministry of Labor, Migration and Employment announced a plan to expand its network of training centers at which Tajik workers can become more marketable. The curriculum at these centers is primarily focused on the migrant community, offering training in English, Russian, culture, and history. It also provides certification of a worker’s existing skills, and short-term vocational training as welders, electricians, tractor operators, textile workers, and confectioners. Article 36 of Tajikistan’s labor code gives employers the right to change workers’ contracts (remuneration, hours, responsibilities, etc.) due to fluctuating market conditions. If the worker does not accept the amended contract, the employer may terminate the worker, but the worker can claim a severance payment equivalent to two months’ salary. Tajikistan’s labor code does not include any provisions for waiving labor regulations to attract or retain investments, but the Tajik government has waived the 70 percent requirement for the employment of Tajik workers in some cases. There are no special regulations regarding treatment of labor in Tajikistan’s four free economic zones. The labor market favors employers. Although the majority of workers are technically unionized, most are not aware of their rights, and few unions effectively advocate for workers’ rights. The Tajik government controls unions. The national trade union federation has not had many disputes with the government. Tajikistan has no formal labor dispute resolution mechanisms. Although collective bargaining can occur, it is rare. During 2019, there were no significant labor strikes in Tajikistan. Tajikistan’s labor code regulates employer-employee relations. The domestic labor code includes reference to international labor standards but employers may frequently violate or misinterpret procedures. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs There are opportunities for the Development Finance Corporation to work in Tajikistan. The Overseas Private Investment Corporation (OPIC) has supported a potato chip factory, an expansion at the University of Central Asia, and consulting companies. Tajikistan signed an investment incentive agreement with the United States in 1992, with provisions for issuing investment insurance, loans, and guarantees administered by OPIC. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 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) 2019 $7,986 2018 $7,523 https://data.worldbank.org/ country/tajikistan Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or internationalSource of data: BEA; IMF; Eurostat; UNCTAD, Other U.S. FDI in partner country ($M USD, stock positions) 2018 $43 2018 $43 BEA data available at https://www.bea.gov/ international/di1usdbal Host country’s FDI in the United States ($M USD, stock positions) 2018 $N/A 2018 $N/A BEA data available at https://www.bea.gov/ international/di1fdinew Total inbound stock of FDI as % host GDP 2019 50.8% 2018 36.7% UNCTAD data available at https://unctad.org/en/Pages/DIAE/ World%20Investment%20Report/ Country-Fact-Sheets.aspx * Source for Host Country Data: National Bank and State Statistics Agency 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 2,860 100% Total Outward 130 100% China, P.R. 1,437 50.2% Italy 129 99.2% Russian Federation 340 11.9% United Kingdom 282 9.8% Switzerland 132 4.6 Iran 124 4.3% “0” reflects amounts rounded to +/- USD 500,000. Table 4: Sources of Portfolio Investment Data not available. 14. Contact for More Information Jason Monks Economic Officer 109A I. Somoni +992 37 2292504 MonksJJ@state.gov Turkmenistan Executive Summary Turkmenistan is slightly larger than the state of California but is sparsely inhabited, with abundant hydrocarbon resources, particularly natural gas. Turkmenistan’s economy depends heavily on the production and export of natural gas, oil, petrochemicals and, to a lesser degree, cotton, wheat, and textiles. The economy is still recovering from a deep recession that followed the late 2014 collapse in global energy prices. The current investment climate is considered high risk for U.S. foreign direct investment. Official figures from the government of Turkmenistan show that the country’s GDP at the official exchange rate was USD 40.76 billion in 2018 and USD 38 billion in 2017. The black-market exchange rate for dollars, on average 4 times the official rate in 2017-2018, suggests the true GDP numbers are much lower. An official number for 2019 GDP was not yet available, though the government reported an implausibly high GDP growth of 6.2 percent in 2019. GDP growth in 2018 was reported as 6.5 percent. Most economic indicators released by the government are widely seen as unreliable. Many businesses assert the government has not taken serious measures to incentivize foreign direct investment outside the petroleum industry and there is no significant U.S. FDI in Turkmenistan. Most U.S. commercial activity in Turkmenistan is related to exports. Some companies, such as General Electric and John Deere, have established themselves as key suppliers of industrial equipment in certain sectors, but their business operations are largely limited to sales to the Turkmen government. Delays in payment to foreign companies are common and some firms require upfront payment prior to delivery of goods. A lack of established rule of law, an opaque regulatory framework, and rampant corruption remain serious problems in Turkmenistan. Contracts are often awarded to companies with close ties to the President’s family. The government strictly controls foreign exchange flows and limits on currency conversion make it difficult to repatriate profits or make payments to foreign suppliers. In 2019 the black market rate was relatively steady, hovering around 18 manat/dollar, while the official exchange rate was pegged at 3.5 manat (TMT)/dollar. The COVID-19 pandemic put additional pressure on Turkmenistan’s hard currency reserves and caused the black-market rate to spike to 21 manat/dollar in the first part of 2020. Although Turkmenistan regularly amends its laws to meet international standards, many businesses have complained that the country often fails to implement or consistently enforce investment-related legislation. There are no meaningful legal protections against government expropriation of assets and there is no independent judiciary. In December 2016, the government expropriated the largest (and only foreign-owned) grocery store in Ashgabat, as well as the shopping center where it was located and a business center, without compensation or other legal remedy. There have also been consistent reports in recent years of officials associated with the family of President Gurbanguly Berdimuhamedov seizing local companies. In some cases, local business owners have reportedly been jailed using security-related laws as a pretext to reopen the business under new ownership. Political stability is the most positive aspect of doing business in Turkmenistan. Where opportunities exist, U.S. companies may be able to secure contracts with the Turkmen government for export of goods or services, in particular for construction materials, agricultural equipment, oil and gas extraction parts, medical devices, and food processing equipment. Many foreign firms working with the Turkmen government are able to provide some form of financing, often through export credit agencies and development banks. The Turkmen government has expressed interest in attracting more U.S. companies to compete for tenders and take part in infrastructure projects and bringing more western technology to the Turkmen market. Key issues to watch: developments in the financial sector, including the TMT/USD black market exchange rate and the severity of restrictions on currency conversion, will determine to some extent the health of the investment climate. The COVID-19 pandemic is expected to have lasting economic consequences for Central Asia in particular, although the extent of the crisis remains to be seen. Downward pressure on global energy prices and fundamental shifts in natural gas markets are also expected to have an outsized impact on Turkmenistan’s government revenue. Table 1: Key Metrics and Rankings Measure Year Index/Rank Website Address TI Corruption Perceptions Index 2019 165 of 180 https://www.transparency.org/country/TKM World Bank’s Doing Business Report 2020 N/A https://www.doingbusiness.org/en/rankings Global Innovation Index 2019 N/A https://www.globalinnovationindex.org/ userfiles/file/reportpdf/GII_2019_EN_English.pdf U.S. FDI in partner country ($M USD, stock positions) 2019 N/A https://apps.bea.gov/international/factsheet/ factsheet.cfm?Area=343&UUID=912a1109- 0ce4-466a-8e93-3c0adb2c4b89 World Bank GNI per capita 2018 6,740 https://data.worldbank.org/ indicator/NY.GNP.PCAP.CD?locations=TM 1. Openness To, and Restrictions Upon, Foreign Investment Policies Toward Foreign Direct Investment Turkmenistan regularly announces its desire to attract more foreign investment, but tight state control of the economy, the government’s inability to meet its financial obligations, a lack of transparency, and a restrictive visa regime have created a difficult foreign investment climate. In January 2013, Turkmenistan created the Agency for Protection from Economic Risks to oversee international investments in the country. The Agency is responsible for reviewing foreign companies wishing to enter Turkmenistan’s market, including an assessment of the financial and political risks associated with allowing the company to do business in Turkmenistan. The arbitrary nature of the agency’s assessments further increases the already opaque and arduous bureaucratic procedures facing foreign firms. Historically, the most promising areas for investment are in the energy, agricultural, and construction sectors and the government often touts foreign loans as investment. However, a number of foreign companies have been forced out of the market in recent years due to their inability to convert local manat into hard currency and non-payment of invoices by the government. The government seeks foreign technology and investment in order to diversify its economy through the development of domestic chemical and petrochemical facilities. Decisions to allow foreign investment are often politically driven; companies offering more “friendly” terms are generally more successful in winning tenders and signing contracts. The tender process is opaque and not all tenders are publicly announced. According to government sources, total capital investment amounted to TMT 54.2 billion (USD 15.5 billion) in 2017 and TMT 40.3 billion (USD 11.5 billion) in 2018. There is no publicly available information on the percent of capital investment that comes from foreign direct investment or loans. In February 2019, the government announced TMT 22 billion (USD 6.3 billion) would be invested in the construction sector in 2019. In June 2018, the State Bank for Foreign Economic Affairs of Turkmenistan announced it was creating an open-ended investment fund to attract foreign direct investment. There is a general lack of integrity and consistency in official economic numbers. In 2012, the government announced that it would invest USD 80.6 billion to construct 450 industrial and social facilities throughout the country by 2020. According to the national program for the transformation of rural areas, of that, TMT 4.9 billion (USD 1.4 billion) was invested in Turkmenistan’s five provinces, including TMT 1.13 billion in Ahal, TMT 1.14 billion in Balkan, TMT 814 million in Dashoguz, TMT 964 million in Lebap, and TMT 850 million in Mary. The government has released no information on the status of this program and it is impossible to verify it independently. Turkmenistan’s key industries are state owned. According to the Union of Industrialists and Entrepreneurs (UIE), the private sector share of the Turkmen economy had reached 70 percent in March 2020. However, this number excludes the hydrocarbon sector, which is estimated to be 35 percent of GDP, and there are no independent estimates available to verify the official statistics. The top economic priorities for the government include increasing domestic production as part of its drive toward import substitution and self-sufficiency in food production. The economy’s health remains reliant on natural gas exports. In May 2010, the government adopted its National Program for the Socio-Economic Development of Turkmenistan (2011-2030). The program envisages diversification of the economy and recognizes, at least in theory, the importance of market and institutional reform. The program also includes the privatization of small- and medium-sized enterprises (SMEs). In October 2006, Turkmenistan adopted an Oil and Gas Development Plan (2007-2030). The Council of Elders, precursor to the People’s Council, adopted the president’s 2018-2024 program on socio-economic development in October 2017. Despite these initiatives, including rhetoric about the importance of privatization, Turkmenistan operates largely as a planned economy. The government selectively chooses its investment partners and establishing a strong relationship with a government official is often essential to achieving commercial success. Officials may “seek rents” for permitting or assisting foreign investors to enter the local market. Some foreign investors have found success working through foreign business representatives who are able to leverage their personal relationships with senior leaders to advance their business interests. Turkmenistan has accepted financing from international financial institutions (IFIs) since its independence in 1991. In 2009, the government reportedly accepted a USD 4 billion loan from the Chinese Development Bank (CDB) to develop Galkynysh, the world’s second largest natural gas field, as well as several significantly smaller loans from the Chinese Export-Import Bank for transportation- and communication-related projects. In 2011, Turkmenistan secured a second USD 4.1 billion loan from the CDB to further develop the Galkynysh gas field. The government also accepted a USD 1 billion loan from the Islamic Development Bank in 2010 to fund infrastructure projects. In 2011, the Asian Development Bank (ADB) provided a USD 125 million loan to the government to finance the procurement and installation of power and signaling equipment for a 311-kilometer section of the Kazakhstan–Turkmenistan–Iran railway. In November 2013, the ADB was appointed as transaction advisor for the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project and TurkmenGas was identified as consortium lead in 2015. In October 2016, the government announced that the Islamic Development Bank would provide a USD 710 million loan to finance the Turkmenistan segment of TAPI. Part of the pipeline in Turkmenistan is reportedly complete but the three partner countries have not yet broken ground on their respective segments. If successful, the project would have a transformative impact on the region, but adequate financing remains an open question. The government tends to support companies wishing to invest in the country and foreign companies with approved government contracts generally do not face problems or significant delays when registering their operations in Turkmenistan. Under Turkmen law, all local and foreign entities operating in Turkmenistan are required to register with the Registration Department under the Ministry of Finance and Economy. Before the registration is granted, however, an inter-ministerial commission that includes the Ministry of Foreign Affairs, the Agency for Protection from Economic Risks, law enforcement agencies, and industry-specific ministries must approve it. Foreign companies without approved government contracts that seek to establish a legal entity in Turkmenistan must go through a lengthy and cumbersome registration process involving the inter-ministerial commission mentioned above. The commission evaluates foreign companies based on their financial standing, work experience, reputation, and perceived political and legal risks. The inter-ministerial commission does not give a reason when denying the registration of a legal entity. In order to participate in a government tender, companies are not required to be registered in Turkmenistan. However, a company interested in participating in the tender process must submit all the tender documents to the respective ministry or agency in person. Many foreign companies with no presence in Turkmenistan provide a limited power of attorney to local representatives who then submit tender documents on the company’s behalf. A list of required documents for screening is usually provided by the state agency announcing the tender. Before the contract can be signed, the State Commodity and Raw Materials Exchange, the Central Bank, the Supreme Control Chamber, and the Cabinet of Ministers must approve the agreement. The approval process is not transparent and is often politically driven. There is no legal guarantee that the information provided by companies to the government will be kept confidential. While Turkmenistan does not have a specific law that governs competition, Article 17 (Development of Competition and Antimonopoly Activities) of the Law on State Support to Small and Medium Enterprises seeks to promote fair competition in the country. Limits on Foreign Control and Right to Private Ownership and Establishment There are no legal limits on foreign ownership or control of companies. In practice, the government has only allowed fully owned foreign operations in the oil sector. The law permits foreigners to establish and own businesses and generally engage in business activities, but revenue repatriation is very challenging as currency conversion remains difficult. The nature of government-awarded contracts may vary in terms of the requirements for ownership of local enterprises. All contractors operating in Turkmenistan for a period of at least 183 days a year must register with the Tax Department of the Ministry of Finance and Economy (formerly the Main State Tax Service). National accounting and international financial reporting standards apply to foreign investors. In the energy sector, Turkmenistan precludes foreign investors from investing in the exploration and production of its onshore gas resources. All land in Turkmenistan is government owned. The State Migration Service of Turkmenistan requires that citizens of Turkmenistan make up 90 percent of the workforce of foreign-owned companies. This policy, however, does not apply to foreign-owned oil and gas companies, which are subject to a more lenient policy requiring only 30 percent of the workforce to be Turkmen citizens, with the expectation that expats will also gradually be replaced by local experts through training programs. Many businesses have asserted there are several ways that the government discriminates against investors, including through excessive and arbitrary tax examinations, arbitrary license extension denials, and customs clearance and visa issuance obstacles. In most cases, the government has insisted on maintaining a majority interest in any joint venture (JV). Foreign investors have been reluctant to enter JVs controlled by the government, mainly because of differing business cultures and conflicting management styles. Although there is no specific legislation requiring foreign investors to receive government approval to divest, in practice they are expected to coordinate such actions with the government. The court system is subject to government interference. Private entities in Turkmenistan have the right to establish and own business enterprises. The 2000 Law on Enterprises defines the legal forms of state and private businesses (state enterprises, sole proprietorships, cooperatives, partnerships, corporations and enterprises of non-government organizations). The law allows foreign companies to establish subsidiaries, though the government does not currently register subsidiaries. The Civil Code of Turkmenistan and the Law on Enterprises govern the operation of representative and branch offices in Turkmenistan. Enterprises must be registered with the Registration Department of the Ministry of Finance and Economy. The 2008 Law on the Licensing of Certain Types of Activities (last amended in November 2015) lists 44 activities that require government licenses. The Law on Enterprises and the Law on Joint Stock Societies allow acquisitions and mergers. Turkmenistan’s legislation is not clear, however, about acquisitions and mergers involving foreign parties, nor does it have specific provisions for the disposition of interests in business enterprises, both solely domestic and those with foreign participation. Governmental approval is necessary for acquisitions and mergers of enterprises with state shares. Other Investment Policy Reviews The government has not undergone an investment policy review by the Organization for Economic Cooperation and Development (OECD) or World Trade Organization (WTO). Turkmenistan has expressed interest in exploring the WTO accession process and in January 2013 created an intergovernmental commission to review the benefits of accession, but until recently, there was little sign of progress or serious interest. In early 2020 the government indicated it would pursue WTO observer status. This may be a precursor to the lengthy process of applying for full membership. According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report (WIR), the volume of FDI into Turkmenistan amounted to USD 2.3 billion in 2016, USD 2.1 billion in 2017 and USD 2 billion in 2018. Laws/Regulations on Foreign Direct Investment Incoming foreign investment is regulated by the Law on Foreign Investment (last amended in 2008), the Law on Investments (last amended in 1993), and the Law on Joint Stock Societies (1999), which pertains to start-up corporations, acquisitions, mergers, and takeovers. Foreign investment activities are affected by bilateral or multilateral investment treaties, the Law on Enterprises (2000), the Law on Business Activities (last amended in 2008), and the Land Code (2004). Foreign investment in the energy sector is subject to the 2008 Petroleum Law (also known as the Law on Hydrocarbon Resources, which was amended in 2011 and 2012). The Tax Code provides the legal framework for the taxation of foreign investment. The Civil Code (2000) defines what constitutes a legal entity in Turkmenistan. The Organization for Security and Co-operation in Europe (OSCE) Center in Ashgabat maintains a database of Turkmenistan’s laws, presidential decrees and resolutions at http://www.turkmenlegaldatabase.info . This information is also available on the Ministry of Justice of Turkmenistan’s website at: http://www.minjust.gov.tm/ru/php/home.php . Turkmenistan has taken a number of steps to promote economic reform, including a law to combat money laundering and terrorism financing and a presidential decree that mandates the use of International Financial Reporting Standards (IFRS). In January 2010, Turkmenistan established a Financial Intelligence Unit under the Ministry of Finance to strengthen its anti-money laundering (AML) efforts and its ability to combat terrorism financing (CFT). On January 1, 2012, Turkmenistan’s banks switched to International Financial Reporting Standards (IFRS). Government agencies transitioned to National Financial Reporting Standards (NFRS) in January 2014. Despite these positive steps, Turkmenistan remains one of the most closed economies in the region and financing of many large projects remains opaque. Most foreign investment is governed by project-specific presidential decrees, which can grant privileges not provided by legislation. Legally, there are no limits on the foreign ownership of companies. In practice, however, the government has allowed fully-owned foreign operations only in the energy sector. Some companies take the presidential decree as a sovereign guarantee. Industrial Promotion In 2007, Turkmenistan created the Awaza (Avaza) Tourist Zone (ATZ) to promote tourism and development on the Caspian Sea coast. It granted some tax incentives to those willing to invest in the construction of hotels and recreational facilities. Amendments to the Tax Code in October 2007 exempted construction and tourist facilities in the ATZ from value-added tax (VAT). Services offered at tourist facilities, including catering and room accommodations, are also exempt from VAT until 2021. In general, tax and investment incentives for the ATZ can be negotiated case by case. Turkmenistan also adopted multiple-year national development programs in various sectors of economy, which might include separate sub-sections on attracting investment in these sectors. However, the country’s visa regime is rigid, making an increase in foreign tourism unlikely in the near term. In addition, as of August 2017, Turkmenistan charges a USD 2 daily fee for foreigners traveling to Turkmenistan, as well as foreigners residing in Turkmenistan if they travel within the country. Information on these programs is not publicly available. While development of tourism is perpetually on the government’s agenda, the concept is largely one of organized tour operators seeking letters of invitation for clients who travel as a group, often to archeological and cultural heritage sites. Business Facilitation Turkmenistan does not have a business registration website for use by domestic or foreign companies. Depending on the type of business activity a foreign company seeks in Turkmenistan, registration with the local statistics office, the Agency for Protection from Economic Risks, the Registration and Tax Departments under the Ministry of Finance and Economy, and the State Commodity and Raw Materials Exchange could all be required. Business registration usually takes about six months and often depends on personal connections in various government offices. The World Bank’s Ease of Doing Business Index has no data for Turkmenistan. Development and implementation of public policies to attract foreign investment, investment coordination, and assistance to foreign investors are carried out by the Cabinet of Ministers of Turkmenistan. The Agency for Protection from Economic Risks under the Ministry of Finance and Economy makes decisions on providing any investment-related services to potential foreign investors based on criteria such as the financial status of the investor. Turkmenistan’s Law on State Support to Small and Medium Enterprises (adopted in August 2009) defines small- and medium-sized enterprises as follows: in industry, power generation, construction, and gas and water supply sectors, small enterprises are defined as those with up to 50 employees and medium enterprises are those with up to 200 employees; in all other sectors small enterprises are those with up to 25 employees and medium enterprises are those with up to 100 people. However, the benefits of the Law on State Support to Small and Medium Enterprises do not apply to: 1) state-owned enterprises; 2) enterprises with foreign investment carrying out banking or insurance activities; and 3) activities related to gambling and gaming for money. As in many countries, business-related activities, particularly any large scale contracts for goods or services, benefits from face-to-face contact. Foreigners wishing to visit Turkmenistan usually request a letter of invitation from the MFA to travel to the country; permission also must be received from the government to meet with state ministries, agencies, and enterprises. It can also be possible to conduct business with the government by hiring a local agent. The U.S. Embassy in Ashgabat can assist with U.S. companies interested in identifying potential local partners and in requesting a letter of invitation, which allows a traveler to board a plane for Turkmenistan and to request a visa on arrival at the airport. Outward Investment The government of Turkmenistan does not promote or incentivize outward investment and there is no investment promotion agency. The existing policies are aimed at reducing imports and promoting exports. According to unofficial reports, individual entrepreneurs have been known to invest in real estate abroad, namely in Turkey and the United Arab Emirates. Those entrepreneurs who invest abroad tend not to disclose such information, fearing possible retribution from the government. The number of inquiries from private businesses that want to invest in the United States has also increased over the past several years. 2. Bilateral Investment Agreements and Taxation Treaties According to UNCTAD, Turkmenistan has signed bilateral investment agreements with 28 countries, including Armenia, Azerbaijan, Bahrain, Belgium, China, Egypt, France, Georgia, Germany, India, Indonesia, Iran, Israel, Italy, Luxembourg, Malaysia, Pakistan, Romania, Russian Federation, Slovakia, Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, and Uzbekistan. In 2009, the European Parliament passed a resolution on the EU-Turkmenistan Interim Trade Agreement, reasoning that economic and trade engagement with the country would stimulate political reforms in Turkmenistan. The United States government considers the Convention with the Union of Soviet Socialist Republics on Matters of Taxation, which entered into force in 1976, to continue to be in effect between the United States and Turkmenistan. There is no bilateral investment treaty between Turkmenistan and the United States. Turkmenistan is one of the former Soviet Republics which are now covered by the 1973 income tax treaty with the Commonwealth of Independent States (CIS). 3. Legal Regime Transparency of the Regulatory System The government does not use transparent policies to foster competition and foreign investment. Laws have frequent references to bylaws that are not publicly available. Most bylaws are passed in the form of presidential decrees. Such decrees are not categorized by subject, which makes it difficult to find relevant cross references. Personal relations with government officials can play a decisive role in determining how and when government regulations are applied. Conversely, running a successful foreign business can lead to problems with local authorities. Some local officials may enforce certain verbal directives as if they were official laws or regulations, without providing any proof of the existence of such laws or regulations. Some successful businesspeople left the country fearing possible targeting by the authorities. In some cases, authorities have jailed the legal owners of a local enterprise using security-related laws as a legal pretext and reopened the business under new ownership. There is no information available on whether the government conducts any market study or quantitative analysis of the impact of regulations. Regulations often appear to follow the government’s try-and-see approach to addressing pressing issues. (See “Expropriation and Compensation” below for specific examples of expropriation.) Some U.S. firms, including General Electric and John Deere, have established themselves as key suppliers in certain sectors, but their business operations are largely limited to sales of industrial equipment to the Turkmen government. Some companies require upfront payment prior to delivery of goods. Government delays in payment to foreign companies and restrictions on converting earnings into hard currency are major contributors to the country’s challenging investment climate. Moreover, arbitrary audits and investigations by several government bodies are common in relation to both foreign and local companies. Belarusian firm Belgorkhimprom is in litigation with Turkmenistan over contractual and non-payment issues. Many businesses report that bureaucratic procedures are confusing and cumbersome. The government does not generally provide information support to investors, and officials use this lack of information to their personal benefit. As a result, foreign companies may spend months conducting due diligence in Turkmenistan. A serious impediment to foreign investment is the lack of knowledge of internationally recognized business practices, as well as the fact that there are few fluent English speakers in Turkmenistan. English-language material on legislation is scarce, and there are very few business consultants to assist investors. Proposed laws and regulations are not generally published in draft form for public comment. The general public is typically not invited to make contributions during parliamentary deliberations on the proposed bills or amendments to legislation and finds out about such laws only when published in the official newspaper. There are no standards-setting consortia or organizations besides the Main State Standards Service. There is no independent body for filing complaints. Financial disclosure requirements are neither transparent nor consistent with international norms. Government enterprises are not required to publicize financial statements, even to foreign partners. Financial audits are often conducted by local auditors, not internationally recognized firms. The legal framework contained in the Law on Petroleum (2008) was a partial step toward creating a more transparent policy in the energy sector. Turkmenistan’s banks completed transitioning to International Financial Reporting Standards (IFRS). State-owned agencies began the transition to the IFRS in 2012 and fully transitioned to National Financing Reporting Standards (NFRS) in January 2014, which is reportedly in accordance with IFRS. While the IFRS may improve accounting standards by bringing them into compliance with international standards, it has no discernible impact on Turkmenistan’s fiscal transparency since fiscal data remains inaccessible to the public. There is no publicly available information regarding the budget’s conformity with IFRS. There is no public consultation process on draft bills and there are no informal regulatory processes managed by nongovernmental organizations or private sector associations. Public finances and debt obligations are not transparent at all. International Regulatory Considerations Turkmenistan pursues a policy of neutrality (acknowledged by the United Nations in 1995) and generally does not join regional blocs. Turkmenistan is, however, a member of the Economic Cooperation Organization (ECO), a ten-member intergovernmental organization created in 1985 to promote trade and economic cooperation among its members. In drafting laws and regulations, the government usually includes a clause that states international agreements and laws will prevail in the case of a conflict between local and international legislation. Turkmenistan is not a member of the Eurasian Economic Union or the WTO, though it may soon pursue WTO observer status. Legal System and Judicial Independence Turkmenistan is a civil law country in terms of the nature of the legal system and many laws have been codified in an effort to transition from Soviet laws. The Mejlis, the country’s parliament, adopts nearly 50 laws per year without involving the public. Most contracts negotiated with the government have an arbitration clause. The Embassy strongly advises U.S. companies to include an arbitration clause identifying a dispute resolution venue outside Turkmenistan. There have been several commercial disputes involving U.S. and other foreign investors or contractors in Turkmenistan, though not all disputes were filed with arbitration courts. Investment and commercial disputes involving Turkmenistan have three common themes: nonpayment of debts, non-delivery of goods or services, and contract renegotiations. The government may claim the provider did not meet the terms of a contract as justification for nonpayment. Several disputes have centered on the government’s unwillingness to pay in freely convertible currency as contractually required. In cases where government entities have not delivered goods or services, the government has often ignored demands for delivery. Finally, a change in leadership in the government agency that signed the original contract routinely triggers the government’s desire to re-evaluate the entire contract, including profit distribution, management responsibilities, and payment schedules. The judicial branch is independent of the executive on paper only and is largely influenced by the executive branch. On February 28, 2015, President Berdimuhamedov signed an updated law entitled “On the Chamber of Commerce and Industry of Turkmenistan” (first adopted in 1993). The new law redefined the legal and economic framework for the activities of the Chamber, defined the state support measures, and created a new body for international commercial arbitration under the Chamber’s purview. This body can consider disputes arising from contractual and other civil-legal relations in foreign trade and other forms of international economic relations, if at least one of the parties to the dispute is located outside of Turkmenistan. The enforcement of the decisions of commercial arbitration outside of Turkmenistan may be denied in Turkmenistan under certain conditions listed under Article 47 of the Law of Turkmenistan, “On Commercial Arbitration”, adopted in 2014 and in force as of 2016. International commercial arbitration is governed by the Law of Turkmenistan “On International Commercial Arbitration” clause and other domestic laws. According to the commercial arbitration law, the parties in dispute can appeal the arbitration decision only to the Supreme Court of Turkmenistan and nowhere abroad. The government of Turkmenistan recognizes foreign court judgements on a case-by-case basis. According to the 2008 Law on Foreign Investment, all foreign and domestic companies and foreign investments must be registered at the Ministry of Finance and Economy. The Petroleum Law of 2008 (last amended in 2012) regulates offshore and onshore petroleum operations in Turkmenistan, including petroleum licensing, taxation, accounting, and other rights and obligations of state agencies and foreign partners. The Petroleum Law supersedes all other legislation pertaining to petroleum activities, including the Tax Code. According to the Land Code (last amended February 2017), foreign companies or individuals are permitted to lease land for non-agricultural purposes, but only the cabinet of ministers has the authority to grant the lease. Foreign companies may own structures and buildings. Turkmenistan adopted a Bankruptcy Law in 1993. Other laws affecting foreign investors include the Law on Investments (last amended in 1993), the Law on Joint Stock Societies (1999), the Law on Enterprises (2000), the Law on Business Activities (last amended in 1993), the Civil Code enforced since 2000, and the 1993 Law on Property. Turkmenistan requires that import/export transactions and investment projects be registered at the State Commodity and Raw Materials Exchange (SCRME) and at the Ministry of Finance and Economy. The procedure applies not only to the contracts and agreements signed at SCRME, but also to contracts signed between third parties. SCRME is state-owned and is the only exchange in the country. The contract registration procedure includes an assessment of “price justification”, and while SCRME does not directly dictate pricing, it does generally set a ceiling for imports and a minimum price for exports. Import transactions must be registered before goods are delivered to Turkmenistan. The government generally favors long-term investment projects that do not require regular hard currency purchases of raw materials from foreign markets. Laws and Regulations on Foreign Direct Investment Under Turkmenistan’s law, all local and foreign entities operating in Turkmenistan are required to register with the Registration Department under the Ministry of Finance and Economy. Before the registration is granted, however, an inter-ministerial commission that includes the Ministry of Foreign Affairs, the Agency for Protection from Economic Risks, law enforcement agencies, and industry-specific ministries must approve it. There is no “one-stop-shop” website for investment that provides relevant laws, rules, procedures, and reporting requirements for investors. Foreign companies without approved government contracts that seek to establish a legal entity in Turkmenistan must go through a lengthy and cumbersome registration process involving the inter-ministerial commission mentioned above. The commission evaluates foreign companies based on their financial standing, work experience, reputation, and perceived political and legal risks. In order to participate in a government tender, the companies are not required to be registered in Turkmenistan. However, a company interested in participating in a tender process must submit all the tender documents to the respective ministry or agency in person. Many foreign companies with no presence in Turkmenistan provide a limited power of attorney to local representatives who then submit tender documents on their behalf. A list of required documents for screening is usually provided by the state agency announcing the tender. Before the contract can be signed, the State Commodity and Raw Materials Exchange, the Central Bank, the Supreme Control Chamber, and the Cabinet of Ministers must approve the agreement. The approval process is not transparent and is often politically driven. There is no legal guarantee that the information provided by companies to the government of Turkmenistan will be kept confidential. Competition and Anti-Trust Laws There is no publicly available information on which agencies review transactions for competition-related concerns. The government does not publish information on any competition cases. While Turkmenistan does not have a specific law that governs competition, Article 17 (Development of Competition and Antimonopoly Activities) of the Law on State Support to Small and Medium Enterprises seeks to promote fair competition in the country. Expropriation and Compensation Three cases raise expropriation concerns for foreign businesses investing in Turkmenistan. In December 2016, the government expropriated the largest (and only foreign-owned) grocery store in Ashgabat, Yimpaş (Yimpash) shopping and business center, without compensation or other legal remedy. In April 2017, the Turkish Hospital in Ashgabat was expropriated without compensation. In September 2017, cell phone service provider MTS suspended its operations after the state-owned Turkmen Telecom cut it off from the network over an alleged expired license. In each case the companies involved had valid licenses or leases. Turkmenistan’s legislation does not provide for private ownership of land. The government has a history of arbitrarily expropriating the property of local businesses and individuals. Under former President Niyazov, the government frequently refused to compensate those affected when the government exercised its right of eminent domain. However, during a March 2007 Cabinet of Ministers meeting, President Berdimuhamedov stated that residents of affected apartments or houses would be provided alternative housing before their homes were demolished. Despite these assurances, many families were evicted from their homes when the government demolished their houses in preparation for the 2017 Asian Indoor and Martial Arts Games and were forced to stay with relatives and friends or rent temporary housing. Dispute Settlement ICSID Convention and New York Convention Turkmenistan is a Party to the 1995 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), but it is not a member of the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). The commercial law enforcement system includes the Arbitration Court of Turkmenistan which tries 13 categories of disputes, both pre-contractual and post-contractual, including taxation, legal foundations, and bankruptcy issues. The court does not interfere in an enterprise’s economic relations, but reviews disputes upon the request of either party involved. Appeals to decisions of the Arbitration Court can be filed at the Arbitration Committee of the Supreme Court of Turkmenistan. Investor-State Dispute Settlement Turkmenistan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States. There are several examples, as recently as 2017, of Western companies being unable to enforce contracts or prevail in formal procedures in investment disputes. In some instances, the government bluntly refused to pay awards to the companies despite a court decision that required it to do so. In others, the government disputes the amount owed, which has made any collection efforts by the companies futile. There are also scattered reports of the government falsifying documents to win arbitration cases. Although Turkmenistan has adopted a number of laws designed to regulate foreign investment, the laws have not been consistently or effectively implemented. The government does not always distinguish between foreign investment and loans from foreign financial institutions. The Law on Foreign Investment, as amended in 2008, is the primary legal instrument defining the principles of investment. The law also provides for the protection of foreign investors. A foreign investor is defined in the law as an entity owning a minimum of 20 percent of a company’s assets. No known investment disputes have involved a U.S. person over the course of the past ten years. International Commercial Arbitration and Foreign Courts There are no alternative dispute resolution mechanisms in Turkmenistan as a means for settling disputes between two private parties. The government’s dispute settlement clause in contracts generally does not allow for arbitration in a venue outside the country. However, the government is sometimes willing to codify the right to international arbitration in contracts with foreign companies. U.S. companies may wish to include an international arbitration clause in their contracts, as political considerations still influence local courts. Several foreign companies have pursued international arbitration against the Turkmen government through the World Bank’s International Center for Settlement of Investment Disputes and the Arbitration Institute of the Stockholm Chamber of Commerce. The commercial law enforcement system includes the Arbitration Court of Turkmenistan, which tries 13 categories of disputes, both pre-contractual and post-contractual, including taxation, legal foundations, and bankruptcy issues. The court does not interfere in an enterprise’s economic relations, but reviews disputes upon the request of either party involved. Appeals to decisions of the Arbitration Court can be filed at the Arbitration Committee of the Supreme Court of Turkmenistan. Bankruptcy Regulations Turkmenistan adopted a Bankruptcy Law in 1993 (last amended March 2016), which protects certain rights of creditors, such as the satisfaction of creditors’ claims in case of the debtor’s inability or unwillingness to make payments. The law allows for criminal liability for intentional actions resulting in bankruptcy. The law does not specify the currency in which the monetary judgments are made. Turkmenistan’s economy is not ranked by the World Bank’s 2020 Doing Business Report. 4. Industrial Policies Investment Incentives According to the Law on Foreign Investments, foreign investors, especially those operating in the free economic zones, may enjoy some incentives and privileges, including license and tax exemptions, reduced registration and certification fees, land leasing rights, and extended visa validity. However, the law is inconsistently implemented and enforced. Foreign investors are more disadvantaged because they face higher tax rates than most local companies. Amendments to the 2005 Tax Code did not affect tax rates. The value-added tax rate (VAT) is 15 percent, an income tax of eight percent is applied to JVs, and an income tax of 20 percent is applied to wholly-owned foreign companies and state-owned enterprises. Dividends are taxed at 15 percent. The personal income tax rate is 10 percent. Under the Simplified Tax System of Turkmenistan, most individual entrepreneurs pay a flat two percent income tax. The president has issued special decrees granting exemptions from taxation and other privileges to specific investors while they recoup their initial investments. The assets and property of foreign investors should be insured with the State Insurance Company of Turkmenistan pursuant to Article 53 of the 2008 Petroleum Law (if applicable) and Article 3 of the 1995 Insurance Law. National accounting and financial reporting requirements apply to foreign investors. All contractors operating in Turkmenistan for a period of at least 183 days a year must register at the Main State Tax Service. As of January 2017, 90 percent of the workforce of a company owned by a foreign investor must be composed of citizens of Turkmenistan. Even large construction and engineering companies executing large-scale turnkey projects must comply with the 90 percent law. Petroleum Production Sharing Agreement (PSA) holders are regulated by the 2008 Petroleum Law. They are subject to a 20 percent income tax and royalties up to 15 percent, depending on the level of production. The social welfare tax, which is 20 percent of the total local staff payroll, is paid by foreign investors and their subcontractors. PSA holders’ employees and their subcontractors pay a personal income tax of 10 percent. Under the Petroleum Law, PSA concessions have been made to eight foreign energy companies: five offshore and three onshore concessions for periods ranging from 20-25 years. Subcontractors of PSA holders can bring their equipment into the country only for the duration of a valid contract. There is no specific legislation that regulates the operations of oil and gas subcontractors. Turkmenistan currently lists 49 import and 20 export goods and materials that are subject to customs duties. The goods and materials on these lists are subject to a 0.2 percent customs fee payment and a charge of TMT 20 (USD 5.7) for every hour a Customs official spends inspecting the imported goods. The Customs Service maintains a list of goods subject to customs duty payment. State enterprises often receive preferential treatment; for example, wool carpets produced at state factories are exempt from customs duties. In contrast, private carpet producers pay USD 20 per square meter in customs duties to export a carpet. Foreign investors are required to adhere to the sanitary and environmental standards of Turkmenistan and should produce products of equal or higher quality than prescribed in national standards. Since Turkmenistan is not a member of WTO, the Embassy is not aware of any measures that U.S. businesses allege are inconsistent with WTO trade-related investment measures (TRIMs). Foreign Trade Zones/Free Ports/Trade Facilitation The Law on Free Economic Zones was enacted in October 2017. The law guarantees the rights of businesses, both foreign and domestic, to operate in free economic zones (FEZs) without profit ceilings. The law forbids the nationalization of enterprises operating in the zones and discrimination against foreign investors. Other rights guaranteed include: Preferential tax status, including an exemption from profit tax if profits are reinvested in export-oriented, advanced technology enterprises; Repatriation of after-tax profits; Exemption from customs duties, except on products of foreign origin; Export of products; and Setting product prices. The Law on Free Economic Zones does not list any FEZs currently in Turkmenistan. Previously there were ten FEZs, but these zones were not successful in drawing increased economic activity, to some extent because the government interfered in the business decisions of firms located in the zones and did not provide financing for FEZ infrastructure. Performance and Data Localization Requirements Ninety percent of the workforce of foreign-owned enterprises must be citizens of Turkmenistan by law. The regulation on this ratio does not differentiate between senior management and other employees. The State Migration Service controls access to the country and monitors the movement of foreign citizens. There have been reports over the last year that some Turkish citizens working for foreign companies in Ashgabat had difficulty renewing their visas and little or no explanation was provided as to why. All visitors staying for more than three business days are required to register with the State Migration Service. Visa-related decisions are not transparent. Travel to most border areas, which covers a large portion of the country, requires a special permit. Representatives of foreign businesses seeking to enter Turkmenistan for the first time often have difficulty obtaining an entry visa unless invited by a government agency or by a local business partner. Established investors frequently complain about bureaucratic delays in securing visas to return to the country. The Government of Turkmenistan does not follow forced localization policies and does not officially require foreign investors to use domestic content in goods and technology. A few foreign companies working in the construction sector on government contracts reported that the government required them to use locally produced cement for their projects. However, this seems to be more of an exception than a rule. The only internet provider is state-owned telecommunications company Turkmen Telekom and service can be unreliable in some areas, particularly outside Ashgabat. The government does not require foreign IT providers to turn over source code or encryption keys. We are not aware of any rules that require foreign companies to maintain a certain amount of data storage in Turkmenistan. 5. Protection of Property Rights Real Property All land is owned by the government. Individuals and entities may own property on the land. The 1993 Law on Property (last amended November 2015) defines the following types of property owners: private, state, non-government organizations, cooperative, joint venture, foreign states, legal entities and citizens, international organizations, and mixed private and state. Some dwellings have been privatized, allowing Turkmenistan’s citizens to rent and sell apartments and houses. The Law on Privatization of State Housing came into force in January 2014. The October 2007 amendments to the Land Code (last amended February 2017) provide land leases for up to 40 years for hotels and recreational facilities in National Tourist Zones. Land and facilities subsequently built on the plot must be transferred to the state after the expiration of the contract. According to the Law on Foreign Investment, foreign investments in Turkmenistan are not subject to nationalization and requisition; foreign properties may be confiscated only following a court decision. However, this law has not been respected in practice. Banks provide preferential mortgage loans (at an annual interest rate of 1 percent for up to 30 years, including a five-year grace period) for the purchase of a new residence. Only government employees qualify for such concessional loans. In addition, government entities often pay 50 percent of the price of the new residence for their employees. Until mid-2015, banks also provided regular mortgage loans (with an annual interest rate of 7-8 percent for up to 10 years) for housing in locations other than so-called “elite” apartments. Liens are not common in Turkmenistan, in part because the 30-year mortgage payment dates have not expired for most of the apartments bought after the country’s independence in 1991. Intellectual Property Rights While the legal structure to protect intellectual property (IP) is strong, enforcement is weak. IP infringement and theft are common. The government has enacted laws designed to protect intellectual property rights (IPR) domestically, but these laws are either arbitrarily implemented or not implemented at all. Among them are the Law on Publishing (2014), Law on State Policy on Research and Technology (2014), Law on Inventions and Industrial Samples (2008), Law on the Protection of Scientific Research (1993), the Patent Law (1993), the Law on Inventions and Industrial Designs (2008), and the Law on Trade and Service Marks and Places of Origin (2008). These regulations provide legal protection to intellectual property registered with the Patent Agency, which was established in 1993. However, due to significant deficiencies in Turkmenistan’s intellectual property protection regime, Turkmenistan has been on the United States Trade Representative (USTR) Special 301 Watch List since 2000. The Law on Foreign Investment guarantees the protection of foreign investors’ intellectual property, including literary, artistic and scientific works, software, databases, patents, and other copyrighted items. Turkmenistan has not yet adopted more explicit and comprehensive administrative and civil procedures and criminal penalties for IPR violations. Turkmenistan adopted a law on copyright and related rights in 2012. The 1993 Most Favored Nation Agreement between the United States and Turkmenistan also provides for favorable treatment of copyrighted materials. The following table presents the major international IPR treaties that Turkmenistan has signed: Treaty Instrument In force Berne Convention Accession: February 29, 2016 May 29, 2016 Hague Agreement Accession: December 16, 2015 March 16, 2016 Nairobi Treaty Accession: December 16, 2015 January 16, 2016 Locarno Agreement Accession: March 7, 2006 June 7, 2006 Nice Agreement Accession: March 7, 2006 June 7, 2006 Vienna Agreement Accession: March 7, 2006 June 7, 2006 Strasbourg Agreement Accession: March 7, 2006 March 7, 2007 Madrid Protocol Accession: June 28, 1999 September 28, 1999 Paris Convention Declaration of Continued Application: March 1, 1995 December 25, 1991 Patent Cooperation Treaty Declaration of Continued Application: March 1, 1995 December 25, 1991 WIPO Convention Declaration of Continued Application: March 1, 1995 December 25, 1991 Turkmenistan has not signed the World Intellectual Property Organization (WIPO)’s 1996 Copyright Treaty, the 1996 WIPO Performances and Phonograms Treaty (collectively known as the WIPO Internet treaties), or the 2000 Patent Law Treaty. In August 2015, Turkmenistan adopted an Action Plan for the Development of an Intellectual Property System in Turkmenistan for 2015-2020, and the plan includes a section on the role of IPR in attracting foreign investment into the country. However, it is still a challenge to purchase legally-recorded material in Turkmenistan. Border enforcement of IPR is weak, allowing pirated goods to cross easily into Turkmenistan for sale. Turkmenistan’s laws do not provide for either civil or criminal ex-parte search procedures needed for effective anti-piracy enforcement. Turkmenistan signed WIPO treaties on industrial property rights and patent cooperation in 1995. Turkmenistan has also joined the Eurasian Patent Organization created as part of the WIPO for CIS countries. The Copyright Law was enacted in 2000 as part of Turkmenistan’s Civil Code. This law defines copyrighted products and the rights of owners of the copyrighted products and provides for their legal protection. In January 2012, the law was amended to include additional IPR-related provisions, including exclusive rights (absolute title), licensing agreements, and the collective management of ownership rights. There is a Patent Department in the Ministry of Finance and Economy which issues patents on intellectual property but does not enforce copyright laws. In November 2014, the government enacted a new Law on Publishing that establishes the legal basis for oversight of publishers, manufacturers, distributors, and consumers of printed materials. The law states that illegal reproduction of printed materials and other violations of intellectual property rights of the publisher will carry monetary penalties and allow for full recovery of losses incurred, including lost income. Article 153 of the Criminal Code details the criminal penalties for IPR-related violations. Currently articles such as DVDs, software, and literature are freely copied and sold. Counterfeit goods constitute a significant share of most consumer goods including imported textile products, footwear, and electronics. There is no publicly available information or estimate on any seizure, storage, or destruction of counterfeit goods. Most software in use is unlicensed, including in many government ministries. The government has not committed to purchasing licensed software. Turkmenistan is not listed on the USTR Notorious Markets List. For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at https://www.wipo.int/directory/en/ . 6. Financial Sector Capital Markets and Portfolio Investment Turkmenistan’s underdeveloped financial system and severe hard currency shortage significantly hinder the free flow of financial resources. The largest state banks include: the State Bank for Foreign Economic Relations (Vnesheconombank), Dayhanbank, Turkmenbashy Bank, Turkmenistan Bank, and Halk Bank. These banks have narrow specializations—foreign trade, agriculture, industry, social infrastructure, and savings and mortgages, respectively. Senagat Bank took over Garagum Bank in 2017 and now is the sole remaining local bank providing general banking services for businesses. In September 2011, the government established the State Development Bank to provide loans to state-owned and private enterprises implementing projects that increase production and create jobs. The government also established Rysgal Bank in 2011 to provide general banking services to the members of the Union of Industrialists and Entrepreneurs. There are also five foreign commercial banks in the country: a joint Turkmen-Turkish bank (joint venture of Dayhanbank and Ziraat Bank), a branch of the National Bank of Pakistan, a branch of Saderat Bank of Iran, as well as Deutsche Bank and Commerzbank offices, which provide European bank guarantees for companies and for the Turkmen government but do not provide general banking services. Insufficient liquidity can make it difficult for investors to exit the market easily. There were no reported cases where foreign investors received credit on the local market. The Union of Industrialists and Entrepreneurs, a nominally- independent organization of private companies and businesspeople, is in fact closely controlled by the government and issues loans with no more than one per cent interest per annum to its member companies to finance projects in strategic sectors, including animal husbandry, agriculture, food production and processing, and industrial development. According to unofficial reports, credit is not allocated on market terms. The European Bank for Reconstruction and Development (EBRD) provides some loans to private small- and medium-sized enterprises (SMEs) in Turkmenistan. In November 2018, the Asian Development Bank (ADB) announced it allocated a USD 500 million loan to Turkmenistan to reinforce its power transmission network, improve reliability of power supply and increase electricity exports. The Islamic Development Bank is also active in Turkmenistan and provides financing for infrastructure projects, including USD 700 million for the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. There is no publicly available information to confirm whether the government or Central Bank respect IMF Article VIII. There is no stock market in the country. Money and Banking System The total assets of the country’s largest bank, Vnesheconombank, were TMT 36.2 billion or about $10.4 billion at the official exchange rate as of December 31, 2018. The bank’s financial statements are published at: http://www.tfeb.gov.tm/en/about-bank-en/financial-statements . Vnesheconombank’s list of correspondent banks is available at: http://www.tfeb.gov.tm/index.php/en/about-bank-en/correspondent-relations . The assets of other banks are believed to be much smaller. All banks, including commercial banks, are tightly regulated by the state. Commercial banks are prohibited from providing services to state enterprises. State banks primarily service state enterprises and allocate credit on subsidized terms to state entities. Foreign investors are only able to secure credit on the local market through the Pakistan National Bank and equity loans from EBRD and Turkmen-Turkish Bank. There are no capital markets in Turkmenistan, although the 1993 Law on Securities and Stock Exchanges outlines the main principles for issuing, selling, and circulating securities. The 1999 Law on Joint Stock Societies further provides for the issuance of common and preferred stock and bonds and convertible securities in Turkmenistan, but in the absence of a stock exchange or investment company, there is no market for securities. In late 2015, the President signed a decree on the issuance of government bonds for a term of up to five years on the basis of the refinancing rate of the Central Bank of Turkmenistan (five percent). The bonds have not yet been issued as of March 2020. The Embassy is not aware of any official restrictions on a foreigner’s ability to establish a bank account based on residency status, though in practice foreigners may only open foreign currency accounts, and not manat accounts. There is no publicly available information on any rules related to hostile takeovers. Foreign Exchange and Remittances Foreign Exchange The government tightly controls the country’s foreign exchange flows. On January 1, 2009, Turkmenistan introduced the re-denominated manat (TMT), which had a fixed exchange rate of 2.85 TMT/1 USD until January 1, 2015, when Turkmenistan devalued its currency against the U.S. dollar to 3.50 TMT/1 USD. In October 2011, Turkmenistan adopted the Law on Hard Currency Control and the Regulation of Foreign Economic Relations as a step towards bringing the national legislation into compliance with international standards. The Central Bank controls the fixed rate by releasing U.S. dollars into official exchange markets. Foreign exchange regulations adopted in June 2008 allow the Central Bank to provide banks with access to foreign exchange. These regulations also allowed commercial banks to open correspondent accounts. For the last several years, the government has been unable to meet demand for U.S. dollars. For example, debit cards have daily and monthly withdrawal limits. (The limits fluctuate, but tend to hover around USD 5 per day and USD 150 per month.). The government has also imposed administrative procedures that make withdrawals more cumbersome (e.g. proof of residency is now required). On January 12, 2016, the Central Bank of Turkmenistan further restricted access to foreign currency and issued a press release preventing banks from selling U.S. dollars at the country’s exchange points. In addition, when an individual purchases foreign currency through a wire transfer (limited to the equivalent of the monthly salaries of the individual and his/her immediate family members’ monthly salaries), the currency (at an exchange rate of 3.50 TMT/1 USD) must be deposited onto the individual’s international debit card (Visa or MasterCard). The individual does not receive cash. There have been media reports in the past that Vnesheconombank has blocked the Visa cards of some of its customers without notice. Moreover, the TMT used to purchase the foreign currency must be transferred through the individual’s TMT account. If the individual wishes to pay cash, he or she must prove the origins of the cash with an official document. The government also introduced an amendment to the Administrative Offenses Code that raises the fines for illegal foreign exchange transactions (i.e., selling and purchasing foreign currency via informal channels) and also trading in foreign currency on the territory of Turkmenistan. Turkmen manat is not freely convertible, and the inability to convert enough manat into a hard currency is problematic for many companies operating in Turkmenistan. The energy sector is somewhat shielded from the problem, as oil producers operating under the Petroleum Law (2008) receive a share of their profit in crude oil, which they ship to other Caspian Sea littoral states. In many cases, petrochemical investors have negotiated deals with the government to recoup their investment in the form of future petroleum products. Some U.S. companies, however, are not being paid by various government agencies and ministries for services and goods delivered. Converting the local currency and repatriating funds remains a challenge for foreign companies and their local distributors operating in Turkmenistan. Turkmenistan imports the vast majority of its industrial equipment and consumer goods. The government’s export earnings, foreign exchange reserves, and foreign loans pay for industrial equipment and infrastructure projects. At the end of 2015, a black market for U.S. dollars emerged in Turkmenistan. During the period covered by this report, the black market rate was relatively steady at roughly TMT 18/USD in 2019. In 2020, the black market rate spiked to TMT 20/USD during the COVID-19 pandemic. Remittance Policies Foreign investors generating revenue in foreign currency do not generally have problems repatriating their profits; the problem lies with foreign companies earning manat. These companies struggle to convert and repatriate earnings. Some foreign companies receiving income in Turkmen manat seek indirect ways to convert local currency to hard currency through the local purchase of petroleum and textile products for resale on the world market. Since the government of Turkmenistan introduced numerous limitations on foreign currency exchange in January 2016, converting local currency remains a challenge in many sectors. Some foreign companies have complained of non-payment or major delays in payment by the government. In June 2010, Turkmenistan became a full member of the Eurasian Group (EAG), a regional organization to combat money laundering and terrorism financing. EAG is an associate member of the Financial Action Task Force (FATF). EAG aims to increase the transparency of financial systems in the region, including measures related to correspondent banking, money and value transfer services, and wire transfer services. Sovereign Wealth Funds The government maintains a sovereign wealth fund known as the Stabilization Fund, which mainly holds state budget surpluses. The government also keeps a separate fund known as the Foreign Exchange Reserve Fund (FERF) for oil and gas revenues. There is no publicly available information about the size of these funds or how they are managed. 7. State-Owned Enterprises State-owned enterprises (SOEs) dominate Turkmenistan’s economy and control the lion’s share of the country’s industrial production, especially in onshore hydrocarbon production, transportation, refining, electricity generation and distribution, chemicals, transportation, and construction material production. Education, healthcare, and media enterprises are, with some rare exceptions, also state owned and tightly controlled. SOEs are also to varying degrees involved in agriculture, food processing, textiles, communications, construction, trade, and services. Although SOEs are often inefficient, the government considers them strategically important. While there are some small-scale private enterprises in Turkmenistan, the government continues to exert significant influence in this area. There are no mechanisms to ensure transparency or accountability in the business decisions or operations of SOEs. There is no publicly available information on the total assets of SOEs, total net income of SOEs, the number of people employed by SOEs and the expenses these SOEs allocate to research and development (R&D). There is no published list of SOEs. Turkmenistan is not a member of the WTO and is not a party to the Government Procurement Agreement (GPA) within the framework of the WTO. SOEs are not uniformly subject to the same tax burden as their private sector competitors. Privatization Program Efforts to privatize former state enterprises have attracted little foreign or domestic investment. Outdated technology, poor infrastructure, and bureaucratic obstacles can make privatized enterprises unattractive for foreign and local investors. In November 2012, Turkmenistan adopted a national program related to the privatization of state-owned enterprises and facilities. The document identifies the main goals and procedures for privatizing state property. The program was implemented in three phases: privatization of small enterprises (2013), privatization of medium-sized enterprises (2014-2015), and privatization of large enterprises (2016-2017). The privatization of state enterprises in construction, transportation, and communications and the creation of joint stock companies are part of the program. Strategic facilities, as identified by the government, are not subject to privatization, including those related to natural resources. Other property not subject to privatization includes objects of cultural importance, the property of the armed and security forces, government institutions, research institutes, the facilities of the Academy of Sciences, the integrated energy system, and the public transportation system. The rules and procedures governing privatization in Turkmenistan lack transparency. Foreign investors are allowed to participate in the bidding process only after they have been approved by the State Agency for Protection from Economic Risks under the Ministry of Finance and Economy. In December 2013, the parliament passed the Law on the Denationalization and Privatization of State Property, which took effect in July 2014. The official newspaper Biznes Reklama (Business Advertising) of the Ministry of Trade and Foreign Economic Affairs published the following state statistics on privatized state property as of January 1, 2019. It is difficult to verify the validity of these numbers. Privatized State Property in Turkmenistan 2010-2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Entities available for privatization 20 24 31 32 118 154 200 247 333 Entities Privatized 20 4 7 1 86 36 46 47 86 Despite official comments emphasizing the importance of private sector growth, supporting privatization has been low on the government’s agenda. All land is government owned. Private citizens have some land usage rights, but these rights exclude the sale or mortgage of land. Land rights can be transferred only through inheritance. Foreign companies or individuals are permitted to lease land for non-agricultural purposes, but only the cabinet of ministers has the authority to grant leases. Since 2018, the government offers some agricultural land for long-term 99-year leases to farmers. As of 2019, 40 such leases existed. The government has attempted to introduce an element of competition for state contracts by announcing international tenders for some projects. The tender process is nontransparent. On December 20, 2014, Turkmenistan adopted the Law on Tenders that went into effect on July 1, 2015. The law ostensibly seeks to develop competition among bidders, improve transparency and implementation of tender procedures, and ensure compliance with international standards. 8. Responsible Business Conduct The government implements various policies and regulations that it states promote socially responsible business conduct (RBC), though there is no point of contact or ombudsperson for stakeholders to raise concerns about RBC. In the past, foreign companies operating in Turkmenistan were not required to implement social projects. Social welfare activities connected with doing business in Turkmenistan generally take the form of financial sponsorship of cultural or athletic events, providing academic scholarships to Turkmen students, or the construction of small-scale facilities, such as medical clinics, to benefit the locality around a company’s facilities. Some large foreign firms have felt pressured to make significant contributions to government construction projects. There are no independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC. In March 2013, Turkmenistan introduced mandatory environmental insurance for all types of enterprises and organizations (with the exception of government-financed entities) carrying out activities that are potentially hazardous to the environment. This insurance program was adopted to raise environmental awareness, hold industries and businesses accountable for violating environmental laws and regulations, and prevent and respond to environmental disasters. The mandatory environmental insurance regulation includes a list of hazardous work and facilities subject to such insurance. The mandatory environmental insurance also applies to foreign legal entities, their branch offices, and entrepreneurs. The State Committee for Environmental Protection and Land Resources conducts ecological inspections for companies’ compliance with regulations. Turkmenistan is not a participant in the Extractive Industries Transparency Initiative (EITI) . It is not clear if the government of Turkmenistan follows the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. 9. Corruption There is no single specifically designated government agency responsible for combating corruption. In June 2017, Turkmenistan set up the State Service for Combating Economic Crimes (SSCEC) to investigate officials and state-owned enterprises on corruption charges. The SSCEC, which reports to the Minister of Internal Affairs, does not appear to be an independent and objective investigative body. There is no independent corruption watchdog organization. Anti-corruption laws are not generally enforced, and rampant corruption remains a problem. Formally, the Ministry of Internal Affairs (including the police), the Ministry of National Security, and the General Prosecutor’s Office are responsible for combating corruption. President Berdimuhamedov has publicly stated that corruption will not be tolerated. In 2020, Transparency International ranked Turkmenistan 165 among 180 countries in its Corruption Perceptions Index. Foreign firms have identified widespread government corruption, including in the form of bribe seeking, as an obstacle to investment and business development throughout all economic sectors and regions. It is most pervasive in the areas of government procurement, the awarding of licenses, and customs. In March 2014, the parliament adopted a law on Combating Corruption to help identify and prosecute cases of corruption. The law prohibits government officials from accepting gifts (in person or through an intermediary) from foreign states, international organizations, and political parties. It also severely limits the ability of government officials to travel on business at the expense of foreign entities. Notwithstanding the 2014 law, corruption remains rampant. There are no NGOs involved in monitoring or investigating corruption. Certain government officials including traffic police are known to ask for bribes. 10. Political and Security Environment Turkmenistan’s political system has remained stable since Gurbanguly Berdimuhamedov became president in February 2007 and, with the exception of a reported coup attempt in 2002, there is no history of politically-motivated violence. There have been no recorded examples of damage to projects or installations. The government does not permit political opposition and maintains a tight grip on all politically sensitive issues, in part by requiring all organizations to register their activities. The Ministry of National Security and the Ministry of Internal Affairs actively monitor locals and foreigners. The country’s parliament passed a Law on Political Parties in January 2012 that defines the legal grounds for the establishment of political parties, including their rights and obligations. In August 2012, under the directive of President Berdimuhamedov, Turkmenistan created a second political party, the Party of Industrialists and Entrepreneurs. This pro-government party, created from the membership of the Union of Industrialists and Entrepreneurs, has a platform nearly identical to the President’s Democratic Party. The same is true for the Agrarian Party, which was created in September 2014 in an effort to move Turkmenistan towards a multi-party system. Organized crime is rare, and authorities have effectively rooted out organized crime groups and syndicates. Turkmenistan does not publish crime statistics or information about crime. The Department of State has reported significant human rights issues in Turkmenistan. These issues include: reports of torture by police and prison officials; arbitrary detention; harsh and life-threatening prison conditions; political prisoners; arbitrary or unlawful interference with privacy; serious problems with the independence of the judiciary; severe restrictions on free expression, the press, and the internet, including threats of violence and threats of unjustified arrests or prosecutions against journalists; censorship and site blocking; interference with the freedoms of peaceful assembly and freedom of association; severe restrictions of religious freedom; substantial restrictions on freedom of movement; restrictions on political participation; widespread corruption; trafficking in persons; and the existence of laws criminalizing consensual same-sex sexual activity between men. The Department of State’s 2019 Human Rights Report for Turkmenistan is available at: https://www.state.gov/reports/2019-country-reports-on-human-rights-practices/turkmenistan/ 11. Labor Policies and Practices Labor issues are governed by the Labor Code of Turkmenistan (last amended in July 2009), the Social Welfare code, and a number of regulations approved by presidential resolutions. Turkmenistan joined the International Labor Organization in 1993. Unemployment and underemployment are major societal issues, particularly among Turkmenistan’s youth and in rural communities. Unofficial estimates of unemployment range from 10 to 50 percent. Due to a severe shortage of jobs and low salaries in the country, anecdotal evidence indicates that growing numbers of young Turkmen have emigrated or are emigrating to other countries, including Turkey, Russia, and other former Soviet republics. In order to stop outward migration, the State Migration Service of Turkmenistan on numerous occasions has arbitrarily denied exit to citizens at the airport and border points. In February 2016, President Berdimuhamedov signed a decree “ On Matters of Registration of the Individuals Arriving in Ashgabat for Employment Purposes,” (https://habartm.org/wp-content/uploads/2016/02/Karar1.pdf ) which makes it more difficult for residents from other regions to seek employment in the capital city, Ashgabat. The decree introduces a work permit system by the Ministry of Labor and Social Protection, which may issue work permits for a maximum of one year. Ashgabat residents are given priority over non-residents for job openings in the city. The government has also introduced a requirement that 90 percent of any firm’s workforce be Turkmen citizens. The government continues to be the largest employer in the country. The Law on Child Labor (2004) prohibits the employment of children under the age of 16 and makes employment in hazardous and harmful labor illegal for any individual under the age of 18. Turkmenistan’s labor regulations require that all vacancies be posted at local employment offices. Most vacancies are for low-skilled jobs. Only a few state agencies post job advertisements in the local newspaper. Most government positions are filled through personal connections. Employment offices have not been effective tools in reducing unemployment, or in providing suitable candidates for international companies. The National Center of Trade Unions of Turkmenistan, the successor to the Soviet-era system of government-controlled trade unions, is the only trade union association allowed in the country. Due to low oil prices, the government has taken steps to reduce expenses by laying off some public sector employees. There have been many reports of ministries not meeting payroll requirements for staff. Article 294 of the Labor Code of Turkmenistan states that the courts handle employer-employee labor disputes. Article 368 states that disputes arising out of collective bargaining and collective agreements can be investigated by commissions on labor disputes, trade unions of enterprises, and the court system. Although the Labor Code allows for collective bargaining, in practice it is not used and the courts do not perform the labor dispute resolution function they are assigned. The International Labor Organization’s Turkmenistan-specific profile is available at: https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:11110:0::NO::P11110_COUNTRY_ID:103551 The official workday in Turkmenistan is eight hours, with the standard work week consisting of 40 hours over five days. The 2009 Labor Code reconfirmed a 40-hour work week, protected workers’ rights by promoting the role of trade unions, guaranteed job security by restricting short-term contracts, and extended the duration of annual leave from 24 calendar days to 30 calendar days. In practice, government and many private sector employees are required to work 10 hours per day and/or a sixth day without compensation. Health and safety regulations exist but are not commonly enforced. Foreigners with government permission to reside in Turkmenistan may work and are subject to the same labor regulations as citizens unless otherwise specified by law. Turkmenistan was listed as a Tier 3 country in the State Department’s most recent Trafficking in Persons Report. This means that the Government of Turkmenistan does not fully comply with the minimum standards outlined in the Trafficking Victims Protection Act of 2000 and has not made significant efforts to do so. Turkmenistan’s Tier 3 ranking is due in part to the government’s continued mobilizations of adult citizens for forced labor in the annual cotton harvest and in public works projects. The Department of State’s 2019 Trafficking in Persons Report for Turkmenistan is available at: https://www.state.gov/reports/2019-trafficking-in-persons-report-2/turkmenistan/. On May 18, 2018, U.S. Customs and Border Protection issued a Withhold Release Order for all Turkmenistan cotton or products produced in whole or in part with Turkmenistan cotton. U.S. Customs and Border Protection issued the order under the authority of the the Trade Facilitation and Trade Enforcement Act of 2015 which includes prohibitions on the importation of products made by forced labor, including child labor. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs Turkmenistan signed an Investment Incentive Agreement with the United States in 1992, but there has been no investment insurance, investment guarantees, or financing provided by the Overseas Private Investment Corporation (OPIC) for Turkmenistan. The recently-formed U.S. International Development Finance Corporation (DFC), which consolidated OPIC and USAID’s Development Credit Authority, is currently evaluating opportunities for financing and investment insurance in Turkmenistan. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics Government data on many economic indicators, including Foreign Direct Investment (FDI), are generally unavailable or unreliable. According to various independent analysts, however, most foreign investment is directed toward the country’s oil and gas sector. Turkmenistan has a natural gas production sharing agreement (PSA) for the Bagtyyarlyk contractual territory with the China National Petroleum Corporation (CNPC), the only foreign firm Turkmenistan has allowed into onshore gas production. In the oil sector there are two onshore PSAs: the Nebitdag contractual territory operated by Italy’s ENI, and the Hazar project operated jointly by the Turkmennebit state oil concern and Mitro International of Austria. In addition, there are five PSAs for offshore operations: Block I operated by Petronas of Malaysia, Block II (Cheleken Contractual Territory) operated by Dragon Oil (UAE), Block III operated by Buried Hill (UK), Blocks 19 and 20 operated by ENI (Italy), and Block 21 operated by Areti (Russian-owned, headquartered in Switzerland). RWE of Germany terminated its PSA for Block 23 with the Government of Turkmenistan and closed down its Turkmenistan branch in December 2017. 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), in billions 2018 $40.76 2018 $61.8 http://country.eiu.com/Turkmenistan/ ArticleList/Updates/Economy Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other U.S. FDI in partner country ($M USD, stock positions) N/A N/A ** BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Host country’s FDI in the United States ($M USD, stock positions) N/A N/A ** BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Total inbound stock of FDI as % host GDP N/A N/A 2018 81.6% UNCTAD data available at https://unctad.org/sections/dite_dir/ docs/wir2019/wir19_fs_tm_en.pdf * Source for Host Country Data: 2019 Statistical Yearbook of Turkmenistan, State Committee of Statistics of Turkmenistan ** Statistics not available. Amount is either zero, or is grouped with other countries under “other” in the source data. Table 3: Sources and Destination of FDI The IMF does not detail the sources and destination of FDI for Turkmenistan: http://data.imf.org/CDIS UNCTAD has limited data on FDI for Turkmenistan: https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx Table 4: Sources of Portfolio Investment The IMF does not provide sources of portfolio investment for Turkmenistan: http://data.imf.org/CDIS 14. Contact for More Information Courtney Brasier Economic Officer U.S. Embassy Ashgabat Economic-Commercial Section 9 Pushkin Street, Ashgabat, Turkmenistan (+993 12) 94-00-45 trade-Ashgabat@state.gov 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 $1 billion in the London Stock Exchange. This success opened the country to foreign fixed income investors and set a benchmark for future foreign bond issuances by Uzbekistan-based companies. At the same time, the government’s poor progress in reducing the domination of state-owned monopolies in the economy, continued non-transparent public procurement practices, and cases of government agencies’ and state-owned enterprises’ inconsistent compliance with contract commitments have negatively impacted Uzbekistan’s investment climate. Furthermore, private businesses have expressed concerns about local government development policies failing to adhere to recently adopted legislation on the protection of private property. Small businesses have reported expropriation of their property in favor of well-connected companies or development projects supported by regional or municipal authorities. Enforcement of legislation on protection of intellectual property rights also remains insufficient. Table 1: Key Metrics and Rankings Measure Year Index/Rank Website Address TI Corruption Perceptions Index 2019 153 of 180 http://www.transparency.org/ research/cpi/overview World Bank’s Doing Business Report 2020 69 of 190 http://www.doingbusiness.org/ en/rankings Global Innovation Index 2019 N/A https://www.globalinnovationindex.org/ analysis-indicator U.S. FDI in partner country ($M USD, historical stock positions) 2018 $71 million http://apps.bea.gov/international/ factsheet/ World Bank GNI per capita 2018 $2,020 http://data.worldbank.org/indicator/ NY.GNP.PCAP.CD 1. Openness To, and Restrictions Upon, Foreign Investment Policies Towards Foreign Direct Investment The Government of Uzbekistan (“the government” or “the GOU”) has declared attracting foreign direct investments (FDI) one of its core policy priorities, acknowledging that greater private sector involvement is critical for economic growth and addressing social challenges caused by relatively high unemployment and poverty rates. In 2019, the GOU launched a policy to improve the business environment through simplification of registration procedures for new businesses, combatting corruption, and increasing transparency. To attract more foreign investors, the government simplified entry visa procedures and extended residence permits for foreigners. The new Tax Code, which became effective on January 1, 2020, lowered corporate and individual income taxes by almost 50% and considerably simplified taxation procedures for private entrepreneurs. President Mirziyoyev challenged all regional governments to improve the attractiveness of their territories to foreign investors and provide FDI progress reports on a quarterly basis. He also created a Supreme Economic Council, envisioned as a platform for coordination of further economic reforms with international businesses, expert communities, and development banks. The government has yet to address several fundamental problems plaguing businesses and investors, such as the domination of state-owned monopolies in key sectors of Uzbekistan’s economy, the lack of transparency in public procurements, its poor track record on enforcing public-private contracts, an underdeveloped and overregulated banking sector, poor protection of private property rights, and insufficient enforcement of intellectual property rights. Uzbekistan’s 2020 Ease of Doing Business (DB) rank rose from 76th to 69th place and its DB Score indicator improved by 2.1 points to 69.9 (100 is the standard of excellence). By law, foreign investors are welcome in all sectors of Uzbekistan’s economy and the government cannot discriminate against foreign investors based on nationality, place of residence, or country of origin. However, government control of key sectors, including energy, telecommunications, transportation, and mining has discriminatory effects on foreign investors. The government has demonstrated a continued desire to control capital flows in major industries, encouraging investments in a preapproved list of import-substituting and export-oriented projects, while investments in import-consuming projects can generally expect very little support. The Ministry of Investments and Foreign Trade (https://mft.uz/en/, http://www.invest.gov.uz/en/) provide foreign investors with consulting services, information and analysis, business registration, and other legal assistance, as does the Chamber of Commerce and Industry of Uzbekistan (http://www.chamber.uz/en/index), on a contractual basis. The GOU organizes and attends media events and joint government-business forums on a regular basis. In June 2019, Uzbekistan hosted the first U.S. Department of Commerce Certified Trade Mission to Tashkent. Supported by the American Chamber of Commerce in Uzbekistan, this event provided a valuable opportunity to meet and discuss business opportunities with senior GOU officials and Uzbekistan business counterparts for 35 representatives of 13 U.S. companies. The Presidential Council of Foreign Investors was established in November 2019 as an enhanced platform of communication with foreign business and the expert community. In May 2017, the Parliament established the “Institute of the Business Ombudsperson” to protect the rights and legitimate interests of businesses and provide them legal support. In public forums, GOU officials continue to stress their interest in seeing new companies establish operations in Uzbekistan. Limits on Foreign Control and Right to Private Ownership and Establishment By law Uzbekistan guarantees the right of foreign and domestic private entities to establish and own business enterprises, and to engage in most forms of remunerative activity. However, due to the prevalence in state-owned monopolies in several sectors, in reality the right to establish business enterprises has been limited in some sectors. The GOU has started the process of reconsidering the role of large state-owned monopolies, especially in the transportation, banking, energy, and cotton sectors. In 2017, President Mirziyoyev ended the monopoly of state-owned enterprise Uzpaxtasanoat to buy and sell raw cotton. In January 2018, the GOU launched pilot projects for a new integrated value chain system in the industry to allow private investors to independently manage cotton cultivation, harvesting, processing, and exports. In 2020, the GOU committed to eliminate the monopoly of state-owned carrier Uzbekistan Air in the air cargo, airport service, and domestic air transportation market. The state still reserves the exclusive right to export some commodities, such as nonferrous metals and minerals. In theory, private enterprises may freely establish, acquire, and dispose of equity interests in private businesses, but, in practice, this is difficult to do because Uzbekistan’s securities markets are still underdeveloped. Private capital is not allowed in some industries and enterprises. The Law on Denationalization and Privatization (adopted in 1991, last amended in 2019) lists state assets that cannot be sold off or otherwise privatized, including land with mineral and water resources, the air basin (atmospheric resources in the airspace over Uzbekistan), flora and fauna, cultural heritage sites and assets, state budget funds, foreign capital and gold reserves, state trust funds, the Central Bank, enterprises that facilitate monetary circulation, military and security-related assets and enterprises, firearm and ammunition producers, nuclear research and development enterprises, some specialized producers of drugs and toxic chemicals, emergency response entities, civil protection and mobilization facilities, public roads, and cemeteries. Foreign ownership and control for airlines, railways, power generation, long-distance telecommunication networks, and other sectors deemed related to national security requires special GOU permission, but so far foreigners have not been welcomed in these sectors. By law, foreign nationals cannot obtain a license or tax permit for individual entrepreneurship in Uzbekistan. In practice, therefore, they cannot be self-employed, and must be employed by a legally recognized entity. According to the law, local companies with at least 15 percent foreign ownership can qualify as having foreign capital. The minimum fixed charter funding requirement for such companies is 400 million soum ($42,000 as of March 2020). Some restrictions apply: foreign investment in media enterprises is limited to 30 percent; in finance, foreign investors may operate only as joint venture partners with Uzbekistani firms, and banks with foreign participation face minimum fixed charter funding requirements (100 billion soum for commercial and private banks, and ranging from 7.5 to 30 billion soum for insurance companies – equivalent to $10.5 million and $0.8-$3.1 million respectively), while the required size of charter funds for Uzbekistani firms is set on a case-by-case basis. The government closely scrutinizes all foreign investment, with special emphasis on sectors of the economy that it considers strategic, such as mining, cotton processing, oil and gas refining, and transportation. There is no standard, transparent screening mechanism, and some elements of Uzbekistan’s legal framework are expressly designed to protect domestic industries and limit competition from abroad. The government also uses licensing as a tool to control enterprises in several important sectors such as energy, telecommunications, wholesale trading, and tourism. There are no legislative restrictions that specifically disadvantage U.S. investors. Other Investment Policy Reviews The Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO), and the United Nations Conference on Trade and Development (UNCTAD) have not conducted investment policy reviews of Uzbekistan in the past three years. Business Facilitation The GOU has declared that business facilitation and improvement of the business environment are among its top policy priorities. Uzbekistan’s working-age population grew by about 200,000 people in 2019. Therefore, the GOU prioritizes private businesses and joint ventures with the potential to create additional jobs and help the government address unemployment concerns. The introduction of one-window and on-line registration practices and electronic reporting systems simplified and streamlined business registration procedures. The GOU has created three special economic zones (Navoi, Jizzakh, and Angren) to attract more FDI. New legislation has created additional tax incentives for private businesses and promised firms protection against unlawful actions by government authorities. By legislation (effective from January 2018), foreign and domestic private investors can register their business in Uzbekistan using any Center of Government Services (CGS) facility, which operate as “Single Window” (SW) registration offices, or the Electronic Government (EG) website – https://my.gov.uz/en. The registration procedure requires electronic submission of an application, company name or trademark, and foundation documents. The SW/EG service will register the company with the Ministry of Justice, Tax Committee, local administration, and other relevant government agencies. The registration fee is equivalent to one base calculation value (BCV) (223,000 soum ($24) as of March 2020) for local investors and 10 BCV (2,230,000 soum ($234) as of March 2020) for foreign investors. Applicants receive a 50 percent discount for using the EG website. The new system has reduced the length of the registration process from several weeks to 30 minutes. Depending on the extent of foreign participation, a business can be defined as an “enterprise with foreign capital” (EFC) if less than 15 percent foreign-owned, or as an “enterprise with foreign investment” (EFI) if more than 15 percent foreign-owned and holding a minimum charter capital of 400 million soum ($42,000 as of March 2020). Foreign companies may also maintain a physical presence in Uzbekistan as “permanent establishments” without registering as separate legal entities, other than with the tax authorities. A permanent establishment may have its own bank account. The World Bank ranked Uzbekistan as eighth in the world for the “Starting a Business” indicator in its 2020 Doing Business report. Outward Investment In general, the GOU does not promote or incentivize outward investments. There is no official institution or agency that promotes outward investment from Uzbekistan. Some state-owned enterprises invest in development of their marketing networks abroad as part of efforts to boost export sales. Private companies that operate primarily in the retail, construction, and textile sectors use outward investments for market outreach, to access foreign financial resources, for trade facilitation, and, in some cases, for expatriation of capital. The most popular destinations for outward investments are Russia, China, Kazakhstan, Singapore, UAE, and Germany. There are no formal restrictions on outward investments. However, financial transactions with some foreign jurisdictions (such as Afghanistan, Iran, Syria, Libya, and Yemen) and offshore tax havens can be subject to additional screening by the authorities. 2. Bilateral Investment Agreements and Taxation Treaties Uzbekistan has signed bilateral investment agreements with 53 countries, though the 1994 agreement signed with the United States has not been ratified, and those with several other countries, including Turkey, Bahrain, Belarus, and South Korea, have not yet entered into force. In 2004, Uzbekistan and Russia signed a Strategic Framework Agreement that also includes free trade and investment concessions. Uzbekistan has signed bilateral free trade agreements with 11 CIS countries (Russia, Belarus, Ukraine, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Turkmenistan and Tajikistan). In 2005, the government signed an alliance agreement with Russia as a follow on to the 2004 Strategic Framework Agreement, which provides for economic cooperation, and Uzbekistan and Ukraine agreed in 2004 to remove all bilateral trade barriers. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014. In December 2015, the GOU officially announced that Uzbekistan would not join the Free Trade Zone within the Shanghai Cooperation Organization (SCO). See UNCTAD’s database for more details: http://investmentpolicyhub.unctad.org/IIA/IiasByCountry#iiaInnerMenu Since its independence in 1991, Uzbekistan has signed double taxation agreements with 55 countries, of which three have not yet entered into force. The U.S. Internal Revenue Service (https://www.irs.gov/businesses/international-businesses/uzbekistan-tax-treaty-documents) considers Uzbekistan to be one of the former Soviet republics now covered by a taxation treaty with the Commonwealth of Independent States (CIS), as the successor to the dual taxation treaty signed between the United States and the Union of Soviet Socialist Republics (USSR) (signed in 1973 and entered into force in 1976). However, the Government of Uzbekistan argues that this agreement cannot be considered in effect and has proposed signing a new double taxation treaty. Uzbekistan officially presented a draft of a new dual taxation treaty to the U.S. government in December 2017. In 2015, Uzbekistan and the United States signed the Intergovernmental Agreement to Improve International Tax Compliance with respect to the United States Information Reporting Provisions, commonly known as the Foreign Account Tax Compliance Act (FATCA). The FATCA agreement entered into force in July 2017. Reform of the taxation system, which for many years had been considered discouragingly burdensome and inadequate, was among the most desired reforms by the new administration. President Mirziyoyev first announced tax reform initiatives in 2016, and active discussions on their parameters started in 2017. The new Tax Code went into effect on January 1, 2020. The tax reform has led to a notable decrease of the tax burden to businesses and simplification of tax reporting. Key changes included: the eight percent social security contributions and all mandatory payments to various state funds were abolished; corporate and individual income taxes were reduced from a progressive rate of up to 24% to a single flat rate of 12%; the income tax rate on dividends was reduced from 10% to 5%; the VAT tax rate also decreased from 20 to 15%; and 13 forms of tax inspections were consolidated into two. 3. Legal Regime Transparency of the Regulatory System Uzbekistan has a substantial body of laws and regulations aimed at protecting the business and investment community. Primary legislation regulating competition includes the 2012 Law on Competition (last updated in 2018), the Law on Guarantees of the Freedoms of Entrepreneurial Activity, the 2003 Law on Private Enterprise (last updated in 2018), the 2019 Law on Investments and Investment Activities and a body of decrees, resolutions and instructions. In late 2016, the GOU publicly recognized the need to improve and streamline business and investment legislation, which is still perceived as complicated, often contradictory, and not fully consistent with international norms. In some cases, the government may require businesses to comply with decrees or instructions that are not publicly available. To avoid problems with tax and regulatory measures, foreign investors often secure government benefits through Cabinet of Ministers decrees, which are approved directly by the president. These, however, have proven to be easily revocable. For additional information, please review the World Bank’s Regulatory Governance assessment on Uzbekistan: https://rulemaking.worldbank.org/en/data/explorecountries/uzbekistan Practices that appear as informal regulatory processes are not associated with nongovernmental organizations or private sector associations, but rather with influential local politicians or well-connected local elites. Most rule-making and regulatory authority exists on the national level. Businesses in some regions and special economic zones can be regulated differently, but relevant legislation must be adopted by the central government and then regulated by national-level authorities. Only a few local legal, regulatory, and accounting systems are transparent and fully consistent with international norms. Although the GOU has started to unify local accounting rules with international standards, local practices are still document- and tax-driven, with an underdeveloped concept of accruals. In late 2016, President Mirziyoyev ordered publication of some draft legislation for public comment, including draft decrees on the government’s development strategies, tax and customs regulation, and legislation to create new economic zones. Public review of the legislation is achieved through the website https://regulation.gov.uz. Prior to 2016, publishing drafts of laws and regulations for public review was uncommon. The GOU publishes presidential decrees and government decisions online. Drafts of some legislation are published on a government website (https://regulation.gov.uz) for public consideration and comments. Uzbekistan’s legislation digest (http://www.lex.uz/) serves as a centralized online location for current legislation in effect. As of now, there is no centralized nor comprehensive online location for Uzbekistan’s legislation, similar to the Federal Register in the United States, where all key regulatory actions or their summaries are published. There are other online legislative resources with executive summaries and comments that could be useful for businesses and investors, including http://www.norma.uz/ and http://www.minjust.uz/ru/law/newlaw/. Formally, the Ministry of Justice and the Prosecutor’s Office of Uzbekistan are responsible for oversight to ensure that government agencies follow administrative processes. In some cases, however, local officials have inconsistently interpreted laws, often in a manner detrimental to private investors and the business community at large. GOU officials have publicly suggested that improvement of the regulatory system is critical for the overall business climate. Presidential Decree UP-5690 “On Measures for the Comprehensive Improvement of the System of Support and Protection of Entrepreneurial Activity,” adopted in March 2019, set enforcement mechanisms for effective protection of private businesses, including foreign investors. The Law on Investments and Investment Activities, adopted in December 2019, guarantees free transfer of funds to and from the country without any restrictions. This law also guarantees protection of investments from nationalization. The GOU has implemented several additional reforms in recent years, including the currency exchange liberalization, tax reform, simplification of business registration and foreign trade procedures, and establishment of the business Ombudsperson. The government’s development strategies include a range of targets for upcoming reforms, such as ensuring reliable protection of private property rights; further removal of barriers and limitations for private entrepreneurship and small business; creation of a favorable business environment; suppression of unlawful interference of government bodies in the activities of businesses; improvement of the investment climate; decentralization and democratization of the public administration system; and expansion of public-private partnerships. Previously implemented regulatory system reforms often left room for interpretation and were, accordingly, enforced subjectively. New and updated legislation continues to leave room for interpretation and contains unclear definitions. In many cases, private businesses still face difficulties associated with enforcement and interpretation of the legislation. More information on Uzbekistan’s regulatory system can be reviewed at the World Bank’s Global Indicators of Regulatory Governance (http://rulemaking.worldbank.org/data/explorecountries/uzbekistan). The scope of business-related regulations in Uzbekistan includes many laws, decrees, resolutions, rules, specific guidelines, and instructions. Usually, regulations and rules are developed by relevant government agencies and are approved by the president or relevant ministers, as appropriate. Public laws are subject to parliamentary approval. The Ministry of Justice and the system of Economic Courts are formally responsible for regulatory enforcement, while the Institute of Business Ombudsperson was established in May 2017 to protect the rights and legitimate interests of businesses and render legal support. The state body responsible for enforcement proceedings is the Bureau of Mandatory Enforcement under the General Prosecutor’s Office. Several GOU policy papers call for expanding the role of civil society, non-governmental organizations, and local communities in regulatory oversight and enforcement. The government also publishes drafts of business-related legislation for public comments, which are publicly available. However, the development of a new regulatory system, including enforcement mechanisms outlined in various GOU reform and development roadmaps, has yet to be completed. Multiple research centers and think tanks are involved in the development and review of regulations. The process includes experts from government agencies and state-owned enterprises, as well as research centers funded by the government and international organizations like UNDP. However, except under rare circumstances, the results of the experts’ scientific studies or analysis on the impact of regulations are not made publicly available. In 2017, the GOU created a specialized Development Strategy Center as an NGO. Its projects involve a number of local organizations, including the Independent Civil Society Monitoring Institute, the Legislation Monitoring Institute, the Chamber of Commerce and Industry, the Chamber of Advocates, the Academy of Public Administration, the National Association of Electronic Media, and the National Association of NGOs. The Center is intended to consolidate efforts of these institutes to facilitate expert and public discussions on reforms outlined in the GOU’s development strategies. In February 2019, the president ordered the creation of a new “National System of Monitoring and Evaluation of the Position of the Republic of Uzbekistan in International Ratings.” This initiative will consolidate efforts of specific scientific institutions and think tanks in the area of regulatory reforms. Public review of the legislation is available through the website https://regulation.gov.uz. Uzbekistan’s fiscal transparency still does not meet generally accepted international standards, although the government demonstrated notable progress in this area in 2019. A Presidential Resolution, dated August 22, 2018, called for transparency of public finances and wider involvement of citizens in the budgetary process. One positive step was the publication of the detailed state budget proposals for fiscal years (FY) 2018, FY2019, and FY 2020 within the framework of Budget for Citizens project. In August and September 2019, the GOU introduced amendments to the Budget Code mandating the publication of the conclusions of the Accounts Chamber of the Republic of Uzbekistan, which are based on the results of an external audit and evaluation of annual reports on the implementation of the state budget and the budgets of state trust funds. In accordance with the law, the Ministry of Finance now posts state budget related reports on its Open Budget website: https://openbudget.uz. Recent legislation also contains measures to harmonize budget accounting with international standards, provides for international assessment of budget documents through the Public Expenditure and Financial Accountability (PEFA) process, and submitting the budget for an Open Budget Survey ranking. In 2019, the GOU officially requested the U.S. Government’s technical assistance to improve fiscal accountability and transparency, initiating an assistance program that will begin in 2020. Under the December 2019 Law on the State Budget, starting in 2020, all government agencies, state trust funds, and the Reconstruction and Development Fund of Uzbekistan (FRDU) shall publish quarterly reports on: distribution of budget funds by subordinate budget organizations; financial statements; implementation of budget funded projects; and all major public procurements. Such reports must be published within 25 days after the end of the reporting quarter. In addition, the government will use https://openbudget.uz/ to ensure transparency of state budget funds directed to the Investment Program of Uzbekistan, tax and customs benefits provided to the taxpayers, measures to control and combat financial violations, and spending of above-forecasted budget incomes. Despite this progress, the government is still not releasing complete information on its off-budget accounts or on its oversight of those accounts, publishing only some generalized parameters at https://www.mf.uz/en/deyatelnost/deyatelnost-ii/mestnyj-byudzhet.html. In FY2019, the GOU’s budget implementation reports were less itemized than in previous years. International Regulatory Considerations Uzbekistan is not currently a member of the WTO or any existing economic blocs although it is pursuing WTO accession and its parliament has approved observer status in the Eurasian Economic Union. No regional or other international regulatory systems, norms, or standards have been directly incorporated or cited in Uzbekistan’s regulatory system – although GOU officials often claim the government’s regulatory system incorporates international best practices. Uzbekistan joined the CIS Free Trade Zone Agreement in 2013, but that does not constitute an economic bloc with supranational trade tariff regulation requirements. Legal System and Judicial Independence Uzbekistan’s contemporary legal system belongs to the civil law family. The hierarchy of Uzbekistan’s laws descends from the Constitution of the Republic of Uzbekistan, constitutional laws, codes, ordinary laws, decrees of the president, resolutions of the Cabinet of Ministers, and normative acts, in that order. Contracts are enforced under the Civil Code, the Law “About the Contractual Legal Base of Activities of Business Entities” (No. 670-I, issued August 29, 1998, and last revised in 2018), and several other decrees and resolutions. Uzbekistan’s contractual law is established by the Law “About the Contractual Legal Base of Activities of Business Entities.” It establishes the legal basis for the conclusion, execution, change, and termination of economic agreements, the rights and obligations of business entities, and also the competence of relevant public authorities and state bodies in the field of contractual relations. Economic disputes, including intellectual property claims, can be heard in the lower-level Economic Court and appealed to the Supreme Court of the Republic of Uzbekistan. Economic court judges are appointed for five-year terms. This judicial branch also includes regional, district, town, city, Tashkent city (a special administrative territory) courts, and arbitration courts. On paper, the judicial system in Uzbekistan is independent, but government interference and corruption are common. Government officials, attorneys, and judges often interpret legislation inconsistently and in conflict with each other’s interpretations. In recent years, for example, many lower level court rulings have been in favor of local governments and companies which failed to compensate plaintiffs for the full market value of expropriated and demolished private property, as required under the law. Court decisions or enforcement actions are appealable though a process that can be initiated in accordance with the Economic Procedural Code and other applicable laws of Uzbekistan, and can be adjudicated in the national court system. Laws and Regulations on Foreign Direct Investment Several laws, presidential decrees, and government resolutions relate to foreign investors. The main laws are: Law on Investments and Investment Activities (ZRU-598, December 25, 2019) Law on Guarantees of the Freedoms of Entrepreneurial Activity (ZRU-328, 2012) Law on Special Economic Zones (ZRU-604, February 17, 2020) Law on Production Sharing Agreements (№ 312-II, 2001) Law on Concessions (№ 110-I, 1995) Law on Investment and Share Funds (ZRU-392, 2015) The GOU adopted several new laws, presidential decrees, and government resolutions related to foreign investments in 2019. These include: Law on Currency Regulation (ZRU-573, October 22, 2019). The law liberalized currency operations, current cross-border transactions, and capital movement transactions. Law on Investments and Investment Activities (ZRU-598, December 25, 2019). The law replaces several laws on investments adopted in the 1990s and provides more rights to foreign investors. Among other things, it guarantees free transfer of funds in foreign currency to and from Uzbekistan without any restrictions, including currency conversion for repatriation. Foreign investors are granted the right to terminate investment activities and to freely repatriate assets. The law guarantees protection of foreign investors’ assets from nationalization. Law on Amendments to the Tax Code of the Republic of Uzbekistan (ZRU-599, December 30, 2019). This law introduces the new Tax Code, which provides a significant decrease of the tax rate and simplifies tax reporting for all businesses. Law on Special Economic Zones (ZRU-604, February 17, 2020). The law will enter into force in May 2020. It will streamline and simplify rules and regulations that apply to businesses registered in previously created specialized economic and industrial zones. Decree on the State Program for the Implementation of the Action Strategy on Five Priority Development Areas in the Year of Science, Education and Digital Economy (March 2, 2020). Decree on Improvement of Investments and Foreign Trade Governance through Establishment of the Ministry of Investments and Foreign Trade of the Republic of Uzbekistan (UP-5643, January 28, 2019). This law consolidated the functions of the State Investments Committee of the Republic of Uzbekistan and the Ministry of Foreign Trade into a newly formed ministry. Decree on Measures to Improve Uzbekistan’s position in International Ratings and Indexes (UP-5687, March 7, 2019). As of now, there is no real “one-stop-shop” website for investors that provides relevant laws, rules, procedures, and reporting requirements in Uzbekistan. In December 2018, the GOU created a specialized web portal for investors called Invest Uz (http://invest.gov.uz/en/), which provides some useful information. The website of the Ministry of Investments and Foreign Trade (http://mift.uz/) offers some general information on laws and procedures, but mainly in the Uzbek and Russian languages. Competition and Anti-Trust Laws Competition and anti-trust legislation in Uzbekistan is governed by the Law on Competition (ZRU-319, issued January 6, 2012, and last revised in 2019). The main entity that reviews transactions for competition-related concerns is the State Antimonopoly Committee (established in January 2019). This government agency is responsible for advancing competition, controlling the activities of natural monopolies, protecting consumer rights and regulating the advertisement market. There were no significant competition-related cases involving foreign investors in 2019. Expropriation and Compensation Private property is protected against baseless expropriation by legislation, including the Law on Investments and Investment Activities and the Law on Guarantees of the Freedoms of Entrepreneurial Activity. Despite these protections, however, the government potentially may seize foreign investors’ assets due to violations of the law or for arbitrary reasons, such as a unilateral revision of an investment agreement, a reapportionment of the equity shares in an existing joint venture with an SOE, or in support of a public works or social improvement project (similar to an eminent domain taking). By law, the government is obligated to provide fair market compensation for seized property, but many who have lost property allege the compensation has been significantly below fair market value. Uzbekistan has a history of expropriations. Profitable, high-profile foreign businesses have been at greater risk for expropriation, but smaller companies are also vulnerable. Under the previous administration, large companies with foreign capital in the food processing, mining, retail, and telecommunications sectors faced expropriation. In cases where the property of foreign investors is expropriated for arbitrary reasons, the law obligates the government to provide fair compensation in a transferable currency. However, in most cases the private property was expropriated based upon court decisions after the owners were convicted for breach of contract, failure to complete investment commitments, or other violations, making them ineligible to claim compensation. Decisions of Uzbekistan’s Economic Court on expropriation of private property can be appealed to the Supreme Court of the Republic of Uzbekistan in accordance with the Economic Procedural Code or other applicable local law. Reviews usually are quite slow. Some foreign investors have characterized the process as unpredictable, non-transparent, and lacking due process. Dispute Settlement ICSID Convention and New York Convention Uzbekistan is a member of the International Center for the Settlement of Investment Disputes (ICSID) and a signatory to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). In November 2006, the Constitutional Court of Uzbekistan issued its ruling that a provision of Uzbekistan law providing for international arbitration does not constitute Uzbekistan’s consent to have any particular dispute settled through international arbitration. ICSID arbitration does not stipulate the consent of the involved parties to have their dispute settled at the international level. In practice, this means that Uzbekistan’s courts do not recognize foreign businesses’ attempts to submit their disputes to international arbitration absent a separate consent to such arbitration, such as a bilateral investment treaty. Investor-State Dispute Settlement Dispute settlement methods are regulated by the Economic Procedural Code, the Law on Arbitration Courts, and the Law on Contractual Basics of Activities of Commercial Enterprises. The Law on Guarantees to Foreign Investors and Protection of their Rights requires that involved parties settle foreign investment disputes using the methods they define themselves, generally in terms predefined in an investment agreement. Investors are entitled to use any international dispute settlement mechanism specified in their contracts and agreements with local partners, and these agreements should define the methods of settlement. The Law on Guarantees to Foreign Investors and Protection of their Rights permits resolution of investment disputes in line with the rules and procedures of the international treaties to which Uzbekistan is a signatory, including the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1992 CIS Agreement on Procedure for Settling Disputes Arising Out of Business Activity, and other bilateral legal assistance agreements with individual countries. Currently there is no such bilateral treaty that covers U.S. citizens. If the parties fail to specify an international mechanism, Uzbekistan’s economic courts can settle commercial disputes arising between local and foreign businesses. The economic courts have subordinate regional and city courts. Complainants may seek recognition and enforcement of foreign arbitral awards pursuant to the New York Convention through the economic courts. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling. Currently Uzbekistan does not have a ratified Bilateral Investment Treaty (BIT) or a Free Trade Agreement (FTA) with an investment chapter with the United States. The governments of the United States and Uzbekistan signed a BIT in 1994, but ratification documents have not been exchanged and the agreement never entered into force. Post is aware of a number of previous cases of commercial or investment disputes involving foreign investors. These have included asset seizures, expropriations, or liquidations; lengthy forced production stoppages; and pressure to sell off foreign shares in joint ventures. These cases have involved a variety of sectors, including food production, mining, telecommunications, and agriculture. Although government actions in such cases have been taken under the guise of law enforcement, some observers have claimed more arbitrary or extralegal motives were at play. However, since President Mirziyoyev came to power, investment disputes have been more limited in scope, but still exist. Foreign investors should have no reasonable expectation that the government will honor an international arbitration verdict. The Constitutional Court of Uzbekistan ruled in 2006 that the written consent of all parties involved is required to recognize an international decision. Although in many cases investor-state disputes in Uzbekistan were associated with immediate asset freezes, almost all of them were followed by formal legal proceedings. International Commercial Arbitration and Foreign Courts Alternative dispute resolution institutions of Uzbekistan include arbitration courts (also known as Third-Party Courts), and specialized arbitration commissions. Businesses and individuals can apply to arbitration courts only if they have a relevant dispute-settlement clause in their contract or a separate arbitration agreement. The Civil Procedural Code and the Commercial Procedural Code also have provisions that regulate arbitration. The Law on International Commercial Arbitration, drafted in late 2018, has yet to be approved by Uzbekistan’s Parliament. The main domestic arbitration body is the Arbitration Court. General provisions of the Law on Arbitration Courts are based on principles of the UNCITRAL model law, but with some national specifics – namely that Uzbekistani arbitration courts cannot make reference to non-Uzbekistani laws. According to the Law, parties of a dispute can choose their own arbiter and the arbiter in turn choses a chair. The decisions of these courts are binding. The Law says that executive or legislative bodies, as well as other state agencies, are barred from creating arbitration courts and cannot be a party to arbitration proceedings. Either party to the dispute can appeal the verdict of the Arbitration Court to the general court system within thirty days of the verdict. Separate arbitration courts are also available for civil cases, and their decisions can be appealed in the general court system. Arbitration courts do not review cases involving administrative and labor/employment disputes. The Tashkent International Arbitration Center (TIAC) under the Chamber of Commerce and Industry of Uzbekistan was created in late 2019 as a non-governmental non-profit organization. The main function of this organization is to facilitate dispute resolution for businesses, including foreign investors. The Center may employ qualified arbitration lawyers, both local and foreign. The Center has the right to resolve disputes through mediation or other alternative methods permitted by the law. Foreign arbitral awards or other acts issued by a foreign country can be recognized and enforced only if Uzbekistan has a relevant bilateral or multilateral agreement with that country. If international arbitration is permitted, awards can be challenged in domestic courts. However, local economic courts do not currently have a solid mechanism for enforcement of foreign courts’ decisions. Most investment disputes involving Uzbekistan’s state-owned enterprises (SOEs) reviewed by domestic courts have been settled out of court and have not reached a verdict, or have been decided in favor of the SOEs. When the court decides in favor of a foreign investor, the Ministry of Justice is responsible for enforcing the ruling. In some cases, the Ministry’s authority is limited and co-opted by other elements within the government. Judgments against SOEs have proven particularly difficult to enforce. Bankruptcy Regulations The Law on Bankruptcy regulates bankruptcy procedures. Creditors can participate in liquidation or reorganization of a debtor only in the form of a creditor’s committee. According to the Law on Bankruptcy and the Labor Code, an enterprise may claim exemption from paying property and land taxes, as well as fines and penalties for back taxes and other mandatory payments, for the entire period of the liquidation proceedings. Monetary judgments are usually made in local currency. Bankruptcy itself is not criminalized, but in August 2013, the GOU introduced new legislation on false bankruptcy, non-disclosure of bankruptcy, and premeditated bankruptcy cases. In its 2020 Doing Business report, the World Bank ranked Uzbekistan 100 out of 190 for the “Resolving Insolvency” indicator ( https://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan). 4. Industrial Policies Investment Incentives All investment incentives to foreign investors are regulated by national level legislation, which can be adopted only by the president. Regional and local governments have limited authorities to offer any additional preferences. Exceptions can be made for tax incentives granted by special government resolutions or presidential decrees. By the new Tax Code, the GOU may provide holidays for land taxes, property taxes and water use taxes to some companies with foreign direct investments on a case-by-case basis. Foreign Trade Zones/Free Ports/Trade Facilitation The first law on free economic zones in Uzbekistan appeared in 1996. After dozens of modifications, on December 2019 it was replaced by the Law on Special Economic Zones (SEZ) (ZRU-604), which will enter into force May 19, 2020. The law provides the following classification of special economic zones: Free Economic Zone (FEZ) – territory allocated for the construction of new high-tech, competitive, import-substituting, and export-oriented industrial production capacities, and for development of industrial, engineering, telecommunications, road, and social infrastructure, as well as appropriate logistics services. Special Scientific and Technological Zone – territory allocated for the development of innovation infrastructure by scientific and science-related organizations, including technology parks, technology distribution/transfer centers, innovation clusters, venture funds, and business incubators. Tourist-Recreational Zone – territory allocated for tourism infrastructure development investment projects, including construction of hotels, cultural and recreational facilities, and functional and seasonal recreation areas. Free Trade Zones – territories for consignment warehouses, areas of special customs and tax regimes, facilities at border crossing points for processing, packing, sorting, storing goods, airports, railway stations or other custom control sites. Special Industrial Zone – territory with special economic and financial regulations of production and logistical business activities. According to the new Law of SEZ (Article 39) and the Tax Code (Article 473), investors to special economic zones of Uzbekistan may expect: Holidays for paying property taxes, land taxes and taxes for the use of water resources. The term of the holiday shall be determined by a separate presidential resolution depending on the size of investments. Such tax holidays can be applied only to business activities stipulated in the relevant investment agreement with administration of a special economic zone. Participants of special economic zones also may get some VAT exemptions and other tax benefits. Exemption from paying customs payments (except for value added tax and customs clearance fees) for construction materials that cannot be sourced locally; technological equipment that cannot be sourced locally, raw materials, materials and components used to produce export-oriented output. The first Free Industrial and Economic Zone (FIEZ) was created in 2008 in the Navoi region. By the end of 2019, there were eight free industrial zones and 49 small industrial zones operating in different regions of the country. According to official statistics, 108 investment projects have been implemented in these zones, creating 83,000 new jobs. Performance and Data Localization Requirements There are several restrictions and quantitative limitations on employment of foreign nationals in Uzbekistan. The chief accountants in banking and auditing companies must be Uzbekistani nationals. The law also requires that either the CEO or one member of a board of directors be a citizen of Uzbekistan. In the tourism sector, only Uzbekistani nationals can be professional tour guides. All foreign citizens, except those from certain countries of the former Soviet Union, need visas to work in Uzbekistan and all individuals must register their residences with authorities. Legislation permits foreign investors and specialists to obtain multiple entry visas for the period of their contract. To apply for a work visa, American citizens must submit documents regarding their company to an Uzbekistani embassy or consulate. American investors have complained in the past about the short validity of visas and the limited number of entries, though we understand that practice is changing, and investors can specifically request multiple entry/longer term visas. Foreign workers must also register with the Ministry of Employment and Labor Relations. The Agency on Foreign Labor Migration under the Ministry of Employment and Labor Relations is responsible for enforcing limits on employment of foreign nationals in various industries. For example, the number of foreign nationals in energy companies that operate in the country under Production Sharing Agreement terms cannot exceed 20 percent of the total number of employees, and additional foreign personnel can be hired only if there is no qualified local labor. Formally, permission from the government is not required to invest in Uzbekistan except for investments in the special economic zones and businesses that are subject to licensing. At the same time, the GOU’s economic policy still maintains an intense focus on import substitution and export-oriented industrialization. Investors in non-priority sectors can expect less support in importing capital and consumer products than those in priority industries. Uzbekistan’s legislation stipulates that the government must apply requirements to use domestic inputs in manufacturing uniformly to enterprises with domestic and foreign investments, but in practice, this is not always the case. There are no requirements for using only local sources of financing. The government welcomes foreign investors mainly in the areas of localization, building local production capacities, and developing export potential. To qualify as an enterprise or business with foreign investment and be eligible for tax and other incentives, the share of foreign investment must be at least 15 percent of the charter capital of a company. The investment must consist of hard currency or new equipment, delivered within one year of registering the enterprise. The minimum requirements for charter capital for incentives (except financial institutions) is 400 million soum ($43,000 as of March 2020). Tax incentives for foreign investment are essentially the same as for local enterprises participating in an investment, localization, or modernization program. Enterprises with significant investment in priority sectors or registered in one of free economic or special industrial zones can expect additional benefits. On February 20, 2020, the GOU announced its plan to require localization of personal data storage, in line with the Law on Personal Data (ZRU-547), adopted July 2, 2019. Per the law, large internet companies like Facebook, Google, and Russian search engine Yandex are encouraged to move their server equipment with local users’ personal data to the territory of Uzbekistan. According to the law, the GOU may block services in the country in the event of non-compliance. Legislation does not require transfer of technology or proprietary information; such transfers are negotiated between the foreign investor and its local partner. 5. Protection of Property Rights Real Property Property ownership is governed by the Law on Protection of Private Property and Guarantees of the Owner’s Rights. Uzbekistani and foreign entities may own or lease buildings, but not the underlying land. Mortgages are available for local individuals only, but not for legal entities. There are no mortgage lien securities in Uzbekistan. The new Law on Privatization of Non-agricultural Land Plots (ZRU-522, August 13, 2019) allows private land ownership for plots that do not fall under the definition of agricultural land by the Land Code of Uzbekistan. Land ownership is granted only to entities and individuals who are residents of Uzbekistan. Foreign citizens and entities do not have land property rights in Uzbekistan. Effective March 1, 2020, Uzbekistan residents can privatize: Land plots of entities, on which their buildings, structures and industrial infrastructure facilities are located, as well as the land extensions necessary for their business activities; Land plots provided to citizens for individual housing construction and maintenance; Unoccupied land plots; Land plots allocated to the Urban Development Fund under the Ministry of Economy and Industry. The following types of land cannot be privatized: Land plots located in territories that are not covered by officially documented layout plans. Land plots that contain mineral deposits or state property of strategic importance. The list of such land plots shall be specified by appropriate legislation. Land plots reserved for environmental, recreational, and historical-cultural purposes, state owned land and water resources, and public areas of cities and towns (e.g. squares, streets, roads, boulevards). Land plots affected by hazardous substances or susceptible to biogenic contamination. Land plots provided to residents of special economic zones. The World Bank ranked Uzbekistan 72nd in the world in the Registering Property category of its 2020 Doing Business Report. More details can be reviewed here: https://www.doingbusiness.org/en/data/exploreeconomies/uzbekistan#DB_rp Land privatization is a new concept for Uzbekistan. All agricultural land in Uzbekistan is still owned by the state. As of March 1, 2020, a new law on privatization allows for the privatization of non-agricultural land plots. Legislation governing the acquisition and disposition of immoveable property (buildings and facilities) poses relatively few problems for foreign investors and is similar to laws in other CIS countries. Immoveable property ownership is generally respected by local and central authorities. District governments have departments responsible for managing commercial real estate issues, ranging from valuations to sale and purchase of immoveable property. Legally purchased but unoccupied immoveable property can be nationalized for several reasons, including by an enforcement process of a court decision, seizure for past due debts on utility or communal services, debts for property taxes, and, in some cases, for security considerations. Unauthorized takeover of unoccupied immoveable property by other private owners (squatters) is not a common practice in Uzbekistan. Usually, authorities inspect the legitimacy of immoveable property ownership at least once every year. Intellectual Property Rights While the concept of registering intellectual property (IP) is still new to Uzbekistan, the GOU recognizes intellectual property rights (IPR) protections as critical to its economic goals. As Uzbekistan prepares for accession to the World Trade Organization (WTO), its leaders have demonstrated a significant political shift towards improved IPR protections. In 2018 and 2019, Uzbekistan completed accession to the Geneva Phonograms Convention and two WIPO Internet Treaties. Responsibility for IPR issues lies with the formerly independent Uzbekistan Agency for Intellectual Property (AIP), which was subsumed under the Ministry of Justice (MOJ) (IPA, http://www.ima.uz/) in February 2019. Uzbekistan’s Customs Code (which came into force on April 22, 2016) allows rights holders to control the importation of intellectual property goods. The Code introduced a special Customs Record procedure, which is based on a database of legal producers and their distributors. Uzbekistan also introduced several amendments to IPR law as well as amendments to civil and criminal codes meant to enforce stricter punishment for IPR violations. Uzbekistan’s patent protections are generally sufficient, but enforcement remains one of the biggest IP challenges. Foreign companies face obstacles proving IP violations and receiving compensation for losses sustained due to violations. IP violators are rarely obligated to cease infringing activities or pay meaningful penalties. AIP lacks any kind of enforcement power, as does the MOJ. Enforcement is weak across different kinds of IP. Copyright cases are almost never brought before the Antimonopoly Committee (the body responsible for responding to IP complaints) because companies makes the decision that the cost of fighting copyright violations outweighs the benefits. Trademark cases often take years to settle in the courts, driving up costs and consuming time and resources. For companies who cannot meet the demands of a multiyear court battle it becomes cost prohibitive to pursue action to protect their IP. While Uzbekistan took important steps in 2018 to address longstanding issues pertaining to IPR, there remain serious deficiencies in trademark and copyright protections, judicial processes related to IPR, and enforcement of actions against IPR violations and violators. On December 26, 2018, President Mirziyoyev signed a bill into law for Uzbekistan to accede to the Geneva Phonograms Convention. The GOU forwarded signed copies of the law to WIPO and the UN, thus completing the formal ratification of these conventions. Later, on February 16, 2019, the President approved adoption of two bills into the law for Uzbekistan to accede to the WIPO Copyright Treaty and the WIPO Performance and Phonograms Treaty (“Internet Treaties”). The GOU is working on amendments to national legislation to bring it in line with the requirements of the IPR Treaties. These measures represent the necessary short-term actions for Uzbekistan to maintain its benefits under the U.S. Generalized System of Preferences (GSP). The full list of IPR-related international agreements/treaties that Uzbekistan has acceded to is available here: https://wipolex.wipo.int/en/legislation/profile/UZ. In April 2018, the GOU provided greater authority to a new Inspectorate under the Ministry of Information Technologies and Communications to monitor compliance and enforce copyright protections on the internet. The GOU is also establishing a system of licensing for companies that sell software legally, in order to stem the flow of pirated software to the marketplace, as described in GOU Resolution #72 of 2012 (https://www.lex.uz/acts/1982899). There are no publicly available reports on seizures of counterfeit goods in 2019. According to AIP officials, Uzbekistan law enforcement agencies recorded over 130 cases of illegal selling of audiovisual records and software copies. In Tashkent, authorities seized 287 DVDs and CDs and documented 31 violation cases. Under current Uzbekistani law, the court considers copyright infringement cases only after the copyright holder submits a claim of damages. Similarly, for imported products, customs officials do not have an ex-officio function, and the onus is on the rights holder to initiate an action against a suspected infringer. The Prosecutor General’s Office (PGO) has the authority to both penalize violators and order them to desist from producing, marketing, or selling infringing goods, but few cases ever make it to the PGO. The burden of proving an IP violation is so high that most cases never leave the Antimonopoly Committee or the administrative court system. While these cases are stalled in the court system, infringing companies may continue to operate without restrictions. Uzbekistan has been on the Watch List of the United States Trade Representative’s (USTR) Special 301 Report since 2000. The political will to improve IPR protection seems to exist at the highest levels of the government, but effective enforcement policies are still not in place. Although Uzbekistan has taken some important first steps to address concerns raised in previous USTR’s reports, the country will have to demonstrate measurable and sustained progress before removal from the Special 301 Watch List. Uzbekistan is not included in the USTR Notorious Markets List. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/. 6. Financial Sector Capital Markets and Portfolio Investment 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. 7. State-Owned Enterprises State-owned enterprises (SOEs) dominate those sectors of the economy recognized by the government as being of national strategic interest. These include energy (power generation and transmission, and oil and gas refining, transportation and distribution), metallurgy, mining (ferrous and non-ferrous metals and uranium), telecommunications (fixed telephony and data transmission), machinery (the automotive industry, locomotive and aircraft production and repair), and transportation (airlines and railways). Most SOEs register as joint-stock companies, and a minority share in these companies usually belongs to employees or private enterprises. Although SOEs have independent boards of directors, they must consult with the government before making significant business decisions. The government owns majority or blocking minority shares in numerous non-state entities, ensuring substantial control over their operations, as it retains the authority to regulate and control the activities and transactions of any company in which it owns shares. The Agency for Management of State-owned Assets is responsible for management of Uzbekistan’s state-owned assets, both those located in the country and abroad. There are no publicly available statistics with the exact number of wholly and majority state-owned enterprises, the number of people employed, or their contribution to the GDP. According to some official reports and fragmented statistics, there are over 3,500 SOEs in Uzbekistan, including 27 large enterprises and holding companies, about 2,900 unitary enterprises, and 486 joint stock companies, which employ about 1.5-1.7 million people, or about 13% of all domestically employed population. Their share in the GDP was about 45% in 2019. The published list of major Uzbekistani SOEs is available on the official GOU website (listing large companies and banks only): http://www.gov.uz/en/pages/government_sites. In theory, private sector or foreign companies can be more competitive than local SOEs in sectors that are not under the control of state-owned monopolies, but regulations make them dependent on government SOEs. By law, SOEs are obligated to operate under the same tax and regulatory environment as private businesses. In practice, however, private enterprises do not enjoy the same terms and conditions. A May 2019 IMF Staff Report mentioned that SOEs absorbed disproportionate shares of skilled labor, energy, and financial resources, while facing weak competition enforcement and enjoying a wealth of investment preferences. The government leverages licensing and access to some commodities and utilities to protect quasi-governmental institutions and companies from commercial competition. Private businesses face more than the usual number of bureaucratic hurdles if they compete with the government or a government-controlled firm. Most SOEs have a range of advantages, including various tax holidays, as well as better access to commodities, energy and utility supplies, local and external markets, and financing. On December 28, 2018, President Mirziyoyev ordered the GOU to develop a plan to restructure its SOEs. He noted that strong involvement of the state in the fuel and energy, petrochemical, chemical, transport, and banking sectors was hampering their development. The Agency for Management of State Assets was ordered to implement a program on strengthening SOE corporate governance. In February 2020, the GOU proposed an SOE reform roadmap, which is expected to be approved on May 1, 2020. The reform will cover 13 large SOEs in the telecommunications, transportation, construction, food processing, automotive, machinery, wheat, cotton and chemical industries, as well as movie-making enterprises. The government plans to optimize the structure of these enterprises to increase their efficiency. Per the roadmap, 781 low-performing assets of these SOEs will be offered for privatization. It is expected that a broader scale optimization reform will also cover the largest SOEs, which control the mining/base metal sectors of the economy. The relevant draft of the decree has been published for public review. Implementation of this SOE optimization and reform program will likely take some time, as the GOU seeks to avoid high social costs, such as mass unemployment. Privatization Program GOU policy papers indicate it is prioritizing further privatization of state-owned assets. The GOU’s goal is to reduce the public share of capital in the banking sector and business entities through greater attraction of foreign direct investments, local private investments, and promotion of public-private partnerships. By law, privatization of non-strategic assets does not require government approval and can be cleared by local officials. Foreign investors are allowed to participate in privatization programs. For investors that privatize assets at preferential terms, the payment period is three years, and the investment commitment fulfillment term is five years. According to official reports, 842 state owned enterprises and facilities were privatized in 2019. Privatization earnings of the state budget were equivalent to $54.3 million. In May 2018, the Mirziyoyev administration first announced upcoming restructuring and privatization in various industries but noted that SOEs in extractive industries (energy, hydrocarbons and gold) would stay under state ownership. On February 26, 2020, a draft of SOE privatization plan was posted by the State Assets Management Agency for public review. The plan includes privatization of 1,115 enterprises, and public-private-partnerships in 42 enterprises. Companies that operate critical infrastructure and enterprises that qualify as companies of strategic importance will remain in full state ownership. The GOU timeline calls for this privatization program to be approved in May 2020 and implemented by 2025. Senior government officials see privatization as a solution to improve the economic performance of inefficient large SOEs and as an instrument to attract private investments, primarily through public-private-partnership agreements. They view such investments as critical for the creation of new jobs and mitigation of state budget deficits. The GOU believes it needs to prepare SOEs for privatization, including modernization of equipment and organizational and financial restructuring of each underperforming industry. Therefore, large scale privatization may be a long way off. Privatization programs officially have a public bidding process, but it is often confusing, discriminatory, and non-transparent. Large privatization deals with the involvement of foreign investment require GOU approval. Formally, such approval can be issued after examination by the Contracts Detailed Due Diligence Center under the Ministry of Economy. Many investors note a lack of transparency at the final stage of the bidding process, when the government negotiates directly with bidders before announcing the results. In some cases, the bidders have been foreign-registered front companies associated with influential Uzbekistani families. 8. Responsible Business Conduct There is no legislation on responsible business conduct (RBC) in Uzbekistan, and the concept has not been widely adopted, though many companies are active in charitable and corporate social responsibility activities, either through their own initiative or because they were mandated by local government officials. Relevant government agencies and departments inspect both newly registering and operating local businesses and enterprises for enforcement of the Labor Code in respect to labor and employment rights; the Law on Protection of Consumer’s Rights for consumer protections; and the Law on Protection of Nature for environmental protections. Labor or environmental laws and regulations are not waived for enterprises with private and foreign investments. Legislation, including the Law on Joint-Stock Companies and Protection of Shareholder’s Rights, issued in 1996 and last updated in 2018, sets a range of standards to protect the interests of minority shareholders. The Law on the Securities Market requires businesses that issue securities (except government securities) to publish annual reports, which should include a summary of business activities for the previous year, financial statements with a copy of an independent audit, and material facts on the activities of the issuer during the corresponding period. There are no independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC in Uzbekistan. At present, Uzbekistan does not adhere to the OECD guidelines regarding responsible supply chains of minerals from conflict-afflicted and high-risk areas, and there has been no substantial evidence to suggest the government encourages foreign and local businesses to follow generally accepted CSR principles such as the OECD Guidelines for Multinational Enterprises. Uzbekistan does not participate in the Extractive Industries Transparency Initiative (EITI). 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: Address: 66, Akademik Gulyamov St., 100047, Tashkent, Uzbekistan Website: www.prokuratura.uz Hotline telephone numbers: +998(71) 1007, 232-4391, 232-4550, Contact information for the office of Uzbekistan’s Ministry of Justice: Address: 5, Sayilgoh Street, 100047, Tashkent, Uzbekistan Website: http://www.minjust.uz/en/, http://www.minjust.uz/ru/anticorruption/feedback/ Hotline telephone numbers: +998(71) 1008, 233-2610, 233-1305, 236-0509 E-mail: email@example.com 10. Political and Security Environment 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. 11. Labor Policies and Practices During 2019, the population of Uzbekistan increased by 650,300 people (2%) to 33,905,800. According to publicly available statistics, 30.5% of the population is under 16 years old; 58.9% is working age (16-60); and 10.6% are 60 years old and older. The Ministry of Employment and Labor Relations of Uzbekistan (MOL) reports indicate that the total number of labor resources in 2019 was about 19 million people (0.9% increase year-on-year). 13.54 million of them were considered employed (2% increase year-on-year), wherein 5.7 million people were employed officially, while remaining 7.8 million were considered as self-employed. The latter includes, among others, 5.37 million self-employed people and unregistered traders (the informal economy workforce), and about 2 million labor migrants. The share of non-agricultural workforce is about 73%. The official number of unemployed is 1.33 million people, or 9% of the total labor resource pool. The level of youth unemployment is 15%, and the level of female unemployment is 12.8%. Note: The accuracy of given statistics is based on records of the residents’ registration offices and studies conducted by the MOL. It does not always reflect the actual situation in the country. The next national census in Uzbekistan is expected in 2022, while the last one was in 1989. End note. With the closure or downsizing of many businesses, it is easy to find qualified employees, and salaries are low by Western standards. According to both government and independent analysts’ statistics, 14% of the population live below the poverty level, and approximately 48 percent of the employed population have low-productivity and low-income jobs. Accordingly, Uzbekistan is the largest supplier of labor migrants among former Soviet Union republics. At 99 percent, literacy is nearly universal, but most local technical and managerial training does not meet international business standards. Foreign firms report that younger Uzbekistanis are more flexible in adapting to changing international business practices but are also less educated than their Soviet-trained elders. Widespread corruption in the education sector has lowered educational standards as unqualified students purchase grades and even admittance to prestigious universities and lyceums. Legislation requires companies to hire Uzbekistani nationals for specified positions in banking and auditing companies. The chief accountant must be an Uzbekistani national, as should either the CEO or any one member of the board of directors. Only Uzbekistani nationals can be tour guides. According to Uzbekistan’s Labor Code, labor-management relations should be formalized in a fixed-term or temporary employment contract. The maximum length of a single fixed-term contract is 60 months (https://www.doingbusiness.org/en/data/labormarketeconomy/uzbekistan). The Labor Code and subordinate labor legislation differentiate between layoffs and firing. Employees can terminate their employment by filing written notice two-weeks prior or applying for leave without pay. Layoffs or temporary leave without pay can be initiated by an employer if the economic situation declines. For firing (severance), the employer should personally give two months’ advance notice in the case of corporate liquidation or optimization, two weeks’ advance notice in the case of an employee’s incompetence, and three days’ advance notice in the case of an employee’s malpractice or unacceptable violations. In case of severance caused by corporate liquidation or optimization, an employee should receive compensation, which should not be less than two average monthly salaries paid during their employment plus payment for unused leave (if another form of compensation was not agreed to in the employment contract). In reality, however, many businesses choose to avoid signing formal contracts with employees, especially those involved in seasonal agricultural or construction work. Officially, labor legislation cannot be waived or applied differently for private or foreign-owned enterprises, including those that operate in free and special economic zones. On March 4, 2020, Uzbekistan joined the Hague Conference on Private International Law. The new Law on Trade Unions (ZRU-588) was adopted in December 2019. According to this law, all trade union activities should be based on the principles of the compliance, voluntariness, non-discrimination, independence and self-governance, equality, transparency and openness. The law guarantees rights of trade unions and their associations and protects them from illegal interventions of government agencies, officials and employers. Currently, the Board of the Federation of Trade Unions of Uzbekistan incorporates 37,632 primary organizations and 14 regional trade unions, with official reports of 60 percent of employees in the country participating. These trade unions are all government owned and operated, including the Federation of Trade Unions. By law, all employees of either local or foreign-owned enterprises operating in Uzbekistan have the right to: fair and timely payment of wages that should not be less than the minimum monthly salary amounts set by the government; a standard workweek of forty hours, with a mandatory rest period of twenty-four hours and annual leave; overtime compensation as specified in employment contracts or agreed to with an employee’s trade union, which can be implemented in the form of additional pay or leave. The law states that overtime compensation should not be less than 200 percent of the employee’s average monthly salary rate (broken down by hours worked). Additional leave time should not be less than the length of actual overtime work; working conditions that meet occupational health and safety standards prescribed by legislation; compensation of any health or property damages incurred as a result of professional duties through an employer’s fault; professional training; formation and joining of labor unions; pensions; and legal support in protection of workers’ rights. There is no single state institution responsible for labor arbitration. The general court system, where civil and criminal cases are tried, is responsible for resolving labor-related disputes. This can be done on a regional or city level. Formally, workers can file their complaints through the Prosecutor General’s Office. The Ministry of Employment and Labor Relations should provide legal support to employees in their labor disputes. The law neither provides for nor prohibits the right to strike. In recent years, SOE employees in the mining sector and workers involved in various large state-facilitated civil construction projects conducted strikes, protesting against salary payment delays and demanding improvement of their working conditions. Reportedly, law enforcement authorities inspected the employing company, which eventually addressed most of the issues raised by the workers. There is no public information about the role of official unions in these negotiations. Although employees in Uzbekistan enjoy many rights by law, in practice these laws are subject to arbitrary and inconsistent interpretation. For example, the law prohibits compulsory overtime – and only 120 hours of overtime per year is permitted. In practice, overtime limitations are not widely observed, and compensation is rarely paid. Wage violations have become more common in recent years. 14 conventions of the UN’s International Labor Organization (ILO) are officially in force in Uzbekistan: Forced Labor Convention; Freedom of Association and Protection of the Right to Organize Convention Right to Organize and Collective Bargaining Convention; Equal Remuneration Convention; Abolition of Forced Labor Convention; Discrimination [Employment and Occupation] Convention; Minimum Age Convention; Worst Forms of Child Labor Convention; Employment Policy Convention; Forty-Hour Week Convention; Holidays with Pay Convention; Maternity Protection Convention [Revised]; Workers’ Representatives Convention; and Collective Bargaining Convention. The most recent observations of the ILO’s Committee of Experts on the Application of Conventions and Recommendations (CEACR) can be reviewed here: https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:11200:0::NO::P11200_COUNTRY_ID:103538 The law prohibits all forms of forced or compulsory labor, including by children, except as legal punishment for offenses such as robbery, fraud, or tax evasion, or as specified by law. Uzbekistan has eliminated the systematic use of child labor in the annual cotton harvest and has implemented reforms to significantly improve its record on adult forced labor. Despite strong political will in the central government to eradicate adult forced labor, at the local level its use in the cotton harvest is still reported, albeit in steadily decreasing numbers. The Ministry of Employment and Labor Relations establishes and enforces occupational health and safety standards. Labor inspectors conduct routine inspections of small and medium-sized businesses once every four years and inspect larger enterprises once every three years. The labor inspectorate – significantly expanded in size — was previously unable to conduct unscheduled inspections, but these are now legal and in regular use. In 2019, Uzbekistan adopted a number of labor related laws and regulations, including: Law on Trade Unions (ZRU-588, entered into force December 6, 2019) Law Ratification of Protocol of 2014 to the ILO Forced Labor Convention 29, 1930. (ZRU-545, June 25, 2019) Presidential Decree on Additional Measures to Improve the System of Countering Trafficking in Persons and Forced Labor (UP-5775, July 30, 2019) Presidential Decree and Government Resolution on introduction of Unified National Labor System interagency operational software and my.mehnat.uz portal (PP-4502, October 31, 2019, and N971, December 5, 2019) Presidential Decree on Measures to Improve the Personnel Policy and the System of Public Civil Service in the Republic of Uzbekistan”(UP-5843, October 3, 2019) Amendments to safety on job regulations in various industries and social service sectors. 12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs The U.S. International Development Finance Corporation (DFC) began working in Uzbekistan in 1992 (as the Overseas Private Investment Corporation, or OPIC) and has loaned approximately $229 million over the course of its operations in Uzbekistan. On May 17, 2018, the Corporation and the GOU officials signed a Memorandum of Cooperation (MOC) on bolstering investment in natural resources, energy, infrastructure and other critical sectors. DFC did not initiate any new projects in FY2019. Uzbekistan is a developing country member of the Multilateral Investment Guarantee Agency. 13. Foreign Direct Investment and Foreign Portfolio Investment Statistics Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy Host Country Statistical source* USG or international statistical source USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other Economic Data Year Amount Year Amount Host Country Gross Domestic Product (GDP) ($M USD) 2019 58,000 2019 N/A www.worldbank.org/en/country 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 ($M USD, stock positions) N/A N/A 2019 N/A BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 N/A BEA data available at https://www.bea.gov/international/ direct-investment-and-multinational- enterprises-comprehensive-data Total inbound stock of FDI as % host GDP 2019 9,800 2019 N/A UNCTAD data available at https://unctad.org/en/Pages/DIAE/ World%20Investment%20Report/ Country-Fact-Sheets.aspx * Source for Host Country Data: The State Statistics Committee of Uzbekistan Table 3: Sources and Destination of FDI Data not available. Table 4: Sources of Portfolio Investment Data not available. 14. Contact for More Information Contact at the U.S. Embassy in Tashkent: Eric Salzman Economic and Commercial Officer 3, Maykurgan St., Yunusabad District, 100093, Tashkent, Uzbekistan Telephone Number: +998-71-140-2130 Email address: BusinessInUzbekistan@state.gov.