Policies Towards Foreign Direct Investment

Bangladesh actively seeks foreign investment, particularly in the agribusiness, garment and textiles, leather and leather goods, light manufacturing, electronics, light engineering, energy and power, information and communications technology (ICT), plastic, healthcare, medical equipment, pharmaceutical, ship building, and infrastructure sectors. It offers a range of investment incentives under its industrial policy and export-oriented growth strategy with few formal distinctions between foreign and domestic private investors.

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Four sectors, however, are reserved for government investment:

• Arms and ammunition and other defense equipment and machinery;
• Forest plantation and mechanized extraction within the bounds of reserved forests;
• Production of nuclear energy; and
• Security printing.

The Bangladesh Investment Development Authority (BIDA) is the principal authority tasked with supervising and promoting private investment. The BIDA Act of 2016 approved the merger of the now-disbanded Board of Investment and the Privatization Committee. BIDA is directly supervised by the Prime Minister’s office and the Executive Chairman of BIDA holds a rank equivalent to Senior Secretary, the highest rank within the civil service. BIDA performs the following functions:

• Provides pre-investment counseling services;
• Registers and approves private industrial projects;
• Issues approval of branch/liaison/representative offices;
• Issues work permits for foreign nationals;
• Issues approval of royalty remittances, technical know-how, and technical assistance fees;
• Facilitates import of capital machinery and raw materials; and
• Issues approvals of foreign loans and supplier credits.

BIDA’s website has aggregated information regarding Bangladesh investment policies, incentives, and ease of doing business indicators: http://bida.gov.bd/ 

In addition to BIDA, three other Investment Promotion Agencies (IPAs) – the Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zones Authority (BEZA), and Bangladesh Hi-Tech Park Authority (BHTPA) — promote domestic and foreign investment. BEPZA promotes investments in Export Processing Zones (EPZs). The first EPZ was established in the 1980s and there are currently eight EPZs in the country. BEZA plans to establish approximately 100 Economic Zones (EZs) throughout the country over the next several years, of which 11 are currently fully or partially operational. Site selections for 77 additional EZs have been completed as of March 2020. While EPZs accommodate exporting companies only, EZs are open for both export- and domestic-oriented companies. Additionally, Bangladesh is setting up several Hi-Tech Parks across the country under the supervision of the Bangladesh Hi-Tech Park Authority.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own, operate, and dispose of interests in most types of business enterprises. Bangladesh allows private investment in power generation and natural gas exploration, but efforts to allow full foreign participation in petroleum marketing and gas distribution have stalled. Regulations in the area of telecommunication infrastructure currently include provisions for 60 percent foreign ownership (70 percent for tower sharing).In addition to the four sectors reserved for government investment, there are 17 controlled sectors that require prior clearance/ permission from the respective line ministries/authorities. These are:

a) Fishing in the deep sea

b) Bank/financial institutions in the private sector

c) Insurance companies in the private sector

d) Generation, supply, and distribution of power in the private sector

e) Exploration, extraction, and supply of natural gas/oil

f) Exploration, extraction, and supply of coal

g) Exploration, extraction, and supply of other mineral resources

h) Large-scale infrastructure projects (e.g. flyover, elevated expressway, monorail, economic zone, inland container depot/container freight station)

i) Crude oil refinery (recycling/refining of lube oil used as fuel)

j) Medium and large industries using natural gas/condensate and other minerals as raw material

k) Telecommunications service (mobile/cellular and land phone)

l) Satellite channels

m) Cargo/passenger aviation

n) Sea-bound ship transport

o) Seaports/deep seaports

p) VOIP/IP telephone

q) Industries using heavy minerals accumulated from sea beaches

While discrimination against foreign investors is not widespread, the government frequently promotes local industries and some discriminatory policies and regulations exist. For example, the government closely controls approvals for imported medicines that compete with domestically-manufactured pharmaceutical products and it has required majority local ownership of new shipping and insurance companies, albeit with exemptions for existing foreign-owned firms, following a prime ministerial directive. In practical terms, foreign investors frequently find it necessary to have a local partner even though this requirement may not be statutorily defined.

In certain strategic sectors, the GOB has placed unofficial barriers on foreign companies’ ability to divest from the country.

BIDA is responsible for screening, reviewing, and approving investments in Bangladesh, except for investments in EPZs, EZs, and High-Tech Parks, which are supervised by BEPZA, BEZA, and BHTPA respectively. Both foreign and domestic companies are required to obtain clearance certificates from relevant ministries and agencies with regulatory oversight. In certain sectors (e.g., healthcare) foreign companies may be required to obtain a No Objection Certificate (NOC) from the relevant ministry or agency stating the specific investment will not hinder local manufacturers and is in line with the guidelines of the ministry concerned. Since Bangladesh actively seeks foreign investments, instances where one of the Investment Promotion Agencies (IPAs) declines investment proposals are rare.

Other Investment Policy Reviews

In 2013 Bangladesh completed an investment policy review (IPR) with the United Nations Conference on Trade and Development (UNCTAD): https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=756 

A Trade Policy Review was done by the World Trade Organization in April 2019 and can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp485_e.htm 

Business Facilitation

In February 2018, the Bangladesh Parliament passed the “One Stop Service Bill 2018,” which aims to streamline business and investment registration processes. The four IPAs — BIDA, BEPZA, BEZA, and BHTPA — are mandated to provide one-stop services (OSS) to local and foreign investors under their respective jurisdictions. Expected streamlined services include: company registration, taxpayer’s identification number (TIN) and value added tax (VAT) registration, work permit issuance, power and utilities connections, capital and profit repatriation, and environment clearance. In 2019 Bangladesh made reforms in three key areas: starting a business, getting electricity, and getting credit. These and other regulatory changes led to an improvement of eight ranks on the World Bank’s Doing Business score. BIDA offers 18 services under its online OSS as of April 2020, and has a plan to expand to 154 services covering 35 agencies. The Bangladesh government is also planning to integrate the services of all four investment promotion agencies under a single online platform. Progress on realizing a comprehensive OSS for businesses has been slowed by bureaucratic delays and a lack of interagency coordination.

Companies can register their businesses at the Office of the Registrar of Joint Stock Companies and Firms (RJSC): www.roc.gov.bd . However, the online business registration process can be unclear and inconsistent. Additionally, BIDA facilitates company registration services as part of its OSS, which is available at: https://bidaquickserv.org/ . BIDA also facilitates other services including office set-up approval, work permits for foreign employees, and tax registration with National Board of Revenue. Other agencies with which a company must typically register are:

City Corporation – Trade License

National Board of Revenue – Tax & VAT Registration

Chief Inspector of Shops and Establishments – Employment of Workers Notification

It takes approximately 20 days to start a business in the country according to the World Bank. The company registration process at the RJSC now takes one or two days to complete. The process for trade licensing, tax registration, and VAT registration requires seven days, one day, and one week, respectively.

Outward Investment

Outward foreign direct investment is generally restricted through the Foreign Exchange Regulation Act of 1947. As a result, the Bangladesh Bank plays a key role in limiting outbound investment. In September 2015, the government amended the 1947 Act by adding a “conditional provision” that permits outbound investment for export-related enterprises. Private sector contacts note that the few international investments approved by the Bangladesh Bank have been limited to large exporting companies with international experience.

Transparency of the Regulatory System

Since 1989, the government has gradually moved to decrease regulatory obstruction of private business. The chambers of commerce have called for a greater voice for the private sector in government decisions and for privatization, but at the same time many support protectionism and subsidies for their own industries. The result is that policy and regulations in Bangladesh are often not clear, consistent, or publicized. Registration and regulatory processes are alleged to be frequently used as rent-seeking opportunities. The major rule-making and regulatory authority exists at the national level under each Ministry with many final decisions being made at the top-most levels, including the Prime Minister’s Office (PMO). The PMO is actively engaged in controlling policies, as well as foreign investment in government-controlled projects.

Bangladesh has achieved incremental progress in using information technology to improve the transparency and efficiency of some government services and to develop independent agencies to regulate the energy and telecommunication sectors. Some investors cited government laws, regulations, and lack of implementation as impediments to investment. The government has historically limited opportunities for the private sector to comment on proposed regulations. In 2009, Bangladesh adopted the Right to Information Act that provides for multilevel stakeholder consultations through workshops or media outreach. Although the consultation process exists, it is still weak and in need of further improvement.

Ministries and regulatory agencies do not generally publish or solicit comments on draft proposed legislation or regulations. However, several government organizations, including the Bangladesh Bank (central bank), Bangladesh Securities and Exchange Commission, BIDA, the Ministry of Commerce, and the Bangladesh Telecommunications Regulatory Commission have occasionally posted draft legislation and regulations online and solicited feedback from the business community. In some instances, parliamentary committees have also reached out to relevant stakeholders for input on draft legislation. The media continues to be the main information source for the public on many draft proposals. There is also no legal obligation to publish proposed regulations, consider alternatives to proposed regulation, or solicit comments from the general public.

The government printing office, The Bangladesh Government Press (http://www.dpp.gov.bd/bgpress/ ), publishes the weekly “Bangladesh Gazette” every Thursday and Extraordinary Gazettes from time to time. The gazette provides official notice of government actions, including the issuance of government rules and regulations and the transfer and promotion of government employees. Laws can also be accessed at http://bdlaws.minlaw.gov.bd/ .

Bangladesh passed the Financial Reporting Act of 2015 which created the Financial Reporting Council (FRC) in 2016 in an aim to establish transparency and accountability in the accounting and auditing system. The country follows Bangladesh Accounting Standards (BAS) and Bangladesh Financial Reporting Standards (BFRS), which are largely derived from International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). However, the quality of reporting varies widely in Bangladesh. Internationally known and recognized firms have begun establishing local offices in Bangladesh and the presence of these firms is positively influencing the accounting norms in the country. Some firms are capable of providing financial reports audited to international standards while others maintain unreliable (or multiple) sets of accounting reports. Regulatory agencies also do not conduct impact assessments of proposed regulations; hence, regulations are often not reviewed on the basis of data-driven assessments. Not all national budget documents are prepared according to internationally accepted standards.

International Regulatory Considerations

The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) aims to integrate regional regulatory systems among Bangladesh, India, Burma, Sri Lanka, Thailand, Nepal, and Bhutan. However, efforts to advance regional cooperation measures have stalled in recent years and regulatory systems remain uncoordinated.

Local law is based on the English common law system but most fall short of international standards. The country’s regulatory system remains weak and many of the laws and regulations are not enforced and standards are not maintained.

Bangladesh has been a member of the World Trade Organization (WTO) since January 1995. WTO requires all signatories to the Agreement on Technical Barriers to Trade (TBT) to establish a National Inquiry Point and Notification Authority to gather and efficiently distribute trade-related regulatory, standards, and conformity assessment information to the WTO Member community. The Bangladesh Standards and Testing Institute (BSTI) has been working as the National Enquiry Point for the WTO-TBT Agreement since 2002. There is an internal committee on WTO affairs in BSTI and it participates in notification to WTO activities through the Ministry of Commerce and the Ministry of Industries.

General Contact for WTO-TBT National Enquiry Point:
Email: bsti_std@bangla.net; bsti_ad@bangla.net
Website: http://www.bsti.gov.bd/ 

Focal Points for TBT:

Mr. Md. Golam Baki,
Deputy Director (Certification Marks), BSTI;
Email: baki_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: 01799828826

Mr. Mohammad Arafat Hossain Sarker,
Assistant Director (Certification Marks), BSTI;
Email: arafat_cm@bsti.gov.bd,
Tel: +88-02-9131582,
Cell: +8801715023589

Focal Point for other WTO related matters:

Mr. Md. Hafizur Rahman,
Director-1, WTO Cell, Ministry of Commerce
Email: director1.wto@mincom.gov.bd,
Tel: +880-2-9552105,
Cell: +88 0171 1861056

Mr. Mohammad Mahbubur Rahman Patwary,
Director-3, WTO Cell, Ministry of Commerce
Email: director3.wto@mincom.gov.bd,
Tel: +880-2-9540580,
Cell: +88 0171 2148758

Legal System and Judicial Independence

Bangladesh is a common law-based jurisdiction. Many of the basic laws of Bangladesh, such as the penal code, civil and criminal procedural codes, contract law, and company law are influenced by English common law. However, family laws, such as laws relating to marriage, dissolution of marriage, and inheritance are based on religious scripts and therefore differ among religious communities. The Bangladeshi legal system is based on a written constitution and the laws often take statutory forms that are enacted by the legislature and interpreted by the higher courts. Ordinarily, executive authorities and statutory corporations cannot make any law, but can make by-laws to the extent authorized by the legislature. Such subordinate legislation is known as rules or regulations and is also enforceable by the courts. However, being a common law system, the statutes are short and set out basic rights and responsibilities but are elaborated by the courts in their application and interpretation of those laws. The Judiciary of Bangladesh acts through (1) The Superior Judiciary, having appellate, revision, and original jurisdiction and (2) The Sub-Ordinate Judiciary, having original jurisdiction.

Since 1971, Bangladesh’s legal system has been updated in the areas of company, banking, bankruptcy, and money loan court laws and other commercial laws. An important impediment to investment in Bangladesh is a weak and slow legal system in which the enforceability of contracts is uncertain.  The judicial system does not provide for interest to be charged in tort judgments, which means delays in proceedings carry no penalties. Bangladesh does not have a separate court or division of a court dedicated solely to hearing commercial cases. The Joint District Judge court (a civil court) is responsible for enforcing contracts.

Some notable commercial laws include:

• The Contract Act, 1872 (Act No. IX of 1930)
• The Sale of Goods Act, 1930 (Act No. III of 1930)
• The Partnership Act, 1932 (Act No. IX of 1932)
• The Negotiable Instruments Act, 1881 (Act No. XXVI of 1881)
• The Bankruptcy Act, 1997 (Act No. X of 1997)
• The Arbitration Act, 2001 (Act No. I of 2001)

The judicial system of Bangladesh has never been completely independent from the interference of the executive branch of the government.  In a significant milestone, the government in 2007 separated the country’s judiciary from the executive but the executive retains strong influence over the judiciary through control of judicial appointments.  Other pillars of the justice system, including the police, courts, and legal profession, are also closely aligned with the executive branch.  In lower courts, corruption is widely perceived as a serious problem. Regulations or enforcement actions are appealable under the Appellate Division of the Supreme Court.

Bangladesh scored 3.33 in the World Bank’s 2017 Judicial Independence Index out of a 1-7 band score with 7 being the best. That was up from 2016 when it scored 2.38. In the Rule of Law Index 2020 published by the independent, non-profit World Justice Project (WJP), Bangladesh ranked 115 among 128 countries and jurisdictions, dropping two positions from 2019.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign investment include: the Foreign Private Investment (Promotion and Protection) Act of 1980, the Bangladesh Export Processing Zones Authority Act of 1980, the Companies Act of 1994, the Telecommunications Act of 2001, the Industrial Policy Act of 2005, the Industrial Policy Act of 2010, and the Bangladesh Economic Zones Act of 2010. The Industrial Policy Act of 2016 was approved by the Cabinet Committee on Industrial Purchase on February 24, 2016 and replaces the Industrial Policy of 2010.

The National Industrial Policy of 2016 offers incentives for “green” (environmental) high-tech or “transformative” industries. Foreigners who invest $1 million or transfer $2 million to a recognized financial institution can apply for Bangladeshi citizenship. The Government of Bangladesh will provide financial and policy support for high-priority industries (those that create large-scale employment and earn substantial export revenue) and creative (architecture, arts and antiques, fashion design, film and video, interactive laser software, software, and computer and media programming) industries. Specific importance will be given to agriculture and food processing, ready-made garments (RMG), information and communication technology (ICT) and software, pharmaceuticals, leather and leather products, and jute and jute goods.

In addition, Petrobangla, the state-owned oil and gas company, has modified its production sharing agreement contract for offshore gas exploration to include an option to export gas. In November 2019, Parliament approved the Bangladesh Flag Vessels (Protection) Act 2019 with a provision to ensure Bangladeshi flag vessels to carry at least 50 percent of foreign cargo, up from 40 percent.

The One Stop Service Act of 2018 mandated the four IPAs to provide OSS to local and foreign investors in their respective jurisdictions. The move aims to facilitate business services on behalf of multiple government agencies to improve ease of doing business. Although the IPAs have started to offer a few services under the OSS, corruption and excessive bureaucracy have hindered the complete roll out of the OSS. BIDA has a “one-stop” website that provides relevant laws, rules, procedure, and reporting requirements for investors at: http://www.bida.gov.bd/ .

Aside from information on relevant business laws and licenses, the website includes information on Bangladesh’s investment climate, opportunities for businesses, potential sectors, and how to do business in Bangladesh. The website also has an eService Portal for Investors which provides services such as visa recommendations for foreign investors, approval/extension of work permits for expatriates, approval of foreign borrowing, and approval/renewal of branch/liaison and representative offices.

Competition and Anti-Trust Laws

The GOB formed an independent agency in 2011 called the “Bangladesh Competition Commission (BCC)” under the Ministry of Commerce. The Bangladesh Parliament then passed the Competition Act in June of 2012. However, the BCC has experienced operational delays and it has not received sufficient resources to operate effectively.

In November 2018, the Bangladesh Telecommunication Regulatory Commission (BTRC) finalized Significant Market Power (SMP) regulations to promote competition in the industry. In February 2019 BTRC declared the country’s largest telecom operator Grameenphone (GP) the first SMP based on its revenue share of more than 50 percent and customer shares of about 47 percent . Since the declaration, the BTRC has attempted to impose restrictions on GP’s operations, which GP has challenged in the judicial system.

Expropriation and Compensation

Since the Foreign Investment Act of 1980 banned nationalization or expropriation without adequate compensation, the GOB has not nationalized or expropriated property from foreign investors. In the years immediately following independence in 1971, widespread nationalization resulted in government ownership of more than 90 percent of fixed assets in the modern manufacturing sector, including the textile, jute and sugar industries and all banking and insurance interests, except those in foreign (but non-Pakistani) hands. However, the government has taken steps to privatize many of these industries since the late 1970s and the private sector has developed into a main driver of the country’s sustained economic growth.

Dispute Settlement

ICSID Convention and New York Convention

Bangladesh is a signatory to the International Convention for the Settlement of Disputes (ICSID) and it acceded in May 1992 to the United Nations Convention for the Recognition and Enforcement of Foreign Arbitral Awards. Alternative dispute resolutions are possible under the Bangladesh Arbitration Act of 2001. The current legislation allows for enforcement of arbitral awards.

Investor-State Dispute Settlement

Bangladeshi law allows contracts to refer investor-state dispute settlement to third country fora for resolution. The U.S.-Bangladesh Bilateral Investment Treaty also stipulates that parties may, upon the initiative of either and as a part of their consultations and negotiations, agree to rely upon non-binding, third-party procedures, such as the fact-finding facility available under the Rules of the “Additional Facility (“Facility”) of the International Centre for the Settlement of Investment Disputes (“Centre”).” If the dispute cannot be resolved through consultation and negotiation, then the dispute shall be submitted for settlement in accordance with the applicable dispute-settlement procedures upon which the parties have previously agreed. Bangladesh is also a party to the South Asia Association for Regional Cooperation (SAARC) Agreement for the Establishment of an Arbitration Council, signed November 2005, which aims to establish a permanent center for alternative dispute resolution in one of the SAARC member countries.

International Commercial Arbitration and Foreign Courts

The Bangladesh Arbitration Act of 2001 and amendments in 2004 reformed alternative dispute resolution procedures. The Act consolidated the law relating to both domestic and international commercial arbitration. It thus creates a single and unified legal regime for arbitration. Although the new Act is principally based on the UNCITRAL Model Law, it is a patchwork as some unique provisions are derived from the Indian Arbitration and Conciliation Act 1996 and some from the English Arbitration Act 1996.

In practice, enforcement of arbitration results is applied unevenly and the GOB has challenged ICSID rulings, especially those that involve rulings against the GOB. The timeframe for dispute resolution is unpredictable and has no set limit. It can be done as quickly as a few months, but often takes years depending on the type of dispute. Anecdotal information indicates average resolution time can be as high as 16 years. Local courts may be biased against foreign investors in resolving disputes.

Bangladesh is a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and recognizes the enforcement of international arbitration awards. Domestic arbitration is under the authority of the district court bench and foreign arbitration is under the authority of the relevant high court bench.

The ability of the Bangladeshi judicial system to enforce its own awards is weak. Senior members of the government have been effective in using their offices to resolve investment disputes on several occasions, but the GOB’s ability to resolve investment disputes at a lower level is mixed. The GOB does not publish the numbers of investment disputes involving U.S. or foreign investors. Anecdotal evidence indicates investment disputes occur with limited frequency and the involved parties often resolve the disputes privately rather than seeking government intervention.

The practice of alternative dispute resolution (ADR) in Bangladesh has many challenges, including lack of funding for courts to provide ADR services, lack of lawyer cooperation, and lack of good faith. Slow adoption of ADR mechanisms and sluggish judicial processes impede the enforcement of contracts and the resolution of business disputes in Bangladesh.

As in many countries, Bangladesh has adopted a “conflicts of law” approach to determining whether a judgment from a foreign legal jurisdiction is enforceable in Bangladesh. This single criterion allows Bangladesh courts broad discretion in choosing whether to enforce foreign judgments with significant effects on matrimonial, adoption, corporate, and property disputes. Most enterprises in Bangladesh, and especially state-owned enterprises (SOEs), whose leadership is nominated by the ruling government party, maintain strong ties with the government.  Thus, domestic courts strongly tend to favor SOEs and local companies in investment disputes.

Investors are also increasingly turning to the Bangladesh International Arbitration Center (BIAC) for dispute resolution. BIAC is an independent arbitration center established by prominent local business leaders in April 2011 to improve commercial dispute resolution in Bangladesh to stimulate economic growth. The BIAC Board is headed by the President of the International Chamber of Commerce – Bangladesh (ICCB) and includes the presidents of other prominent chambers such as the Dhaka Chamber of Commerce and Industry (DCCI) and the Metropolitan Chamber of Commerce and Industry (MCCI), among others. The center operates under the Bangladesh Arbitration Act of 2001. According to BIAC, fast track cases are resolved in approximately six months while typical cases are resolved in one year. Major Bangladeshi trade and business associations such as the American Chamber of Commerce in Bangladesh (AmCham) can sometimes help resolve transaction disputes.

Bankruptcy Regulations

Many laws affecting investment in Bangladesh are old and outdated. Bankruptcy laws, which apply mainly to individual insolvency, are sometimes disregarded in business cases because of the numerous falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies. A Bankruptcy Act was passed by Parliament in 1997 but has been ineffective in addressing these issues. Some bankruptcy cases fall under the Money Loan Court Act which has more stringent and timely procedures.

Investment Incentives

Current regulations permit a tax holiday for designated “thrust” (strategic) sectors and infrastructure projects established between July 1, 2019 and June 30, 2024. The thrust sectors enjoy graduated tax exemption from 90 percent to 20 percent over a period of five to ten years depending on the zone where the business is established. Industries set up in Export Processing Zones (EPZs) and Special Economic Zones (SEZs) are also eligible for tax holidays. Details of fiscal and non-fiscal incentives are available on the following websites:

BIDA: http://bida.gov.bd/?page_id=146

BEPZA: https://www.bepza.gov.bd/investor_details/incentives-facilities

BEZA: https://www.beza.gov.bd/investing-in-zones/incentive-package/

Thrust sectors subject to tax exemption include: certain pharmaceuticals, automobile manufacturing, contraceptives, rubber latex, chemicals or dyes, certain electronics, bicycles, fertilizer, biotechnology, commercial boilers, certain brickmaking technologies, compressors, computer hardware, home appliances, insecticides, pesticides, petro-chemicals, fruit and vegetable processing, textile machinery, tissue grafting, tire manufacturing industries, agricultural machineries, furniture, leather and leather goods, cell phones, plastic recycling, and toy manufacturing. Eligible physical infrastructure projects are allowed graduated tax exemption from 90 percent to 20 percent over a period of 10 years.

Physical infrastructure projects eligible for exemptions include: deep sea ports, elevated expressways, road overpasses, toll road and bridges, EPZs, gas pipelines, information technology parks, industrial waste and water treatment facilities, liquefied natural gas (LNG) terminals, electricity transmission, rapid transit projects, renewable energy projects, and ports.

Independent non-coal fired power plants (IPPs) commencing production (COD) after January 1, 2015 are granted a 100 percent tax exemption for 5 years, a 50 percent exemption for years 6-8, and a 25 percent exemption for years 9-10. For coal-fired IPPs contracting with the GOB before June 30, 2020 and COD before June 30, 2023, the tax exemption rate is 100 percent for the first 15 years of operations. For power projects, import duties are waived for imports of capital machinery and spare parts.

The valued-added tax (VAT) rate on exports is zero. For companies that only export, import duties are waived for imports of capital machinery and spare parts. For companies that primarily export (80 percent of production and above), an import duty rate of 1 percent is charged for imports of capital machinery and spare parts identified and listed in notifications to relevant regulators. Import duties are also waived for EPZ industries and other export-oriented industries for imports of raw materials consumed in production.

Special incentives are provided to encourage non-resident Bangladeshis to invest in the country. Incentives include the ability to buy newly-issued shares and debentures in Bangladeshi companies. A quota of 10 percent of primary shares has been fixed for non-resident Bangladeshis. Furthermore, non-resident Bangladeshis can maintain foreign currency deposits in Non-resident Foreign Currency Deposit (NFCD) accounts.

In the past several years, U.S. companies have experienced difficulties securing the investment incentives initially offered by the GOB. Several companies have reported instances of infrastructure guarantees (ranging from electricity to gas connections) not being fully delivered or tax exemptions being delayed, either temporarily or indefinitely. These challenges are not specific to U.S. or foreign companies and reflect broader challenges in the business environment,

Foreign Trade Zones/Free Ports/Trade Facilitation

Under the Bangladesh Export Processing Zones Authority Act of 1980, the government established an EPZ in Chattogram in 1983. Additional EPZs now operate in Dhaka (Savar), Mongla, Ishwardi, Cumilla, Uttara, Karnaphuli (Chattogram), and Adamjee (Dhaka). Korean investors are also operating a separate and private EPZ in Chattogram.

Investments that are wholly foreign-owned, joint ventures, and wholly Bangladeshi-owned companies are all permitted to operate and enjoy equal treatment in the EPZs. Approximately one dozen U.S. firms – mostly textile producers – are currently operating in Bangladesh EPZs.

In 2010, Bangladesh enacted the Special Economic Zone Act that allows for the creation of privately owned SEZs that can produce for export and domestic markets. The SEZs provide special fiscal and non-fiscal incentives to domestic and foreign investors in designated underdeveloped areas throughout Bangladesh.

Performance and Data Localization Requirements

Performance Requirements

BIDA has set restrictions for the employment of foreign nationals and the issuance of work permits as follows:

Nationals of countries recognized by Bangladesh are eligible for employment consideration;

Expatriate personnel will only be considered for employment in enterprises duly registered with the appropriate regulatory authority;

Employment of foreign nationals is generally limited to positions for which qualified local workers are unavailable;

Persons below 18 years of age are not eligible for employment;

The board of directors of the employing company must issue a resolution for each offer or extension of employment;

The percentage of foreign employees should not exceed 5% in industrial sectors and 20% in commercial sectors, including among senior management positions;

Initial employment of any foreign national is for a term of two years, which may be extended based on merit; and

The Ministry of Home Affairs will issue necessary security clearance certificates.

In response to the high number of expatriate workers in the ready-made garment industry, BIDA has issued informal guidance encouraging industrial units to refrain from hiring additional semi-skilled foreign experts and workers. Overall, the government looks favorably on investments that employ significant numbers of local workers and/or provide training and transfers of technical skills.

The GOB does not formally mandate that investors use domestic content in goods or technology. However, companies bidding on government procurement tenders are often informally encouraged to have a local partner and to produce or assemble a percentage of their products in country.

According to a legal overview by the Telenor Group, for reasons of national security or in times of emergency, several regulations and amendments, including the Bangladesh Telecommunication Regulatory Act, 2001 (the “BTRA”), Information and Communication Technology Act 2006 (the “ICT Act”), and the Telegraph Act 1885 (the “1885 Act”), grant law enforcement and intelligence agencies legal authority to lawfully seek disclosure of communications data and request censorship of communications. A draft Digital Security Act of 2016 (the “Digital Security Act”) was adopted by Parliament in October 2018.

On the grounds of national security and maintaining public order, the GOB can authorize relevant government authorities (intelligence agencies, national security agencies, investigation agencies, or any officer of any law enforcement agency) to suspend or prohibit the transmission of any data or any voice call and record or collect user information relating to any subscriber to a telecommunications service.

Under section 30 of the ICT Act, the GOB, through the ICT Controller, may access any computer system, any apparatus, data, or any other material connected with a computer system, for the purpose of searching for and obtaining any such information or data. The ICT Controller may, by order, direct any person in charge of, or otherwise concerned with the operation of a computer system, data apparatus, or material, to provide reasonable technical and other assistance as may be considered necessary. Under section 46 of the ICT Act, the ICT Controller can also direct any government agency to intercept any information transmitted through any computer resource, and may order any subscriber or any person in charge of computer resources to provide all necessary assistance to decrypt relevant information.

There is no direct reference in the BTRA to the storage of metadata. Under the broad powers granted to the BTRA, however, the GOB, on the grounds of national security and public order, may require telecommunications operators to keep records relating to the communications of a specific user. Telecommunications operators are also required to provide any metadata as evidence if ordered to do so by any civil court.

The ICT Controller enforces the ICT Act and the Bangladesh Telecommunication Regulatory Commission (BTRC) enforces the BTRA. The Ministry of Home Affairs grants approval for use of powers given under the BTRA. The ICT Act also established a Cyber Tribunal to adjudicate cases. The Digital Security Act of 2018 created a Digital Security Agency empowered to monitor and supervise digital content. Also under the Digital Security Act, for reasons of national security or maintenance of public order, the Director General (DG) of the DSA is authorized to block communications and to require that service providers facilitate the interception, monitoring, and decryption of a computer or other data source.

The Bangladesh Road Transport Authority’s (BRTA) Ride-sharing Service Guideline 2017 came into force on March 8, 2018. The new regulations included requirements that ride sharing companies keep data servers within Bangladesh.

Real Property

Although land, whether for purchase or lease, is often critical for investment and as security against loans, antiquated real property laws and poor record-keeping systems can complicate land and property transactions. Instruments take effect from the date of execution, not the date of registration, so a bona fide purchaser can never be certain of title. Land registration records have been historically prone to competing claims. Land disputes are common, and both U.S. companies and citizens have filed complaints about fraudulent land sales. For example, sellers fraudulently claiming ownership have transferred land to good faith purchasers while the actual owners were living outside of Bangladesh. In other instances, U.S.-Bangladeshi dual citizens have purchased land from legitimate owners only to have third parties make fraudulent claims of title to extort settlement compensation. A study by a leading Bangladeshi think tank Policy Research Institute (PRI) revealed in 2015 one in seven households in the country faced land disputes. Bangladesh ranks 184 among 190 countries for ease of registering property in the World Bank’s Doing Business 2020 Report.

Property owners can obtain mortgages but parties generally avoid registering mortgages, liens, and encumbrances due to the high cost of stamp duties (i.e., transaction taxes based on property value) and other charges. There are also concerns that non-registered mortgages are often unenforceable.

Article 42 of the Bangladesh Constitution guarantees a right to property for all citizens but property rights are often not protected due to a weak judicial system. The Transfer of Property Act of 1882  and the Registration Act of 1908  are the two main laws that regulate transfer of property in Bangladesh but these laws do not have any specific provisions covering foreign and/or non-resident investors. Currently, foreigners and non-residents can incorporate a company with the Registrar of Joint Stock Companies and Firms. The company would be considered a local entity and would be able to buy land in its name.

Intellectual Property Rights The GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR. Investors note police are willing to investigate counterfeit goods producers when informed, but are unlikely to initiate independent investigations.

The GOB has limited resources to devote to intellectual property rights (IPR) protection. Counterfeit goods are readily available in Bangladesh and industry estimates that 90 percent of business software is pirated. A number of U.S. firms, including film studios, manufacturers of consumer goods, and software firms, have reported violations of their IPR. Investors note police are willing to investigate counterfeit goods producers when informed, but are unlikely to initiate independent investigations.

The Software Alliance, also known as BSA, is a trade group established by Microsoft Corporation in 1988. It opened a Bangladesh office in early 2014 as a platform to improve IPR protection in Bangladesh. Public awareness of IPR is growing, thanks in part to the efforts of the Intellectual Property Rights Association of Bangladesh: http://www.ipab.org.bd/ . Bangladesh is not currently listed in the U.S. Trade Representative’s Special 301 or Notorious Markets reports. Bangladesh is a member of the World Intellectual Property Organization (WIPO) and acceded to the Paris Convention on Intellectual Property in 1991.

Bangladesh has slowly made progress toward bringing its legislative framework into compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The government enacted a Copyright Law in July 2000 (amended in 2005), a Trademarks Act in 2009, and a Geographical Indication of Goods (Registration and Protection) Act in 2013. The Department of Patents, Designs and Trademarks (DPDT) drafted a new Patent Act in 2014 prepared in compliance with the requirements of the TRIPS Agreement. The draft act remains under Ministry of Industries review, and has not made measurable progress during the past year.

A number of government agencies are empowered to take action against counterfeiting, including the NBR/Customs, Mobile Courts, the Rapid Action Battalion (RAB), and local Police. The Department of National Consumer Rights Protection (DNCRP) is charged with tracking and reporting on counterfeit goods and the NBR/Customs tracks counterfeit goods seizures at ports of entry. Reports are not publicly available.

Capital Markets and Portfolio Investment

Capital markets in Bangladesh are still developing and the financial sector remains highly dependent on bank lending. Current government policy inhibits the creation of reliable benchmarks for long-term bonds and prevents the development of a tradable bond market.

Bangladesh is home to the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The Bangladesh Securities and Exchange Commission (BSEC), a statutory body formed in 1993 and attached to the Ministry of Finance, regulates both. As of March 25, 2020, the DSE market capitalization stood at $36.7 billion, a 24.6 percent drop year-on-year caused by an acute shortage of liquidity and reduced investor confidence.

Although the Bangladeshi government has a positive attitude towards foreign portfolio investors, participation remains low due to limited liquidity and the lack of publicly available and reliable company information. The DSE has attracted some foreign portfolio investors to the country’s capital market; however, the volume of foreign investment in Bangladesh remains a small fraction of total market capitalization. As a result, foreign portfolio investment has had limited influence on market trends and Bangladesh’s capital markets have been largely insulated from the volatility of international financial markets. Bangladeshi markets continue to rely primarily on domestic investors.

In 2019, BSEC undertook a number of initiatives to launch derivatives products, allow short selling, and activate the bond market. To this end, BSEC introduced three rules in May 2019: Exchange Traded Derivatives Rules 2019, Short-Sale Rules 2019, and Investment Sukuk Rules 2019. Other recent, notable BSEC initiatives include forming a central clearing and settlement company named Central Counterparty Bangladesh Limited (CCBL) and promoting private equity and venture capital firms under the 2015 Alternative Investment Rules. In December 2013, BSEC became a full signatory of the International Organization of Securities Commissions (IOSCO) Memorandum of Understanding.

BSEC has taken steps to improve regulatory oversight, including installing a modern surveillance system, the “Instant Market Watch,” that provides real time connectivity with exchanges and depository institutions. As a result, the market abuse detection capabilities of BSEC have improved significantly. A mandatory Corporate Governance Code for listed companies was introduced in August 2012 but the overall quality of corporate governance remains substandard. Demutualization of both the DSE and CSE was completed in November 2013 to separate ownership of the exchanges from trading rights. A majority of the members of the Demutualization Board, including the Chairman, are independent directors. Apart from this, a separate tribunal has been established to resolve capital market-related criminal cases expeditiously. However, both domestic and foreign investor confidence remains low.

The Demutualization Act 2013 also directed DSE to pursue a strategic investor who would acquire a 25 percent stake in the bourse. DSE opened bids for a strategic partner in February 2018 and, in September 2018, the Chinese consortium of the Shenzhen and Shanghai stock exchanges became DSE’s strategic partner after buying a 25 percent share of DSE for taka 9.47 billion ($112.7 million).

According to the International Monetary Fund (IMF), Bangladesh is an Article VIII member and maintains restrictions on the unapproved exchange, conversion, and/or transfer of proceeds of international transactions into non-resident taka-denominated accounts. Since 2015, authorities have relaxed restrictions by allowing some debits of balances in such accounts for outward remittances, but there is currently no established timetable for the complete removal of the restrictions.

Money and Banking System

The Bangladesh Bank (BB) acts as the central bank of Bangladesh. It was established on December 16, 1971 through the enactment of the Bangladesh Bank Order of1972. General supervision and strategic direction of BB has been entrusted to a nine–member Board of Directors, which is headed by the BB Governor. BB has 45 departments and 10 branch offices.

According to the BB, four types of banks operate in the formal financial system: State Owned Commercial Banks (SOCBs), Specialized Banks, Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs). Some 60 “scheduled” banks in Bangladesh operate under the full control and supervision of the central bank as per the Bangladesh Bank Order of 1972. The scheduled banks including six SOCBs, three specialized government banks established for specific objectives such as agricultural or industrial development or expatriates’ welfare, 42 PCBs, and nine FCBs as of March 2019. The scheduled banks are licensed to operate under the Bank Company Act of 1991 (Amended 2013). There are also five non-scheduled banks in Bangladesh, including Nobel Prize recipient Grameen Bank, established for special and definite objectives and operating under legislation that is enacted to meet those objectives.

Currently, 34 non-bank financial institutions (FIs) are operating in Bangladesh. They are regulated under the Financial Institution Act, 1993 and controlled by the BB. Of these, two are fully government-owned, one is a subsidiary of an SOCB, 15 are private domestic initiatives, and 15 are joint venture initiatives. Major sources of funds for these financial institutions are term deposits (at least three months’ tenure), credit facilities from banks and other financial institutions, call money, as well as bonds and securitization.

The major differences between banks and FIs are:

FIs cannot issue checks, pay-orders, or demand drafts;

FIs cannot receive demand deposits; and

FIs cannot be involved in foreign exchange financing.

Microfinance institutions (MFIs) remain the dominant players in rural financial markets. According to the Bangladesh Microcredit Regulatory Authority, as of June 2018, there were 705 licensed micro-finance institutions operating a network of 18,196 branches with 31.2 million members. Additionally, Grameen Bank had 830,000 million microfinance members as of June 2018. A 2014 Institute of Microfinance survey study showed that approximately 40 percent of the adult population and 75 percent of households had access to financial services in Bangladesh.

The banking sector has had a mixed record of performance over the past several years. Industry experts have reported shrinking liquidity and a rise in risky assets. Total domestic credit stood at 45.22 percent of gross domestic product at end of June 2019. With total assets of $15.4 billion, the state-owned Sonali Bank is the largest bank in the country while Islami Bank Bangladesh ($11.7 billion) and Standard Chartered Bangladesh ($4.5 billion) are the largest local private and foreign banks respectively as of December 2018, the latest data available. The gross non-performing loan (NPL) ratio was 9.3 percent at the end of December 2019 but was as high as 12.0 percent in the previous quarter. At 23.9 percent SCBs had the highest NPL ratio, followed by 15.1 percent of Specialized Banks, 5.8 percent of PCBs, and 5.7 percent of FCBs as of December 2019. Following the outbreak of COVID-19, the central bank directed all banks in March 2020 not to classify any new clients as non-performing until June 30. However, industry contacts predict NPLs will increase sharply after the exemption expires.

On December 26, 2017, the BB issued a circular, warning citizens and financial institutions about the risks associated with cryptocurrencies. The circular noted that using cryptocurrencies may violate existing money laundering and terrorist financing regulations and that users may incur financial losses. The BB issued similar warnings against cryptocurrencies in 2014.

Foreign investors may open temporary bank accounts called Non-Resident Taka Accounts (NRTA) in the proposed company name without prior approval from the BB in order to receive incoming capital remittances and encashment certificates. Once the proposed company is registered, it can open a new account to transfer capital from the NRTA account. Branch, representative, or liaison offices of foreign companies can open bank accounts to receive initial suspense payments from headquarters without opening an NRTA account. In May 2019, the BB relaxed regulations on the types of bank branches foreigners could use to open NRTAs, removing a previous requirement limiting use of NRTA’s solely to Authorized Dealers (ADs).

Foreign Exchange and Remittances

Foreign Exchange

Free repatriation of profits is legally allowed for registered companies and profits are generally fully convertible. However, companies report the procedures for repatriating foreign currency are lengthy and cumbersome. The Foreign Investment Act guarantees the right of repatriation of invested capital, profits, capital gains, post-tax dividends, and approved royalties and fees for businesses. The central bank’s exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees. BIDA may need to approve repatriation of royalties and other fees.

Bangladesh maintains a de facto managed floating foreign exchange regime. Since 2013, Bangladesh has tried to manage its exchange rate vis-à-vis the U.S. dollar within a fairly narrow range. Until 2017, the Bangladesh taka traded between 76 and 78.8 taka to the dollar. The taka has depreciated relative to the dollar since October 2017 reaching 84.95 taka per dollar as of March 2020, despite interventions from the Bangladesh Bank from time to time. The Bangladesh currency, the taka, is approaching full convertibility for current account transactions, such as imports and travel, but not for financial and capital account transactions, such as investing, currency speculation, or e-commerce.

Remittance Policies

There are no set time limitations or waiting periods for remitting all types of investment returns. Remitting dividends, returns on investments, interest, and payments on private foreign debts do not require approval from the central bank and transfers are typically made within one to two weeks. For repatriating lease payments, royalties and management fees, some central bank approval is required, and this process can take between two and three weeks. If a company fails to submit all the proper documents for remitting, it may take up to 60 days. Foreign investors have reported difficulties transferring funds to overseas affiliates and making payments for certain technical fees without the government’s prior approval to do so. Additionally, some regulatory agencies have reportedly blocked the repatriation of profits due to sector-specific regulations. The U.S. Embassy also has received complaints from American citizens who were not able to transfer the proceeds of sales of their properties.

In September 2019, BB simplified the profit repatriation process for foreign firms. Foreign companies and their branches, liaison, or representative offices no longer require prior approval from the central bank to remit funds to their parent offices outside Bangladesh. However, banks need to submit applications for ex post facto approval within 30 days of profit remittance.

The Financial Action Task Force (FATF) notes that Bangladesh has established the legal and regulatory framework to meet its Anti-Money Laundering/Counterterrorism Finance (AML/CTF) commitments. The Asia/Pacific Group on Money Laundering (APG), an independent and collaborative international organization based in Bangkok, conducted its mutual evaluation of Bangladesh’s AML/CTF regime in September 2018 and found that Bangladesh had made significant progress since the last Mutual Evaluation Report (MER) in 2009, but still faces significant money laundering and terrorism financing risks. The APG reports are available online: http://www.fatf-gafi.org/countries/#Bangladesh 

http://www.fatf-gafi.org/countries/#Bangladesh 

Sovereign Wealth Funds

The Bangladesh Finance Ministry first announced in 2015 that it was exploring the possibility of establishing a sovereign wealth fund to invest a portion of Bangladesh’s foreign currency reserves. In February 2017, the Cabinet initially approved a $10 billion “Bangladesh Sovereign Wealth Fund,” (BSWF) to be created with funds from excess foreign exchange reserves but the plan was subsequently scrapped.

Bangladesh’s 49 non-financial SOEs are spread among seven sectors – industrial; power, gas and water; transport and communication; trade; agriculture; construction; and services. The list of non-financial SOEs and relevant budget details are published in Bangla in the Ministry of Finance’s SOE Budget Summary 201-20: http://www.mof.gov.bd/site/page/5eed2680-c68c-4782-9070-13e129548aac/SOE-Budget 

The current government has taken steps to restructure several SOEs to improve their competitiveness. The GOB converted Biman Bangladesh Airline, the national airline, into a public limited company that initiated a rebranding and fleet renewal program, including the purchase of twelve aircraft from Boeing, all of which have been delivered. Five of six state-owned commercial banks (SCBs) – Sonali, Janata, Agrani, Rupali, and BASIC – were converted to public limited companies, of which only Rupali is publicly listed.

The contribution of SOEs to gross domestic product, value-added production, employment generation, and revenue earning is substantial. SOEs usually report to the ministries, though the government has allowed some enhanced autonomy for certain SOEs, such as Biman Bangladesh Airline. SOEs maintain control of rail transportation whereas private companies compete freely in air and road transportation. The corporate governance structure of SOEs in Bangladesh has been restructured as per the guidelines published by the Organization for Economic Cooperation and Development (OECD), but the country’s practices are not up to OECD standards.  There are no guidelines regarding ownership of SOEs, and while SOEs are required to prepare annual reports and make financial disclosures, disclosure documents are often unavailable to the public. Each SOE has an independent board of directors composed of both government and private sector nominees. The boards report to the relevant regulatory ministry.  Most SOEs have strong ties with the government, and the ruling party nominates most SOE leaders.  As the government controls most of the SOEs, domestic courts tend to favor the SOEs in investment disputes.

The Bangladesh Petroleum Act of 1974 grants authority for the government to award natural resources contracts and the Bangladesh Oil, Gas and Mineral Corporation Ordinance of 1984 gives Petrobangla, the state-owned oil and gas company, authority to assess and award natural resource contracts and licenses, to both SOEs and private companies. Currently, oil and gas firms can pursue exploration and production ventures only through production sharing agreements with Petrobangla.

Privatization Program

The Bangladeshi government has privatized 74 state-owned enterprises (SOEs) over the past 20 years, but SOEs still retain an important role in the economy, particularly in the financial and energy sectors. Of the 74 SOEs, 54 were privatized through outright sale and 20 through offloading of shares.

Since 2010, the government’s privatization drive has slowed. Previous privatization drives were plagued by allegations of corruption, undervaluation, political favoritism, and unfair competition. Nonetheless, the government has publicly stated its goal is to continue the privatization drive. SOEs can be privatized through a variety of methods including: sales through international tenders; sales of government shares in the capital market; transfers of some portion of the shares to the employees of the enterprises when shares are sold through the stock exchange; sales of government shares to a private equity company (restructuring); mixed sales methods; management contracts; leasing; and direct asset sales (liquidation). In 2010, 22 SOEs were included in the Privatization Commission’s (now the BIDA) program for privatization. However, a study on privatized industries in Bangladesh conducted by the Privatization Commission in 2010 found that only 59 percent of the entities were in operation after being privatized and 20 percent of them were permanently closed down – implying a lack of planning or business motivation of their private owners. In 2014, the government declared SOEs would not be handed over to private owners by direct selling. Offloading shares of SOEs in the stock market can be a viable way to ensure greater accountability of the management of the SOEs and minimize the government’s exposure to commercial activities. The offloading of shares in an SOE, unless it involves more than 50 percent of its shares, does not divest the government of the control over the enterprise. Both domestic and foreign companies can participate in privatization programs. Additional information is available on the BIDA website at: http://bida.gov.bd/?page_id=4771

The business community is increasingly aware of and engaged in responsible business conduct (RBC) activities with multinational firms leading the way. While many firms in Bangladesh fall short on RBC activities and instead often focus on philanthropic giving, some of the leading local conglomerates have begun to incorporate increasingly rigorous environmental and safety standards in their workplaces. U.S. companies present in Bangladesh maintain diverse RBC activities. Consumers in Bangladesh are generally less aware of RBC, and consumers and shareholders exert little pressure on companies to engage in RBC activities.

While many international firms are aware of OECD guidelines and international best practices concerning RBC, many local firms have limited familiarity with international standards. There are currently two RBC NGOs active in Bangladesh:

CSR Bangladesh, http://www.csrbangladesh.org/about.html 

CSR Centre Bangladesh, http://www.csrcentre-bd.org 

Along with the Bangladesh Enterprise Institute (BEI), the CSR Centre is the joint focal point for the United Nations Global Compact (UNGC) and its principles in Bangladesh. The UN Global Compact is the world’s largest corporate citizenship and sustainability initiative. The Centre is a member of a regional RBC platform called the South Asian Network on Sustainability and Responsibility (SANSAR). Currently, SANSAR has five member countries including Afghanistan, Bangladesh, India, Nepal, and Pakistan.

While several NGOs have proposed National Corporate Social Responsibility Guidelines, the GOB has yet to adopt any national standards for RBC. As a result, the GOB encourages enterprises to follow generally accepted RBC principles but does not mandate any specific guidelines.

Bangladesh has natural resources, but it has not joined the Extractive Industries Transparency Initiative (EITI). The country does not adhere to the Voluntary Principles on Security and Human Rights.

Corruption remains a serious impediment to investment and economic growth in Bangladesh. While the government has established legislation to combat bribery, embezzlement, and other forms of corruption, enforcement is inconsistent. The Anti-Corruption Commission (ACC) is the main institutional anti-corruption watchdog. With amendments to the Money Prevention Act, the ACC is no longer the sole authority to probe money-laundering offenses. Although it still has primary authority for bribery and corruption, other agencies will now investigate related offenses, including:

• The Bangladesh Police (Criminal Investigation Department) – Most predicate offenses.
• NBR – VAT, taxation, and customs offenses.
• The Department of Narcotics Control – Drug related offenses.

The current Awami League-led government has publicly underscored its commitment to anticorruption efforts and reaffirmed the need for a strong ACC, but opposition parties claim that the ACC is used by the government to harass political opponents. Efforts to ease public procurement rules and a recent constitutional amendment that reduced the independence of the ACC may undermine institutional safeguards against corruption. Bangladesh is a party to the UN Anticorruption Convention, but has not joined the OECD Convention on Combating Bribery of Public Officials. Corruption is common in public procurement, tax and customs collection, and among regulatory authorities. Corruption, including bribery, raises the costs and risks of doing business. By some estimates, off-the-record payments by firms may result in an annual reduction of two to three percent of GDP. Corruption has a corrosive impact on the broader business climate market and opportunities for U.S. companies in Bangladesh. It also deters investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

Resources to Report Corruption

Mr. Iqbal Mahmood
Chairman
Anti-Corruption Commission, Bangladesh
1, Segun Bagicha, Dhaka 1000
+88-02-8333350
chairman@acc.org.bd

Contact at “watchdog” organization:

Mr. Iftekharuzzaman
Executive Director
Transparency International Bangladesh (TIB)
MIDAS Centre (Level 4 & 5), House-5, Road-16 (New) 27 (Old),

Dhanmondi, Dhaka -1209
+880 2 912 4788 / 4789 / 4792
edtib@ti-bangladesh.org, info@ti-bangladesh.org, advocacy@ti-bangladesh.org

Prime Minister Hasina’s ruling Awami League party won 289 parliamentary seats out of 300 in a December 30, 2018 election marred by wide-spread vote-rigging, ballot-box stuffing and intimidation. Harassment, intimidation and violence during the pre-election period made it difficult for many opposition candidates and their supporters to meet, hold rallies, and/or campaign freely. The clashes between rival political parties and general strikes that previously characterized the political environment in Bangladesh have become far less frequent in the wake of the Awami League’s increasing dominance of the country and crackdown on dissent. Many civil society groups have expressed concern about the apparent trend toward a one-party state and the marginalization of all political opposition groups.

Americans are advised to exercise increased caution due to crime and terrorism when traveling to Bangladesh. Some areas have increased risk. For further information, see the State Department’s travel website for the Worldwide Caution, Travel Advisories, and Bangladesh Country Specific Information.

Bangladesh’s comparative advantage in cheap labor for manufacturing is partially offset by lower productivity due to poor skills development, inefficient management, pervasive corruption, and inadequate infrastructure. According to the 2010 Labor Force Survey, 87 percent of the Bangladeshi labor force is employed in the informal economy. Bangladeshi workers have a strong reputation for hard work, entrepreneurial spirit, and a positive and optimistic attitude. With an average age in Bangladesh of 26 years, the country boasts one of the largest and youngest labor forces in the world. However, training is not well aligned with labor demand. Bangladesh has labor laws that specify employment conditions, working hours, minimum wage levels, leave policies, health and sanitary conditions, and compensation for injured workers. Freedom of association and the right to join unions are guaranteed in the constitution. In practice, compliance and enforcement of labor laws are inconsistent, and companies frequently discourage or prevent the formation of worker-led labor unions, preferring pro-government unions. Export Processing Zones (EPZs) are a notable exception to the national labor law in that they do not allow trade unions, but do allow worker welfare associations, to which 74 percent of workers belong, according to GOB.

Since two back-to-back tragedies killed over 1,250 workers—the Tazreen Fashions fire in 2012 and the Rana Plaza collapse in 2013—Bangladesh made significant progress in factory fire and structural safety remediation, thanks mostly to two brand-led initiatives, the Alliance for Bangladesh Worker Safety (Alliance), comprised of U.S. and Canadian brands, and the Accord on Fire and Building Safety in Bangladesh (Accord), which was formed by European brands. Monitoring and remediation of RMG factories outside the purview of the Alliance and the Accord were handled by the GOB, with assistance from the ILO, under the National Initiative. The Alliance and Accord were scheduled to close in 2018 and hand over all monitoring to Bangladesh. The Alliance successfully concluded its factory monitoring and remediation operations at the end of 2018, as scheduled, but U.S. brands established a local organization, Nirapon, to continue monitoring remediated factories to ensure there is no backsliding.

As of March 2020, only 32 percent of factories under the National Initiative have completed remediation. After several court cases attempted to force the Accord out of Bangladesh in 2018 before its factories completed remediation, it signed an MOU with the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) in May 2019 to hand over its operations to a new entity, the RMG Sustainability Council (RSC) on June 1, 2020. In addition to BGMEA, the RSC would have representation from Accord brands and trade union federations. BGMEA and the GOB envision all RMG factories will eventually come under one monitoring platform, but have not yet agreed on how to coordinate inspections through an Industrial Safety Unit.

The U.S. government suspended Bangladesh’s access to the U.S. Generalized System of Preferences (GSP) over labor rights violations following a six-year formal review conducted by USTR. The decision, announced in 2013 in the months following the Rana Plaza collapse, was accompanied by a 16-point GSP Action Plan to help start Bangladesh’s path to reinstatement of the trade benefits. While some progress has been made in the intervening years, several key issues have not been adequately addressed. Despite revisions in 2018 intended to make Bangladesh more compliant with international labor standards, the 2019 Bangladesh Labor Act (BLA) and 2019 Export Processing Zone (EPZ) Labor Act (ELA, which replaces the EPZ Workers Welfare Association and Industrial Relation Act) still restrict the freedom of association and formation of unions, and maintain two administrative systems for workers inside and outside of zones. The GOB reported it will issue implementation rules for both laws in 2020, and further amend them starting in July 2021.

The U.S. government funds efforts to improve occupational safety and health alongside labor rights in the readymade garment (RMG) sector in partnership with other international partners, civil society, businesses, and the GOB. The United States is also working with the EU, Canada, and the International Labor Organization (ILO) to continuously improve working conditions in the RMG sector via the Sustainability Compact, a coordination platform launched in 2013 to promote continuous improvements under three pillars: 1) respect for labor rights; 2) structural integrity of buildings and occupational safety and health; and 3) responsible business conduct.

Under the current BLA, legally registered unions are entitled to submit charters of demands and bargain collectively with employers, but this has rarely occurred in practice. Labor leaders estimate there are no more than 80 or 90 trade unions in the country, and only 30 to 40 are able to negotiate with owners. The law provides criminal penalties for unfair labor practices such as retaliation against union members for exercising their legal rights, but charges are rarely brought against employers and the labor courts have a large backlog of cases. Labor organizations reported most workers did not exercise their rights to form unions, attend meetings, or bargain collectively due to fear of reprisal. A crackdown on mostly peaceful wage protests between December 2018 and February 2019 reportedly led to the termination or forced resignation of some 11,000 workers—many of whom were blacklisted and remained unable to find new employment a year later.

Labor laws differentiate between layoffs and terminations; no severance is paid if a worker is fired for misconduct. In the case of downsizing or “retrenchment,” workers must be notified and paid 30 days’ wages for each year of service. The law requires factories and establishments to notify Bangladesh’s Department of Inspection for Factories and Establishments (DIFE) a week prior to temporarily laying off workers due to a shortage of work or material. Laid off workers are entitled to their full housing allowance. For the first 45 days, they are entitled to half their basic wages, then 25 percent after that. Workers who were employed for less than one year are not eligible for any compensation in a lay off. In reality, trade unions and protesting workers report employers not only fail to pay workers their severance or benefits, but also their regular wages. No unemployment insurance or other social safety net programs exist.

The GOB does not consistently and effectively enforce applicable labor law. For example, the law establishes mechanisms for conciliation, arbitration, and dispute resolution by a labor court and workers in a collective-bargaining union have the right to strike in the event of a failure to reach a settlement. In practice, few strikes followed the cumbersome and time-consuming legal requirements for settlements, and strikes or walkouts often occur spontaneously. The GOB was partnering with the ILO to introduce a dispute settlement system with its Department of Labor.

The BLA guarantees workers the right to conduct lawful strikes, but with many limitations. For example, the government may prohibit a strike deemed to pose a “serious hardship to the community” and may terminate any strike lasting more than 30 days. The BLA also prohibits strikes at factories in the first three years of commercial production, and at factories owned by foreign investors or built with foreign investment funds. 12. U.S International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Policies Towards Foreign Direct Investment

With GDP growth of 5.02 percent in 2019, Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  Foreign investors, however, have complained about vague and conflicting regulations,  bureaucratic inefficiencies, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines 492 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD 6.6 million) or employing 1,000 local workers. The government has provided investment incentives particularly for “pioneer” sectors, (please see the section on Industrial Policies)

To further improve the investment climate, the government drafted an omnibus law on job creation to amend dozens of prevailing laws deemed to hamper investment.  In February 2020, the draft omnibus law was submitted to the legislature for deliberation.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The DNI aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors.  The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields.  Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR 100 billion (USD 6.6 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership.  The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent:  online marketplaces under IDR 100 billion (USD 6.6 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices.  In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries.  Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership.  For investment in certain sectors, such as mining and higher education, the 2016 DNI is useful only as a starting point for due diligence, as additional licenses and permits are required by individual ministries.  A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity.  Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations.  As part of President Jokowi’s second-term economic reform agenda, Indonesian ministers have stated their interest in revising the 2016 DNI through a new presidential regulation that will be issued in 2020.  This new Investment Priorities List, or DPI, will incentivize investment into certain sectors, notably export-oriented manufacturing, digital technology projects, labor-intensive industries, and value-added processing, with the aim to spur innovation and reduce Indonesia’s current account deficit.  The government also intends to shorten the list of restricted sectors to six categories including cannabis, gambling, and chemical weapons..

In 2016, Bank Indonesia issued Regulation No.18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s 2017 Regulation No.19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are not subject to the DNI.

The government issued Trade Minister Regulation 71/2019 to revoke the requirement for eighty percent local content and limitation of outlet numbers in the franchise industry.  Nevertheless, the government encourages companies to utilize domestic goods and services that meet franchisor quality standards.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the WTO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm 

The last OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm 

The 2019 UNCTAD Report on ASEAN Investment can be found here: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2568 

Business Facilitation

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights.  Once incorporated, a PMA must register through the OSS system.  Upon registration, a company will receive a business identity number (NIB) along with proof of participation in the Workers Social Security Program (BPJS) and endorsement of any Foreign Worker Recruitment Plans (RPTKA).  An NIB remains valid as long as the business operates in compliance with Indonesian laws and regulations.  Existing businesses will eventually be required to register through the OSS system.  In general, the OSS system simplified processes for obtaining NIB from three days to one day upon the completion of prerequisites.

Once an investor has obtained a NIB, he/she may apply for a business license.  At this stage, investors must:  document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary. Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations.  Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 6.6 million) or employing 1,000 local workers.  After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail.  In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD 0.7 million) or with total annual sales under IDR50 billion (USD 3.3 million).  However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees.  The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 13,000); and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing, and notification system has dramatically reduced the number of days needed to register a company.  Foreign firms are not required to disclose proprietary information to the government.

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval.  In November 2019, the government through Presidential Instruction 7/2019 appointed BKPM as the main institution to issue business permits and to grant investment incentives which have been delegated from all ministries and government institutions. BKPM has also been tasked to review policies deemed unfavorable for investors.  In addition, BKPM now issues soft-copy investment and business licenses.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities.  Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.

The Ministry of Home Affairs, the Ministry of Administrative and Bureaucratic Reform, and BKPM issued a circular in 2010 to clarify which government offices are responsible for investment that crosses provincial and regional boundaries.  Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by the central government, or central BKPM.  BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the domestic market.  BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in and policies of other countries.  BKPM also uses their investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities.  The government neither restricts nor provides incentives for outward investment.

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in 2010 and a land acquisition law in 2012.  Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies, including the DNI, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as additional red tape.  Certain businesses claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption.  U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government regulation 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations.  The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations.  Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.

In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business.  However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision.  The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.

In 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process.  The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  Presidential Instruction No. 7 also requires Ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation.  The presidential instruction did not address the frequent lack of coordination between the central and local governments.  Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018.  Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies.  The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform.  An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.   Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation.  The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the aviation sector have faced difficulty in utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law.  The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort).  Indonesia also has a Constitutional Court.  The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation.  Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staffs.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues.  In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized.  Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets.  Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, commonly referred to as the 2016 Negative Investment List or DNI. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 DNI enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 DNI contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  See section two for Indonesia’s procedures for licensing foreign investment.

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly in regard to mineral and oil and gas reserves. According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investors’ property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provided market value compensation to the investor.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts; however, some investors note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys. Two cases involved Newmont Nusa Tenggara under the BIT with Netherlands and Oleovest under the BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests. The Indonesian model BIT is under legal review.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreement signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration. Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is viewed as pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 billion (USD 6.6 million), a significant reduction from the previous regulation at IDR 500 billion (USD 33 million). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Based on BKPM Regulation 1/2019 as amended by BKPM Regulation 8/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

1. Upstream basic metals;
2. Oil and gas refineries;
3. Petrochemicals derived from petroleum, natural gas, and coal;
4. Inorganic basic chemicals;
5. Organic basic chemicals;
6. Pharmaceutical raw materials;
7. Semi-conductors and other primary computer components;
8. Primary medical device components;
9. Primary industrial machinery components;
10. Primary engine components for transport equipment;
11. Robotic components for manufacturing machines;
12. Primary ship components for the shipbuilding industry;
13. Primary aircraft components;
14. Primary train components;
15. Power generation including waste-to-energy power plants;
16. Economic infrastructure;
17. Digital economy including data processing; and
18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

• Deduction of 30 percent from taxable income over a six-year period
• Accelerated depreciation and amortization
• Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to 10 years with certain conditions for companies that are:

1. 1. Located in industrial or bonded zone;
   2. Developing infrastructure;
   3. Using at least 70 percent domestic raw material;
   4. Absorbing 500 to 1000 laborers;
   5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
   6. Reinvesting capital; or,
   7. Exporting at least 30 percent of their product.

On March 31, 2020, Indonesia issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and the Stability of Financial Systems for the Handling of the Coronavirus Disease 2019 Pandemic (Perppu 1/2020). Among its provisions are plans to regulate electronic based trading activity (e-trading) and to charge value-added taxes (VAT) on taxable intangible goods and services from foreign e-commerce parties and other highly-digitalized businesses. Income tax will also be imposed upon foreign e-commerce parties that are judged to meet a “significant economic presence” threshhold, based on consolidated gross circulation of a business group, total sales value, or active Indonesian users. The regulation also introduces an electronic transaction tax (ETT) that will be imposed on foreign entities that are subject to income tax obligations under the aformentioned threshhold but would not otherwise be subject to corporate income tax in Indonesia in the absence of a permanent establishment, where taxing such transactions is prohibited by bilateral tax treaties.  Industry representatives have expressed concern that such provisions seek to circumvent bilateral tax treaties intended to avoid double taxation, including the tax treaty between Indonesia and the United States.  They have also noted a lack of clarity over the Perppu’s implementation and concerns over administrative sanctions and the high cost to comply with new measures.  The new regulation will also also cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent.

The government provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 12/2020 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components including for electric vehicles, telecommunications, fertilizers, and pharmaceuticals until December 2020.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation 86/2020 streamlined licensing requirement for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

 At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry of Research and Technology handles applications on a case-by-case basis.

Indonesia’s vast natural resources have attracted significant foreign investment over the last century and continues to offer significant prospects. However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. A ban on the export of raw minerals went into effect in January 2014. However, in July 2014, the government issued regulations that allowed, until January 2017, the temporary export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full export ban came back into effect in January 2017, the government again issued new regulations that allowed exports of copper concentrate and other specified minerals, but imposed more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves. In January 2020, the government banned the export of  nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

During President Jokowi’s first term, the Indonesian government invested more than  USD 350 billion in infrastructure to connect Indonesia’s more than 17,000 islands. The investments included toll roads, seaports, airports, power generation, telecommunications, and upgrades to Indonesia’s social infrastructure, such as, clean water and sanitation, and housing projects.  President Jokowi has emphasized that he will continue this infrastructure program during his second five-year term, aiming to increase Indonesia’s infrastructure stock from 43 percent of GDP in 2019 to 50 percent in 2024.

Despite high-level attention from Indonesian policymakers, many U.S. companies and investors report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, corruption, and a relatively small Indonesian private sector. As a result of these challenges, the World Bank estimates that Indonesia faces a USD 1.5 trillion infrastructure gap in comparison to other emerging market economies.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials. Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of  February 2020, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction. Eleven SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten; 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara; 5) Arun Lhokseumawe, Aceh; 6) Galang Batang, Bintan, Riau Islands; 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan; and 11) Sorong, Papua. Four more SEZs are under construction: Tanjung Api-Api, South Sumatera; Singhasari, East Java; Kendal, Central Java; and Likupang, North Sulawesi. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is still ongoing  and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 103 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to designate more in eastern Indonesia.  In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum six months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower issued Decree 228/2019 to widen the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunication, and professionals. Foreign workers  have to obtain approval from Manpower Minister or designated officials for applying positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In October 10, 2019, Indonesia issued Government Regulation No. 71 (GR71) to replace Regulation No. 82/2012 which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervision authority. Private ESOs are individuals, businesses and communities that operate electronic system. Public ESOs are required to manage, process, and store their data in Indonesia, unless the storing technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs choose to process data outside of Indonesia, they are required to provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, GR71 provides  that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities with regards to the private sector’s ESO systems, data processing, and data storage.

In March 2020, the Ministry of Communication and Information Technology (MCIT) published a proposed draft implementing regulation of GR 71 for private ESOs. Article 6 of the draft requires private ESOs to obtain approval from MCIT before they can manage, process, and store their data outside of Indonesia. This provision has been widely criticized by foreign firms and is more restrictive than the original government regulation (GR71) which allows offshore data storage. Post continues to monitor this issue.

Additionally, pursuant to GR71, the Financial Services Authority (OJK) issued Regulation 13/2020, an amendment to Regulation 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Furthermore, OJK will evaluate whether the arrangement for offshore data could diminish its supervisory efficiency, negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ”forest land.” Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

As part of President Jokowi’s second-term economic reform agenda, the Indonesian government has introduced an omnibus bill on job creation that aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs).

Intellectual Property Rights

In the U.S. Trade Representative’s (USTR) Special 301 Report released on April 29, 2020, Indonesia remains on the priority watch list due to the  lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including with respect to patentability criteria and compulsory licensing. Further, counterfeiting and piracy continue to be pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia, Bukalapak, were included in USTR’s Notorious Markets List in 2019.

Indonesia improved market access by amending a troubling provision within the 2016 Patent Law related to compulsory licenses (CLs). Ministry of Law and Human Right (MLHR) Regulation 30/2019 aims to provide more clarity on the criteria for CLs, including provisions on the non-transferability of CLs to third parties, specific purposes, and duration. The provisions also clarify conditions where CLs can be granted based on determination of “detriment to society”, including insufficient supply and unfordable prices of patented products. The new regulation incorporates Regulation 15/2018’s renewable exemption for patent holders to delay local manufacturing requirements. While industry contacts viewed this regulation as an improvement, they still have concerns that this regulation may undermine the overall level of protection that patent holders receive by registering their patents in Indonesia.

MLHR’s Director General of Intellectual Property (DGIP)  said the GOI will further amend the 2016 Patent Law through the pending omnibus bill and a future Patent Law amendment. The job creation omnibus bill would remove a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. Previously, MLHR allowed a five-year exemption from local production requirements under Regulation 15/2018. The Patent Law amendment will contain revisions to Article 4 on second use and Article 82 on compulsory licensing. The 2016 Patent Law contains several other concerning provisions, including a restrictive definition of “invention” that potentially imposes an additional “meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  Observers expect the omnibus bill to be passed in 2020.  Aside from the Article 20 revision in the omnibus bill, there is no concrete timeline for the Patent Law amendment. DGIP reports it is currently drafting guidelines for patent examiners on pharmacy, computer, and biotechnology patents that will be released in 2020.

DGIP has relaxed its more aggressive efforts to collect patent annuity fees by offering extensions to the deadline.  On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website extending the deadline to August 17, 2019. DGIP has since announced a further extension to settle any unpaid annuities to July 31, 2020. However, in order to benefit from the latest extension, companies were required to send a “commitment letter” to DGIP by January 31, 2020 indicating their intention to pay the outstanding annuities.  The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol are required to first register their application with DGIP , and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Following the issuance of Ministry of Finance (MOF) Regulation No.40/2018, on December 10, 2019, the Supreme Court ruled on MOF Regulation No. 6/2019, which further granted DGCE the legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No.6/2019, rights holders are notified by DGCE (through the recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a suspension of the shipment. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (approximately USD 6,600) when they file a claim with the court. Rights holders can apply for a 10-day (extendable for an additional 10 days) temporary suspension of the shipment until the completion of a commercial court review.  Once the commercial court examines the evidence, the court can make a ruling that same day whether to maintain the temporary hold or to cancel the judgement.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the task force remained focused on coordinating the review of complaints from industry about infringing websites in 2018.  MCIT reported that it blocked 1,946 infringing websites in 2019, a significant increase from the previous  year’s 442 cases. IndoXXI and LayarIndo21, two of the largest online pirated entertainment providers,  reportedly closed in early January. After the IndoXXI shutdown was announced, Video Coalition of Indonesia (VCI) found 200 new infringing websites with similar content. A YouGov survey published by the Asia Video Industry Association (AVIA) revealed that 63 percent of Indonesians access infringing websites for entertainment purposes. MCIT senior officials stated the Ministry is working with the Indonesia National Police Cybercrime Unit and industry groups, including AVIA, to determine and identify the source host, but admitted MCIT does not have the capability to track down the perpetrators and bring criminal charges,

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 30 in 2018 to 47 in 2019. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 668 listed companies as of December 2019 with a daily trading volume of USD 650 million and market capitalization of USD 521 billion. Over the past five years, there has been a 34 percent increase of the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 59.26 percent of the market cap. There were 50 initial public offerings in 2019 – seven fewer than 2018. As of January 2020, domestic entities conducted more than 67.97 percent  of total IDX stock trades.

In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. This was followed in 2017 by the IDX’s introduction the first online sharia stock trading platform. As of December 2019, the ISSI is composed of 429 stocks that are a part of IDX’s Jakarta Composite Index (JCI), with a total market cap of USD 267 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2019 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment (including 38.57 percent of government securities). Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries or sectors, such as those outlined in the DNI.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of August 2019, the 10 top banks had IDR 5,210 trillion (USD 372 billion) in total assets. Loans grew 6.08 percent in 2019 compared to 11.5 percent in2018. Gross non-performing loans in December 2019 remained at 2.53 percent from 2.4 percent the previous year. For 2020, the Financial Services Authority (OJK) project annual credit growth at 12-14 percent and deposit growth around 10-12 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

On March 16, OJK  issued OJK Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and the encouraging consolidation of banks in Indonesia. This regulation generally consists of two main regulations concerning bank consolidation policies, as well as  increasing minimum core capital for commercial banks and increasing Capital Equivalency Maintained Assets for foreign banks with branch offices by least IDR 3 trillion, by December 31, 2022.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies recorded a triple-digit increase in 2008 and e-payment services have grown more than six-fold since 2012. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro-, small-, and medium-sized enterprises (MSMEs), with estimates that in 2020, fintech lending will hit IDR 223 trillion (USD 13.61 billion) in loan disbursements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 6,600) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses; and
• compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Carrying rupiah bank notes of more than IDR 100 million (approximately USD 6,600) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

As of mid-2020, Indonesia is still preparing to establish a sovereign wealth fund, despite macroeconomic and budgetary pressures from the pandemic response. When established, it is expected the fund will operate as a state-owned investment fund that will aim to attract foreign capital, including from foreign sovereign wealth funds, and invest that capital in long-term Indonesian assets. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies. The sovereign wealth fund will be authorized by the planned passage of the omnibus bill on job creation, which includes 14 articles to set up the fund and facilitate greater cooperation with foreign partners. This cooperation includes authorizing the fund to be set up in foreign jurisdictions and allowing foreigners as general partners of the fund.

In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir  has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the IDX.

Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In the third quarter of 2019 (the most recent data available), SOEs have contributed USD 22 billion of tax payments, non-tax payments, and dividends to the Indonesian state. SOEs also contributed a profit of USD 131 billion, with total assets of 626 billion, liabilties of USD 429 billion, and equities of USD 196 billion.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in 2015.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000).  The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2019 improved to 85 out of 180 countries surveyed, compared to 89 out of 180 countries in 2018.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 40 in 2019 (scale of 0/very corrupt to 100/very clean).  At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4^th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

On September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter. This revised law introduced several changes relating to the authority and supervision of the KPK, including KPK’s status as a state agency under the authority of the executive branch (it was previously an independent body outside of the judicial, legislative, or executive branches) and establishment of a Supervisory Council to oversee certain KPK activities.  The new law also changed the KPK’s status as a separate law enforcement authority and mandated the KPK to provide performance review reports to the President, the DPR RI, and the supervisory board.  Finally, the KPK’s previous independent authority to terminate corruption investigations and prosecutions, as well as authorize wiretaps, searches, arrests, and asset seizures, has now been transferred to the Supervisory Council.  Many observers view these changes as limiting KPK’s ability to pursue corruption investigations without political interference.

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there, including the death of a New Zealand citizen in an attack on March 30, 2020. Additionally, racially-motivated attacks against ethnic Papuans living in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.6 million (USD 256.6) per month in 2018 to IDR 3.94 million (USD 260) per month in 2019. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Until the onset of the COVID-19 pandemic, unemployment has remained steady at 4.38 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

The government has proposed an omnibus bill on labor reforms intended to attract investors, boost economic growth and create jobs.  The bill covers foreign workers, wages, work hours, redundancy and social security.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

• Child Labor Report: https://www.dol.gov/agencies/ilab/resources/reports/child-labor/indonesia .
• Trafficking in Persons Report: https://www.state.gov/reports/2019-trafficking-in-persons-report/indonesia/
• Human Rights Report: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/

*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,156 for 2019

*Indonesia Investment Coordinating Board (BKPM), January 2020

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Source:  IMF Coordinated Direct Investment Survey for inward and outward investment data.

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.

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.

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.

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.

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.

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.

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 

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.

Kazakhstan’s rating in Transparency International’s (TI) 2019 Corruption Perceptions Index is 34/100, ranking Kazakhstan 113 out of 180 countries rated – a relatively weak score, but the best in Central Asia.  According to the report, corruption remains a serious challenge for Kazakhstan, amplified by the instability of the economy.  In its March 2019 report on the fourth round of monitoring under the Istanbul Action Plan, OECD stated a lack of progress on 9 of 29 recommendations, including: implementation of a holistic anti-corruption policy in the private sector, ensuring independence of the anti-corruption agency, detailed integrity rules for political officials, independence of the judiciary and judges, mandatory anti-corruption screening of all draft laws, bringing the Law on Access to Information in line with international standards, effective and dissuasive liability of legal entities for corruption crimes; and ensuring the effectiveness of investigative and prosecutorial practices to combat corruption crimes.

The 2015-2025 Anti-Corruption Strategy focuses on measures to prevent the conditions that foster corruption, rather than fighting the consequences of corruption.  The Criminal Code imposes tough criminal liability and punishment for corruption, eliminates suspension of sentences for corruption-related crimes, and introduces a lifetime ban on employment in the civil service with mandatory forfeiture of title, rank, grade and state awards.  The Law on Countering Corruption introduces broader definitions of corruption and risks, anticorruption monitoring and analysis, and stronger financial accountability measures.  The Law on Government Procurement prohibits companies, the managers of which are directly related to decision makers of contracting government agencies, from participation in tenders.  The Law on Countering Corruption states that private companies should undertake measures to prevent corruption, while business associations can develop codes of conduct for specific industries.

The Agency for Countering Corruption presents its report on countering corruption annually. Kazakhstan ratified the UN Convention against Corruption in 2008.  It has been a participant of the Istanbul Anti-Corruption Action Plan of the OECD Anti-Corruption Network since 2004, the International Association of Anti-Corruption Agencies since 2009, and the International Counter-Corruption Council of CIS member-states since 2013.  Kazakhstan became a member of the Group of States against Corruption (GRECO) in January 2020.  The government and local business entities are aware of the legal restrictions placed on business abroad, such as the Foreign Corrupt Practices Act and the UK Bribery Act.

Despite provisions in laws, however, corruption allegations are noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector.  The International Finance Corporation’s Enterprise Survey that gathers responses from thousands of small and medium-sized enterprises in each of more than 100 countries, finds that respondents indicate corruption as the most severe obstacle to doing business in Kazakhstan.  For more information, please see: http://www.enterprisesurveys.org/data/exploreeconomies/2013/kazakhstan#corruption 

Transparency International Kazakhstan conducted a survey in 2019 to assess the corruption perception of 1,824 representatives of small businesses and individual entrepreneurs.  A total of 76.1 percent of respondents reported that they can develop their business without corruption.

The legal framework controlling corruption has been eased and loopholes exist.  In 2018 the president signed into law a set of criminal legislation amendments  mitigating punishment for acts of corruption by officials, including decriminalizing official inaction, hindrance to business activity, and falsification of documents; significantly reducing the amounts of fines for taking bribes; and reinstituting a statute of limitation for corruption crimes.  The largest loophole surrounds the first president and his family.  The Law on the First President of the Republic of Kazakhstan—Leader of the Nation establishes blanket immunity for First President Nazarbayev and members of his family from arrest, detention, search or interrogation.  Journalists and advocates for fiscal transparency are reported to have faced frequent harassment, administrative pressure, and there are reports of disappearances and unaccounted deaths.

Resources to Report Corruption

Under the Law On Countering Corruption, all government, quasi-government entities, and officials are responsible for countering corruption.  Along with the Anti-Corruption Agency, prosecutors, national security agencies, police, tax inspectors, military police, and border guard service members are responsible for the detection, termination, disclosure, investigation, and prevention of corruption crimes, and for holding the perpetrators liable within their competence.

Transparency International maintains a national chapter in Kazakhstan.

Contact at the government agency responsible for combating corruption:

Alik Shpekbayev
Chairman
Agency for Civil Service Affairs and Countering Corruption
37 Seyfullin Street, Astana
+7 (7172) 909002
a.shpekbaev@kyzmet.gov.kz

Contact at a “watchdog” organization:

Olga Shiyan
Executive Director
Civic Foundation “Transparency Kazakhstan”
Office 308/2
89 Dosmuhamedov str,
Business Center Caspi
Almaty 050012
+7 (727) 292 0970; +7 771 589 4507
oshiyantikaz@gmail.com

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.

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.

*The Statistic Committee and The National Bank of Kazakhstan

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.

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.

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.

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:

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/ .

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.

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.

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.

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.

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.

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/

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.

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.

* 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 

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 76^th to 69^th 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.

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).

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.

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/.

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.

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.

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).

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: info@minjust.gov.uz

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.

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.

* 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.