Policies Toward FDI

Kazakhstan has attracted significant foreign investment since independence. As of January 1, 2021, the total stock of foreign direct investment (by the directional principle) in Kazakhstan totaled USD 166.4 billion, primarily in the oil and gas sector. International financial institutions consider Kazakhstan to be a relatively attractive destination for their operations, and international firms have established regional headquarters in Kazakhstan.

In 2017, Kazakhstan adhered to the OECD Declaration on International Investment and Multinational Enterprises, meaning it committed to certain investment standards, including the promotion of responsible business conduct..

In its Strategic Plan of Development to 2025, the government stated that bringing up the living standards of Kazakhstan’s citizens to the level of OECD countries is one of its strategic goals.

In addition to earlier approved program documents, the President adopted a National Development Plan to 2025 in February 2021. The Plan outlines objectives and parameters of a New Economic Course announced by President Tokayev in September 2020. The Course included seven priorities: a fair distribution of benefits and responsibilities, the leading role of private entrepreneurship, fair competition, productivity growth and the development of a more technologically advanced economy, human capital development, development of a green economy, and state accountability to the society. A favorable investment climate is a part of this course. To implement his program, the President established the Supreme Council for Reforms and the Agency for Strategic Planning and Reforms. The President chairs the Supreme Council for Reforms, while Sir Suma Chakrabarti, a former President of the European Bank for Reconstruction and Development will serve as Deputy Chairman.

In January 2021, the Prime Minister announced the government’s commitment to increase the share of annual FDI in GDP from 13.2 percent of GDP in 2018 to 19 percent of GDP in 2022.

The government of Kazakhstan has incrementally improved the business climate for foreign investors. Corruption, lack of rule of law and excessive bureaucracy, however, do remain serious obstacles to foreign investment.

Over the last few 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 created the Coordination Council for Attracting Foreign Investment. The Prime Minister acts as the Chair and Investment Ombudsman. In December 2018, the Investment Committee was transferred to the supervision of the Ministry of Foreign Affairs, which took charge of attracting and facilitating the activities of foreign investors. In January 2021, the Minister of Foreign Affairs received an additional title of Deputy Prime Minister due to the expanded portfolio of the Ministry. 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 and the Ministry of Trade and Integration interact 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. 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, ) operates as a regional investment hub regarding tax, legal, and other benefits. In 2019, the government founded Kazakhstan’s Direct Investment Fund which became resident at the AIFC and aims to attract private investments for diversifying Kazakhstan’s economy. The state company KazakhInvest, located in this hub, offers investors a single window for government services.

In 2020-2021, the government attempted to improve the regulatory and institutional environment for investors. However, these changes have sometimes been associated with an over-structured system of preferences and an enhanced government role. For example, in January 2021 the Foreign Minister suggested for consideration establishment of an additional group, the Investment Command Staff (ICS) that would make decisions on granting special conditions and extending preferences for investors signing investment agreements. This Investment Command Staff is expected to consider project proposals after their verification by KazakhInvest and the Astana International Financial Center. The government maintains its 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 caused the government to amend the country’s mid-term economic development plans. In March 2020, the government approved a stimulus package of $13.7 billion, mostly oriented at maintaining the income of the population, 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 certain business enterprises. While no sectors of the economy are completely closed to foreign 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. Article 16 in the December 2017 Code on Subsoil and Subsoil Use (the Code) mandates that share of the national company KazAtomProm be no less than 50% in new uranium producing joint ventures.

As a result of its WTO accession, Kazakhstan formally removed the limits on foreign ownership 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 in December 2020, the restriction on opening branches of foreign banks and insurance companies was lifted in compliance with the country’s OECD commitments. However, the law limits the participation of offshore companies in banks and insurance companies and prohibits foreign ownership of pension funds and agricultural land. In addition, foreign citizens and companies are restricted from participating in private security businesses.

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 litigation as pressure tactics.

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.  In 2020, developments ranged from a major reduction to a full annulment of work permits for some categories of foreign workforce (see Performance and Data Localization Requirements.)   During a March 2021 virtual meeting with international oil companies, Kazakhstan’s President urged the government to ensure legal protection and stability of investments and investment preferences. He also tasked the recently established Front Office for Investors to address investor challenges and bring them to the attention of the Prime Minister’s Council.  Moreover, Kazakhstan supported the request of oil companies to remove a discriminatory approach to fines imposed on them for gas flaring.  Under the current legislation, oil companies pay gas flaring fines several times higher than those paid by other non-oil companies.

In April 2008, Kazakhstan introduced a customs duty on crude oil and gas condensate exports, this revenue goes to the government’s budget and does not reach the National Fund.  The National Fund 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 disposal of agricultural land.  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 – if the global oil price drops below $25 per barrel, the duty zeros.

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 latest approved list is dated June 28, 2018: https://www.primeminister.kz/ru/decisions/28062018-389.

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 streamline 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.

Kazakhstan is committed under the Paris Climate Agreement to reduce GHG emissions 15 percent from the level of base year 1990 down to 328.3 million metric tons (mmt) by 2030.  In the meantime, Kazakhstan increased emissions 27.8 percent to 401.9 mmt in the five years from 2013 to 2018. The energy sector accounted for 82.4 percent of GHG emissions, agriculture for 9 percent, and others for 5.6 percent.  The successor of the Energy Ministry for environmental issues, Ministry of Ecology, Geology, and Natural Resources, started drafting the 2050 National Low Carbon Development Strategy in October 2019. The Concept is scheduled for submission to the government in June 2021.

In November 2020, the government adopted a National Plan for Allocation of Quotas for Greenhouse Gas (GHG) Emissions for 2021. The emissions cap (a total number of emissions allowed) is set for 159.9 million. The power sector received the highest number of allowances, or 91.4 million, for 90 power plants.  The cap for the oil and gas sector is 22.2 million for 61 installations, while 24 mining installations get 7.3 million allowances, and 21 metallurgical facilities have 29.6 million.  The combined caps for the chemical and processing sectors are 9.3 million. In February 2018, the Ministry of Energy announced the creation of an online GHG emissions reporting and monitoring system.  The system is not operational, and it is likely to be launched after the Environmental Code comes into effect in July 2021.  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.

Other Investment Policy Reviews

The OECD Investment Committee 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 Investment Committee 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. The OECD Investment Committee is 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 Index 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 must have Kazakhstan’s visa for a business immigrant and submit electronic copies of their IDs, as well as any certification of their companies from their country of origin. 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 ‘Doing Business’ Index, it takes 4 procedures and 5 days to establish a foreign-owned limited liability company (LLC) in Kazakhstan. 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.

The COVID-19 pandemic triggered new measures for easing the doing business process. In 2021, the government introduced a special three-percent retail tax for 114 types of small and medium-sized businesses. Companies can switch to the new regime voluntarily. The government also introduced an investment tax credit allowing entrepreneurs to receive tax deferrals for up to three years. As a part of his new economic policy, President Tokayev stated that prosecution or tax audits against entrepreneurs should be possible only after a respective tax court ruling.

In 2020, the government approved new measures aimed to facilitate the business operations of investors and to help Kazakhstan attract up to $30 billion in additional FDI by 2025. For example, the government introduced a new notional an investment agreement (see details in Section 4) and removed a solicitation of local regional authorities for obtaining a visa for a business-immigrant.

In order to facilitate the work of foreign investors, the government has recommended to use the law of the Astana International Financial Center (AIFC) as applicable law for investment contracts with Kazakhstan and has planned some steps, including a harmonization of tax preferences of the AIFC, the International IT park Astana Hub, Astana Expo 2017 company and Nazarbayev University. Plans on the further liberalization of a visa and migration regime, and the development of international air communication with international financial centers were suspended due to the COVID-19 pandemic.

Utilizing the advantages of the Astana International Financial Center may bring positive results in attracting foreign investments. Nonetheless, there is still room for improvement in business facilitation in the rest of Kazakhstan’s territory. For example, foreign investors often complain about problems finalizing contracts, delays, and burdensome practices in licensing. The problems associated with the decriminalization of tax errors still await full resolution, despite an order to this effect issued by the General Prosecutor’s Office in January 2020. The controversial taxation of dividends of non-residents that came into force in January 2021, has additionally raised concerns of foreign investors.

Outward Investment

The government neither incentivizes nor restricts outward investment.

The United States-Kazakhstan Bilateral Investment Treaty came into force in 1994, and the United States-Kazakhstan Treaty on the Avoidance of Double Taxation came into force in 1996.

Since independence, Kazakhstan has signed treaties on the avoidance of double taxation with 55 countries at: http://kgd.gov.kz/ru/content/konvencii-ob-izbezhanii-dvoynogo-nalogooblozheniya-i-predotvrashchenii-ukloneniya-ot, and bilateral investment protection agreements with 51 countries, four of which have not come into force yet and four other have been terminated. The list of investment protection agreements is here: https://investmentpolicy.unctad.org/international-investment-agreements/countries/107/kazakhstan?type=bits.

Some foreign investors allege Kazakhstani tax authorities are reluctant to refer double taxation questions to the appropriate resolution bodies. Among other tax issues that cause concern with U.S. investors are the criminalization of tax errors, VAT refund issues, and a recently introduced taxation of dividends of non-residents.

Eurasian Economic Integration and WTO

Kazakhstan entered into a Customs Union with Russia and Belarus on July 1, 2010 and was a founding member of the Eurasian Economic Union (EAEU) created on May 29, 2014 with Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia. Kazakhstan joined the WTO in November 2015. The EAEU is governed by the Eurasian Economic Commission, a supra-national body headquartered in Moscow, and is expected to integrate further the economies of its member states, and to provide for the free movement of services, capital, and labor within their common territory.

Kazakhstan entered into a Customs Union with Russia and Belarus on July 1, 2010 and was a founding member of the Eurasian Economic Union (EAEU) created on May 29, 2014 with Armenia, Belarus, Kazakhstan, Kyrgyz Republic, and Russia. Kazakhstan joined the WTO in November 2015. The EAEU is governed by the Eurasian Economic Commission, a supra-national body headquartered in Moscow, and is expected to integrate further the economies of its member states, and to provide for the free movement of services, capital, and labor within their common territory.

Kazakhstan’s trade policy has been heavily influenced by EAEU regulations. While Kazakhstan asserts the EAEU agreements comply with WTO standards, since joining the Customs Union Kazakhstan doubled its average import tariff and introduced annual tariff-rate quotas (TRQs) on poultry, beef, and pork. Per its WTO commitments, Kazakhstan lowered 3,512 import tariff rates to an average of 6.1 percent as of December 2020. As a part of this commitment, Kazakhstan applies a lower-than-EAEU tariff rate on food products, automobiles, airplanes, railway wagons, lumber, alcoholic beverages, pharmaceuticals, freezers, and jewelry. After December 2020, Kazakhstan will have a three-year implementation period prior to starting tariff adjustment negotiations with its EAEU partners.

Furthermore, Kazakhstan is a signatory to the Free Trade Agreement with CIS countries, and as a member of the EAEU, is party to the Free Trade Agreements between the EAEU and Vietnam, between the EAEU and Serbia, and between the EAEU and Singapore. In addition, Kazakhstan is a part of the Interim Agreement on formation of a free trade zone between the EAEU with Iran. Kazakhstan is also party to the Eurasian Economic Union Mutual Investment Protection Agreement, which came into force in 2016.

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 enacted 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 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 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 websites of the Ministry of Justice: http://adilet.zan.kz/rus and http://zan.gov.kz/en/ .

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 barriers 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 requirements.

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 with impunity.

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. One of the recent cases involves a U.S. company that has objected to the retroactive application of a new rule on an exemption on dividend taxes in Kazakhstan’s Tax Code.  Other examples from the past include foreign companies reporting that local and national authorities arbitrarily imposed high environmental fines, saying the fines were assessed to generate revenue for local and national authorities rather than for environmental protection. Government officials have acknowledged the system of environmental fines required reform and developed the new Environmental Code (Eco Code), compliant with OECD standards, in 2018.  The new Eco Code signed into law in January 2021 will come into effect on July 1, 2021.  The Eco Code mandates local authorities to have 100 percent of environmental payments spent on environmental remediation.  Oil companies have complained that the emission payment rates for pollutants when emitted from gas flaring are at least twenty times higher than when the same pollutants are emitted from other stationary sources. The Parliament is currently reviewing the amendments to the Administrative Code to make gas flaring fines for oil companies equivalent to those imposed on non-oil companies.

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.

President Tokayev, who was elected in June 2019, stated his adherence to reforms, initiated by former President Nazarbayev, and called the government to reset approaches to reforms, including robust implementation. The New Economic Course, announced by President Tokayev in 2020, included the streamlining of the taxation system to stimulate inflow of foreign investment and the decriminalization of tax errors. In addition, Tokayev tasked the government to develop in 2021 a new bill guaranteeing the right of citizens to access information on the government’s activity. Public financial reporting, including debt obligations, and explicit liabilities, are published by the National Bank of Kazakhstan at https://nationalbank.kz/en/news/vneshniy-dolg and by the Ministry of Finance on their site: https://www.gov.kz/memleket/entities/minfin/press/article/details/17399?directionId=261&lang=ru.

However, contingent liabilities, such as exposures to state-owned enterprises, their crossholdings, 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 has declared its adherence to the 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.  The status of the TFA implementation by Kazakhstan can be found here: https://tfadatabase.org/members/kazakhstan.

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 effectively dominates 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 nominally enforce arbitration clauses in contracts. However, in actual fact the Government has refused to honor at least one fully litigated international arbitral decision. 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 independent of the Kazakhstani judiciary. The court is now led by former Deputy President of the UK Supreme Court, Lord Mance, 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. In February 2020, the AIFC reported that both Chevron in Kazakhstan and Tengizchevroil included the AIFC arbitration center as their preferred institution for resolution of commercial disputes in Kazakhstan.  Local lawyers have observed a growing positive influence of the high standards of AIFC court and the AIFC arbitration over the entire judicial system of Kazakhstan.

President Tokayev’s policy on a new Economic Course anticipates further judiciary reforms aimed to strengthen public trust in courts.

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; the Law on Currency Regulation and Currency Control, and the Constitutional Law on the Astana International Financial Center. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. However, 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, and 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 section 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.

In 2020, Kazakhstan enacted a new provision to the Entrepreneurial Code on investment agreement between strategic investors and the government. According to the law, the investment agreement is expected to provide investors with incentives, preliminarily negotiated with the government. The government guarantees the stability of the legal regime for these investment agreements. The investment agreement is an addition to a system of investment contacts already established in Kazakhstan (see Section 4 for details).

A law on Currency Regulation and Currency Control, which came into force July 1, 2019, expands the statistical monitoring of transactions in foreign currency and facilitates the process of de-dollarization. In particular, the law treats branches of foreign companies in Kazakhstan as residents and enables the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK approved a list of companies that keep their non-resident status; the majority of these companies are from extractive industries (see also section 6, Financial Sector).

The legal and regulatory framework offered by AIFC to businesses registering on that territory differs substantially from that of Kazakhstan. The AIFC activity has gained momentum since its establishment in 2018. More detailed information on the legal and regulatory implications of operating within AIFC can be found here: https://aifc.kz/annual-report/ and in Section 6, Financial Sector. Additionally, 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/.

Competition and Antitrust Laws

The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. In 2020, in order to enhance an anti-monopoly policy, the President ordered the transfer of the functions on protection of competition to a newly created Agency for Protection and Development of Competition that operates under his direct supervision. The Agency is responsible for reviewing transactions in terms of competition-related concerns. Regulation of natural monopolies remained with the Ministry of National Economy. In order to be responsive to public opinion, the Agency for Protection and Development of Competition has established various consultative bodies, including the Open Space, the Council on Identifying and Removal of Barriers for Entering Markets, the Public Council, and the Exchange Committee. Foreign companies may participate in the Council on Identifying and Removal of barriers for Entering Markets.

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 to require prompt and adequate compensation at fair market value.

The Mission is aware of cases where owners of flourishing and developed businesses have been forced 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. However, the government does not always honor such awards.

Investor-State Dispute Settlement

The government is a signatory to bilateral investment agreements with 47 countries, the Energy Charter Treaty, and one 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.

Kazakhstan is legally obligated to recognize arbitral awards, yet does not always honor this fact.

In January 2021, Kazakhstan’s Ministry of Justice reported that in 2020, Kazakhstan was involved in 25 arbitration proceedings, including 15 in international arbitration courts.  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. However, investors who have entered such settlement discussions in good faith report that the government pursued criminal litigation just as the parties were closing in on a deal (after the investors had devoted significant time and resources toward achieving a settlement).

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 investor are in the exclusive competence of a special investment panel at the Supreme Court of Kazakhstan. Amendments to legislation on the court system the Parliament adopted in March 2021 will change this system once implemented. Starting from July 1, 2021, the Special Economic Court and the Special Administrative Court of Nur-Sultan City will be the courts of first instance for investment disputes between the government and investors. The Nur-Sultan City Court and the Judicial Chamber on administrative cases of the Supreme Court will serve as the first court of appeal.

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 18 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. 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 relevant provisions of commercial legislation. President Tokayev has recognized that that the judicial system lacks specialists in taxation, subsoil use, intellectual property rights and corporate law.

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.

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 was premeditated, or rehabilitation measures are wrongful. 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 2019-2020 introduced a number of changes. Among them are a more specified definition of premeditated bankruptcy; a requirement to prove a sustained insolvency when filing a claim on bankruptcy; a possibility for the bank-agent to file a request for bankruptcy on behalf of a syndicate of creditors; a possibility for individual entrepreneurs to apply for a rehabilitation procedure to reinstate its 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 Concept for Industrial and Innovative Development 2020-2025 and the National Development Plan for 2025 aim to diversify the economy from its current dependence on extractive resources. The Entrepreneurial Code and Tax Code provide incentives for foreign and domestic investment in priority sectors, which include agriculture, metallurgy, extraction of metallic ore, chemical and petrochemical industries, textile and pharmaceutical industries, food production, machine manufacturing, waste recycling, and renewable energy. The approach helps the government to take decisions on projects on a case-by-case basis. After signing investment contracts with the government, firms in priority sectors receive tax and customs duty waivers, in-kind grants, investment credits, 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, the size of investment and type of the investment project.

The government has outlined different categories of investment projects. Each category corresponds with a particular type of contract between an investor and the government, and a particular set of incentives. For example, model investment contracts are prepared and signed for investment priority projects by the Investment Committee at the Ministry of Foreign Affairs and KazakhInvest. Details on their requirements are available here: https://invest.gov.kz/  and at https://invest.gov.kz/doing-business-here/regulated-sectors/.

Special investment projects and projects on industrial assembly of vehicles and agricultural equipment are in the competence of the Ministry of Industry and Infrastructural Development. Volume of preferences in such agreements depends on the level of localization.

In 2020, the government modified this system slightly. The government introduced model contract clauses on guaranteeing the stability of laws and lowered the threshold for the cost of projects in textile and light industries to USD 7 million in order to make them eligible for preferences. In addition, investors received the right to adjust model contracts twice a year with the consent of the government.

In January 2021, the government introduced to the Entrepreneurial Code one more type of contract– an investment agreement. Such agreements will be applied to investment projects exceeding USD 50 million in industries selected by the government. Only Kazakhstan’s companies or residents of the Astana International Financial Center will be eligible to sign such agreements with the government. Under this agreement, the government provides an investor with an individual scope of incentives and a stability of legal regime for 25 years. In turn, the investor undertakes commitments on project implementation. Some obligations on supporting a certain level of localization may be a part of the agreement. Unlike model contracts, investment agreements are subject to negotiations between an investor and the government.

A U.S. investor signed the first investment agreement early in January 2021. The Prime Minister enacted this agreement by issuing a special decree. Per the agreement, the government will establish a special economic zone at the location of the project with all implied tax and customs preferences. Potential investors can apply for preferences through the government’s single window portal; which 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 collection of documents, including a comprehensive government’s expertise on the proposed investment project. 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. More information is available here: https://invest.gov.kz/invest-guide/ and at https://irm.invest.gov.kz/en/support/.

Prior to the pandemic the government substantially liberalized the visa regime for foreign investors, especially for non-extractive industries. In particular, the government 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 could stay in Kazakhstan without visas for up to 30 days. However, the COVID-19 pandemic prompted the government to suspend this regime temporarily. Through December 31, 2021, any visit of a foreigner, with some exceptions, must be approved by a special intra-agency government commission.

In 2020, the government also introduced a more liberal regime for violation of visa rules of stay. Foreign visitors are permitted to pay administrative fines only in the case of infringing rules for the first and the second time.

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. As of the beginning of 2021, twelve managing companies control the SEZ activity. The Ministry of Industry and Infrastructural Development is in charge of monitoring SEZ activity and developing new policies and rules in this area.

Performance and Data Localization Requirements

The government requires local employment and content, although 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 WTO 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 phased 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.  In October 2020, Tengizchevroil, North Caspian Operating Company, and Karachaganak Operating Consortium, which have stabilized contracts, committed to maintaining local content requirements after January 1, 2021.  The government has been signing voluntary agreements with other oil companies to support local businesses.  In November 2020, the government announced the establishment of a fund for the development of local content.  The new fund will invest in technology, IT, assembly of oil and gas equipment, and environmental projects..  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 have generally elected to abide by them. The Ministry of Energy, Ministry of Industry and Infrastructure Development, the National Welfare Fund Samruk-Kazyna, and the National Chamber of Entrepreneurs Atameken monitor local content compliance.

The government regulates foreign labor at the macro and micro levels.  Foreign workers must obtain work permits. 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 a 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).  Kazakhstan offered a few extensions on work permits and visas due to pandemic- related restrictions on movement.  The latest resolution allows foreign citizens with work permits or certificates of self-employment to stay in the country until June 5, 2021.

Following the June 2019 brawl at Chevron-operated Tengiz oilfield that reportedly resulted from discontent with wage discrepancies 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 government approved a foreign labor quota for 2020 at 0.32 percent of the country’s total labor force. The number of work permits had been reduced by 37% for employees of category 3 (specialists) and by 23% for category 4 (qualified workers).  The largest decreases were in administrative; 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 introduced an obligation to replace foreign workers with skilled Kazakhstani labor. The foreign workforce annual quota for 2021 is 0.31 percent or 29.3 thousand units.

In 2021, Kazakhstan introduced a so-called scoring system of localization assessment. This system is aimed at stimulating local assembly of vehicles and agricultural equipment. The volume of incentives in agreements on industrial assembly will depend on the number of scores received for localization. The more scores the enterprise obtains, the more preferences the government extends to this enterprise.

Foreign investors may, in theory, participate in government and quasi-government procurement tenders, however, they should have established 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, according to which, only pre-qualified suppliers will be allowed to bid for government contracts.  A key requirement for being recognized as a pre-qualified bidder is that your product should be made in Kazakhstan and be added to a register of trusted products. While this requirement is applied to some selected sectors of government procurement (e.g. construction, IT, textile), it has been practiced since 2016 at procurement of quasi-sovereign companies under the National Welfare Fund Samruk-Kazyna. The pandemic has amplified the import substitution trend. In the course of 2020 and 2021 President Tokayev several times highlighted the importance of support to local producers and the increase of local content share at procurement processes and implementation of infrastructural projects.

The National Chamber of Entrepreneurs Atameken introduced in 2018 an industrial certificate that serves as an extra (and costly) tool to prove the financial and production abilities of the company to participate in tenders. The industrial certificate is also an indirect confirmation of status as a local producer. Thus, a foreign investor who plans to bid for government and quasi-government contracts can benefit from such an industrial certificate.

In 2019, the government introduced significant recycling fees on imported combines and tractors. Although major popular Western brands initially received waivers on recycling fees, the government revisited the exception and imposed recycling fees in 2020. The government suggested foreign producers start local production and hence, become eligible for preferential treatment. Foreign companies consider this measure to be a case of coercion to localize production.

Per Kazakhstan’s legislation, cross-border transmission of data would be possible if countries, receiving this data, provide due data protection. Otherwise, the data transmission should be regulated by respective bilateral agreements or allowed by the data subject. Kazakhstan reserves its right to restrict or to ban data transmission by enacting separate regulation. The National Security Committee and the Ministry of Digital Development, Innovations and Aerospace Industry supervise data protection and date storage in Kazakhstan.

Real Property

With certain sectoral exceptions, 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, agricultural land and certain other natural resources may be owned or leased only 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 agricultural lands and 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. In March 2021, President Tokayev initiated changes in the legislation to ban both the sale and lease of agricultural lands to foreigners. On March 17, the Mazhilis, the lower Chamber of the Parliament, started to consider the amended legislation, according to which, foreigners, persons without citizenship, foreign legal entities and legal entities with foreign participation, international organizations, scientific centers with foreign participation, and repatriated Kazakhs cannot own and take in temporary use agricultural lands. The amendments are expected to be adopted in the first half of 2021.

Intellectual Property Rights

The legal structure for intellectual property rights (IPR) protection is relatively strong; however, enforcement needs further improvement. Kazakhstan is not currently included in the United States Trade Representative (USTR) Special 301 Report. 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): https://wipolex.wipo.int/en/treaties/ShowResults?country_id=97C.

Kazakhstan’s IPR legislation has improved. The Criminal Code sets out punishments for violations of copyright, rights for inventions, useful models, industrial patterns, selected inventions, and integrated circuit topographies. The law authorizes the government to target internet piracy and shut down websites unlawfully sharing copyrighted material, provided that the 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 agencies, and have criticized the government’s enforcement efforts.

To comply with OECD IPR standards, in 2018 Kazakhstan accepted amendments to its IPR legislation. 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. Currently, the Parliament is considering a new bill on IPR issues. The bill introduces a notion of geographical indication, a short-term (up to three years) protection of unregistered industrial designs, an “opposition” system for challenging requests for registration of trademarks, geographical indications, and appellation of origin of goods. Also, the bill is expected to make copyright collective organizations more transparent and effective and to improve regulation of patent attorneys’ activity. In 2020, Kazakhstan ratified the Protocol on Protection of Industrial Designs of the Eurasian Patent Convention from September 1994 and signed the Agreement of the Eurasian Economic Union on trademarks, service marks, and appellation of origin of goods.

Kazakhstan’s 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.  In 2020, these campaigns resulted in the seizing of 4.8 thousand units of counterfeit goods. The Ministry of Justice and law enforcement agencies regularly report the results of their inspections. However, the moratorium on inspections of small and medium-sized businesses that came into force in December 2019 reduced significantly the number of IPR-related inspections in 2020.

In 2020, the Ministry of Internal Affairs initiated 14 criminal cases for copyright violations and seven administrative cases, imposing penalties of USD 5,300. In addition, regional authorities reportedly seized 3,800 units of counterfeit goods worth around USD 4,000 and identified 24 foreign websites, selling pirated software. On the border, customs officials suspended the release of counterfeited goods in the amount of USD 20.1 million.

In 2020, the government agency on investigation of economic crimes identified and closed one illegal plant that produced counterfeited pharmaceuticals. Criminals fabricated packages using known trademarks and altered the expiry dates of the drugs. Although Kazakhstan continues to make progress to comply with WTO requirements and OECD standards, foreign companies complain of inadequate IPR protection. Judges, customs officials, and police officers also lack IPR expertise, which exacerbates weak IPR enforcement.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at https://www.wipo.int/directory/en/details.jsp?country_code=KZ.

Capital Markets and Portfolio Investment

Kazakhstan maintains a stable macroeconomic framework, although weak banks inhibit the financial sector’s development , valuation and accounting practices are inconsistent, and large state-owned enterprises (SOEs) 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 SOEs 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 often cheaper and easier for foreign investors to use retained earnings or borrow from their home country. The government actively seeks to attract FDI, including portfolio investment. Foreign clients may only trade via local brokerage companies or after registering at Kazakhstan’s Stock Exchange (KASE) or at the AIFC.

KASE, in operation since 1993 and with 189 listed companies, trades a variety of instruments, including equities and funds, corporate bonds, sovereign debt, international development institutions debt, foreign currencies, repurchase agreements (REPO) and derivatives. Most of KASE’s trading is comprised of money market (84 percent) and foreign exchange (10 percent). As of January1, 2021, stock market capitalization was USD 45.3 billion, while the corporate bond market was around USD 35.2 billion. The Single Accumulating Pension Fund, the key source of the country’s local currency liquidity accumulated USD 30.7 billion as of January1, 2021.

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 88 listings in its Official List, including 30 traded on its platform.

Kazakhstan is bound by Article VIII 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

As of January 1, 2021, Kazakhstan had 26 commercial banks. The five largest banks (Halyk Bank, Sberbank-Kazakhstan, Forte Bank, Kaspi Bank and Bank CenterCredit) held assets of approximately USD 47.4 billion, accounting for 64.0 percent of the total banking sector.

Kazakhstan’s banking system remains impaired by legacy non-performing loans, poor risk management, weak corporate governance practices, and significant related-party exposures.  In recent years, the government has undertaken measures to strengthen the sector, including capital injections, enhanced oversight, and expanded regulatory authorities. In 2019, the National Bank of Kazakhstan (NBK) initiated an asset quality review (AQR) of 14 major banks, which combined held 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 January 2021, the ratio of non-performing loans to banking assets was 6.8 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 NBK. In January 2020, parliament established the Agency for Regulation and Development of the Financial Market (ARDFM), which assumed the NBK’s role as main financial regulator overseeing banks, insurance companies, the stock market, microcredit organizations, debt collection agencies, and credit bureaus. The 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 the incremental introduction of the Basel III regulatory standard. As of January 2021, Basel III methodology applies to capital and liquidity calculation with required regulatory ratios gradually changing to match the standard.  Starting December 16, 2020, as a part of WTO commitments, Kazakhstan allowed foreign banks to operate in the country via branches (previously only local subsidiaries were allowed). To open a branch, foreign banks must have international credit ratings of BBB or higher, a minimum of $20 billion in global assets, and comply with other NBK and ARDFM norms and requirements.  Foreigners may open bank accounts in local banks as long as they have a local tax registration number.

Foreign Exchange and Remittances

Foreign Exchange

Transfers of currency are protected by Article VII of the International Monetary Fund (IMF) Articles of Agreement (http://www.imf.org/External/Pubs/FT/AA/index.htm#art7).

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.

Foreign company branches are treated as residents, except for non-financial organizations treated as non-residents based on previously made special agreements with Kazakhstan.  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 NBK has intervened in foreign exchange markets to combat excess volatility. Kazakhstan maintains sufficient international reserves according to the IMF. As of January 1, 2021, international reserves at the NBK, including foreign currency, gold, and National Fund assets, totaled USD 94.4 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 are subject to reporting requirements. There are no time limitations on remittances; and timelines to remit investment returns depend on the 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 the oil sector and external shocks. The National Fund’s assets are generated from direct taxes and other payments from oil companies, public property privatization, sale of public farmlands, and investment income. The government, through the Ministry of Finance, controls the National Fund, while the NBK acts as the 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 January 1, 2021, the National Fund’s assets were USD 58.7 billion or around 34 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 National Statistical Bureau, as of January 1, 2021, the government owns 25,386 state-owned enterprises (SOEs), including all forms of SOEs, from small veterinary inspection offices, kindergardens, regional departments for the protection of competition, and regional hospitals, to large national companies controlling energy, transport, agricultural finance, and product development.

A list of SOEs is available at: https://gr5.gosreestr.kz/p/ru/gr-search/search-objects.

SOEs plays a leading role in the country’s economy. According to the 2017 OECD Investment Policy Review, SOE assets amount to USD 48-64 billion, approximately 30-40 percent of GDP; net income was approximately USD 2 billion. In order to stop an expansion of the quasi-sovereign sector, President Tokayev introduced in 2019 a moratorium on establishing new parastatal companies that will be in effect until the end of 2021. A bill on improving the business climate adopted by Parliament in April 2020 disincentivizes the establishment of new parastatal companies.

In pursuance of his New Economic Course, President Tokayev proposed in September 2020 the creation of a unified information portal that would consolidate all information about the activity of quasi-sovereign companies (SOEs), including their financial statements. If this portal is established, it would improve transparency of the quasi-sovereign sector significantly. Portfolio investors are also required to have corporate governance standards and independent boards.

Despite these positive developments, the number of SOEs in the economy remains large. The preferential status of parastatal companies is also unchanged; for example, parastatals enjoy greater access to subsidies and government support.

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 2019, SK reported USD 61 billion in assets and USD 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 a new SK strategy which declared effective management of its companies, restructuration and diversification of assets and investment projects, and compliance with principles of sustainable development as priority goals. SK stated its adherence to international standards of SOE management and its willingness to separate the role of the state as a main owner from its regulator’s role. To follow a new strategy, early in 2020, the SK removed the Prime Minister from the Board and elected four independent directors, one of whom became the Chair of the Board. Thus, the government is now represented by three members on the Board- an Aide to the President, the Minister of National Economy, and the CEO of Samruk-Kazyna. Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and 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/ .

Regardless of these positive moves, in reality political influence continues to dominate SK. First President Nazarbayev is the life-long Chair of the Managing Council of SK, with the right to take strategically important decisions on SK activity. SK has special rights, such as the ability to conclude large transactions among members of its holdings without public notification. SK enjoys a pre-emptive right to buy strategic facilities and 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 and to drive economic diversification. Baiterek is comprised of the Development Bank of Kazakhstan, the Investment Fund of Kazakhstan, the Housing and Construction Savings Bank – Otbassy Bank, the National Mortgage Company, KazakhExport, the Entrepreneurship Development Fund Damu and other financial and development institutions. In 2021, following the President’s request, Baiterek joined the other quasi-sovereign holding company – KazAgro. Thus, the financing of the agricultural sector will now be in the portfolio of Baiterek. Unlike SK, the Prime Minister remains Chairof the Baiterek Board, assisted by several cabinet ministers and independent directors. As of the end of September 2020, Baiterek had USD 14.3 billion in assets and earned USD 133.5 million in net profit. Please see https://www.baiterek.gov.kz/en .

Another significant SOE is the national holding company Zerde, which 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

Kazakhstan has stated the aim to decrease the SOE share in the economy to 15 percent by 2020, in line with OECD averages. The goal has not yet been reached, but the government continues a large-scale privatization campaign. According to a government report, 93 percent of the 2016-2020 plan has been implemented. In 2020, the government enacted a new comprehensive privatization program for 2021-2025. The government’s reports on both campaigns are available at: https://privatization.gosreestr.kz/.

As of March 30, 2021, out of 1,748 organizations planned for privatization, 729 had been sold for USD 1.7 billion. The government sells small, state owned and municipal enterprises through electronic auctions. The public bidding process is established by law. By law and in practice, foreign investors may participate in privatization projects. However, foreign investors may experience challenges in navigating the process.

SK has an important role in the privatization campaign and as of March 2021 had sold full or partial stakes in 88 subsidiaries of large national companies operating in the energy, mining, transportation, and service sectors. 53 subsidiaries have been liquidated or reorganized. In June 2020, SK completed the privatization of 25 percent of KazAtomProm by selling the remaining 6.28 percent of common shares via a dual-listed IPO on the London Exchange and the Astana International Stock Exchange. Although the pandemic affected the preliminary privatization timelines, SK plans to offer institutional investors non-controlling shares in eight national companies via initial public offerings (IPOs), secondary public offerings (SPO) and sale to strategic investors. These companies are: state oil company KazMunaiGas, Air Astana, national telecom operator Kazakhtelecom, railway operator Kazakhstan Temir Zholy, KazPost, and Samruk–Energy, Tau-Ken Samruk and Qazaq Air.

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 Multinational Enterprises, and the government promotes the concept of RBC. The OECD National Contact Point 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 take a due diligence approach to ensuring socially responsible actions. The Code considers donations to charity one of the forms of social responsibility and envisions a tax deduction for charitable giving, though no such rule currently 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 Atameken National Chamber of Entrepreneurs 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 RBC, including to provide occupational safety, pay salaries on time, and invest in human capital. The President presents annual awards for achievements in corporate social responsibility (CSR). Foreign investors report that local government officials regularly pressure them to provide donations 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 that disclose revenues from the extraction of its natural resources.  Companies disclose what they have paid in taxes and other payments, and the government discloses what it has received; these two sets of figures are then compared and reconciled.   The EITI Board started a second certification process on August 13, 2019, to review whether Kazakhstan has achieved meaningful progress and found that it had made considerable improvements since its first validation in 2017 by providing additional information on local content, social investment, and transportation of oil, gas, and minerals.  The Board gave Kazakhstan 18 months before a third validation, i.e. until October 14, 2021, to carry out corrective actions regarding multi-stakeholder group oversight, license allocations, state participation, production data, barter arrangements, transport revenues, social expenditures, and quasi-fiscal expenditures.

Starting 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 included names of beneficial owners and their level of ownership under new licenses only.

Kazakhstan’s rating in Transparency International’s (TI) 2020 Corruption Perceptions Index (CPI) is 38/100, ranking Kazakhstan 94 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. Improvement of Kazakhstan’s CPI under the conditions of the COVID-19 emergency indicates that the country took persistent efforts to combat corruption. The world community assessed positively measures taken by the government of Kazakhstan to support people and businesses during the pandemic, as well as legislative amendments to tighten up liability for corruption, and to further digitalize government services. However, the authorities violated democratic standards related to transparency and access to financial information on healthcare spending, and imposed excessive restrictions on media, human rights, and civil society activities.

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 lifelong 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 law on Public Service sets adherence to the rule of law principles including anti-corruption and professionalism of civil service as the main duty of public servants. In 2020, Kazakhstan made amendments to anti-corruption legislation to tighten up liability for corruption crimes (below please see detailed descriptions of those amendments).

The country took actions to tighten up control of corruption. In October and December 2020, it passed two sets of anti-corruption legislative amendments which: – tightened up liability for accepting gifts by officials and their family members (Counter-corruption law and the Civil Code);

– tightened up liability for accepting gifts by officials and their family members (Counter-corruption law and the Civil Code); – added quasi-government organizations’ procurement officers to the list of officials who can be held accountable for corruption (Counter-corruption law article 1.4);

– added quasi-government organizations’ procurement officers to the list of officials who can be held accountable for corruption (Counter-corruption law article 1.4); – mandated establishment of counter-corruption compliance units in the quasi-government sector; other business companies have the right to establish such units (Counter-corruption law articles 16 and 16.3);

– mandated establishment of counter-corruption compliance units in the quasi-government sector; other business companies have the right to establish such units (Counter-corruption law articles 16 and 16.3); – banned high-level officials from taking a job which would put them in direct subordination to a close family member (Counter-corruption law article 14);

– banned high-level officials from taking a job which would put them in direct subordination to a close family member (Counter-corruption law article 14); – prohibited early release from prison of individuals convicted of grave and particularly grave corruption crimes, with a few exceptions (Criminal Code article 72.8);

– prohibited early release from prison of individuals convicted of grave and particularly grave corruption crimes, with a few exceptions (Criminal Code article 72.8); – strengthened punishment of law enforcement employees and judges for commitment of corruption crimes (several articles in the Criminal Code);

– strengthened punishment of law enforcement employees and judges for commitment of corruption crimes (several articles in the Criminal Code); – banned government officials from opening and owning accounts in foreign banks (Counter-corruption law, article 12 subparagraph 1.5 and article 14-1).

– banned government officials from opening and owning accounts in foreign banks (Counter-corruption law, article 12 subparagraph 1.5 and article 14-1).

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 legal provisions, however, corruption allegations have been noted in nearly all sectors, including extractive industries, infrastructure projects, state procurements, and the banking sector. The International Finance Corporation’s Enterprise Survey, which gathers responses from thousand 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 Kazakhstan conducted a survey in 2020 to assess corruption perception. 9,000 respondents were interviewed and 1347 written complaints were analyzed in all regions of the country, applying the methodology of Transparency International’s Global Corruption Barometer and the Corruption Perception Index. 37.4 percent of common citizens and 45.9 percent of entrepreneurs indicated a decrease of corruption in their regions. 11.3 percent of respondents faced petty corruption (a decrease compared to 13.4 percent in 2019), 8.2 percent of entrepreneurs had to resort to illegitimate ways in resolving issues with government (9.2 percent in 2019). More than 80 percent of the interviewed entrepreneurs stated that business could be developed without giving bribes. The survey showed that the most trusted officials and offices were the President (70 percent), the Anti-corruption Agency (65 percent), the Cabinet (62 percent), the Civil Service Agency (59 percent) and the Nur Otan party (55 percent); the most corrupt state institutions were viewed to be healthcare, police, tax, fire services, land relations and urban planning authorities, public service centers, and education institutions: http://tikazakhstan.org/transparency-kazakhstan-prezentoval-rezultaty-monitoringa-sostoyaniya-korruptsii-v-strane-za-2020-god/.

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 and administrative pressure.

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.

TI 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, Nur-Sultan
+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 Street,
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. No major terrorist attacks took place in Kazakhstan in 2020. 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 as President, Nursultan Nazarbayev resigned March 20, 2019, and was succeeded by Kassym-Jomart Tokayev, the former Senate Chairman and next in line of constitutional succession. On June 9, 2019, Kazakhstan held an early presidential election, and Tokayev was elected to a full term with 71 percent of the vote. The Organization for Security and Cooperation in Europe (OSCE) noted in its final report that the election “was tarnished by clear violations of fundamental freedoms as well as pressure on critical voices;…significant irregularities were observed on election day”; “the election took place within a political environment dominated by the ruling Nur Otan party and with confined space for civil society and opposition views.” In the January 10, 2021 election for the Mazhilis (lower house of Parliament), Kazakhstan’s largest party, Nur-Otan, received 71 percent of the vote, while the business-friendly Ak Zhol party received 11 and the People’s party 9 percent. The OSCE similarly criticized the January 10 elections for their lack of adherence to OSCE standards for democratic elections.

The July 2017 EBRD Kazakhstan Diagnostic Paper (the latest available) singles out skill mismatches across sectors as the fifth 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 skill mismatches are not a result of lack of access to 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% of the total workforce need, according to the OECD.  Many large investors rely on foreign workers and engineers to fill the void.  Kazakhstan has approved a foreign workforce quota of 29.3 thousand for 2021.  As of December 29, 2020, the Labor Ministry reported about 14,600 valid work permits.  Chinese workers received the largest number of permits, with the rest going to foreign workers from Uzbekistan, Turkey, India, the UK, 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 employment, 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 January 2021, Energy Minister Nurlan Nogayev welcoming the new Director General of Tengizchevroil noted that a Kazakhstani citizen can become a future head of the company, according to the company’s charter documents.  In November 2015, the government amended legislation on migration and employment that resulted in new rules for foreign labor starting January 2017 (please see details in 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 obtain and employ foreign workers without any work permit.

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.

The Constitution and National Labor Code guarantee basic workers’ rights, including occupational safety and health, the right to organize, and the right to strike.  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.

On May 4, 2020, the government enacted amendments to labor-related laws, including the trade union law, to bring them closer to compliance with ILO standards, in particular, the convention on freedom of association. The amendments removed the requirement that lower-level unions affiliate with higher-level sectoral, territorial, and national-level federations. The amendments also lowered membership requirements and simplified other registration requirements.   Kazakhstan’s three independent labor unions – the Federation of Trade Unions of the Republic of Kazakhstan (FTUK), Commonwealth of Trade Unions of Kazakhstan Amanat, and Kazakhstan Confederation of Labor (KCL) – had over three million members, or 40 percent of the workforce, as of March 1, 2020. Another trade union, Yntymak, with more than 57,000 members, was established in 2018 to represent small and medium enterprises.  According to the FTUK, as of January 2020, ninety-eight percent of large and medium enterprises had collective agreements. Overall, 41.2 percent of all working enterprises had collective agreements.

Article 46 of the Labor Code gives the employer the right to change work 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 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 with 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, 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 the 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.  On March 1, 2021, FTUK reported on 22 labor conflicts since January 1, 2021. The conflicts that resulted in strikes were mostly observed in Chinese oil companies.

On January 31, 2021, the workers of KMK Munay, affiliated with China National Petroleum Corporation, resumed their work, following a seven-day strike to demand a 100-percent wage increase they had been seeking since March 2020.  The workers of another Chinese company AMK Munay did not agree with the management offer to increase wages by seven percent.  Following a joint meeting at the local municipality, AMK Munay agreed to increase wages and pay a bonus equal to 50-percent of the workers monthly wage. On January 6, 2021, three hundred workers of Bonatti, a contractor of Karachaganak Petroleum Operating B.V., declared a hunger strike, demanding a 50-percent wage increase.  Local authorities reported that the company’s management and workers subsequently reached an agreement.

In August 2020, FTUK reported that over 4,000 employees appealed to FTUK during the pandemic, seeking clarifications on their rights.  Each trade union established a call center to respond to inquiries from the employees. FTUK negotiated with M-TechService a payment of 50-percent wages to workers who could not come to work due to movement restrictions and the payment of double wages to workers who worked on rotational shifts longer than usual.

Other employers agreed to provide workers interest-free loans or cut working hours by two hours without withholding wages.

Tengizchevroil provided unprecedented support to its contractors during the pandemic. From March 23, 2020 to July 1, 2020, Tengizchevroil paid 100 percent of the average wage to all contract employees in Tengiz during the downtime due to the pandemic. These payments helped to save jobs and stabilize the social situation. From July 1, 2020 to October 1, 2020, Tengizchevroil lowered this compensation to 50-percent of the employee’s salary to contractors.

Workers’ right to strike are limited by several conditions.  It may take over 40 days to initiate a 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 Prosecutor General’s Office.  Employers may fire striking workers after a court declares a strike illegal.  The 2014 Criminal Code enabled the government to target labor organizers by imposing criminal charges and up to three years in prison for calls to participate in strikes declared illegal by the court. The 2020 amendments to the Code reduced the penalty for such calls. If the calls for strikes did not result in a material violation of rights and interests of other individuals, they would be classified as minor criminal offenses, and the penalty would be limited to a fine or community service.

The Labor Union Law enacted in 2014 restricted workers’ freedom of association.  Under the law, any local (and potentially independent) labor union had to be affiliated with larger unions, and the right to freely establish and join independent organizations without prior authorization had been 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 highlighted the Law on Unions and also raised concerns about the use of Article 404 of the Criminal Code, which appeared to prohibit unregistered organizations.  In May 2020, Kazakhstan signed into law amendments to labor-related laws.  The amendments removed the requirement of affiliation with a large labor union for local labor unions and simplified procedures for registration of labor unions.   The law no longer requires an industrial labor union to have no less than 50 percent of industry workers as its members. The time to register labor unions was extended from six months to one year.  Other changes included reducing 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 amendments also reduced penalties for calls to continue strikes declared illegal by a court.   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. The unemployment rate in the fourth quarter of 2020 dropped to 4.9 percent, while it was 5 percent from April to September 2020.  Youth unemployment rate was 3.6 percent.

* Source for Host Country Data: *The National Statistical Bureau and The National Bank of Kazakhstan.

Policies Towards Foreign Direct Investment

The Kyrgyz Republic is actively seeking foreign direct investment, and the government publicly recognizes that foreign direct investment is an important component to economic development. While the government has implemented laws to attract foreign investment, inconsistent application, onerous bureaucracy as well as inability to protect investors’ assets in the field continue to deter foreign investors. In particular, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, pose significant impediments to attracting foreign investment. Pandemic uncertainty coupled with political tumult has had an outsized negative impact in the country and net FDI inflows in 2020 collapsed by over 50 percent relative to 2019.  This includes a notable reduction in FDI inflows from all main investment partners, Canada, China, Russia, and the United Kingdom.

Since 1993, the United States has had a Bilateral Investment Treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment. The newly restructured Investment Promotion and Protection Agency (IPPA) of the Kyrgyz Republic (as of February 2021), under the Ministry of Economy and Finance, serves as a vehicle for maintaining an ongoing dialogue with foreign investors and advocates for investing in the Kyrgyz Republic. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment and support investors in the Kyrgyz Republic, including private investment and public-private partnerships, as well as assist local exporters to promote Kyrgyz goods to external markets, and develop Free Economic Zones (FEZ). The IPPA has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The IPPA often coordinates with international donor organizations on hosting round- tables discussions, exchanges, and capacity building workshops in the field of economic development.

The Institute of the Business Ombudsman was created in January 2019 as an independent non-state body, funded by external donor sources, to protect the rights, freedoms, and legitimate interests of business entities, both local and foreign. In August 2019, the Supervisory Board of the Institute of the Business Ombudsman appointed former UK Ambassador to the Kyrgyz Republic, Robin Ord-Smith, as Business Ombudsman. The Institute of Business Ombudsman has concluded memorandums of cooperation with leading international business associations, including the American Chamber of Commerce in the Kyrgyz Republic (Amcham), International Business Council (IBC), and the Chamber of Commerce of Industry of the Kyrgyz Republic (CCI). In 2020, the Business Ombudsman recommended that business reform, protection and support of local entrepreneurs and protecting private property rights are key conditions for attracting direct investment.

The government has established several committees and councils to coordinate cooperation between the business associations and government bodies. Since 2017, the Business and Entrepreneurship Development Council under the Speaker of the Parliament regularly convenes MPs, business community representatives from various sectors of the economy to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic. The Committee on Development of Industry and Entrepreneurship under the President of the Kyrgyz Republic serves as a platform for entrepreneurs to turn to in case if their grievances are not addressed by the government. The presidential decree to establish the Committee under the National Council on Sustainable Development of the Kyrgyz Republic was signed on December 24, 2019 with the amendment to designate to the Vice-Prime-Minister for economic development, the Business Ombudsman and heads of business associations. The committee includes platforms to raise investment climate and other business concerns to the offices of the President, Parliament, and Prime Minister. The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including Amcham, IBC, and the National Alliance of Business Associations of the Kyrgyz Republic (http://caa.kg/ru/ru-naba/). The Ministry of Economy and Finance, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy.

Limits on Foreign Control and Right to Private Ownership and Establishment

While there are still no official limits on foreign control, a large investor in a politically sensitive industry may find that the government imposes investor-specific requirements such as a high percentage of local workforce employment or a minimum number of local seats on a board of directors. Foreigners have the right to establish and own businesses, and there have been no allegations of market access restrictions from U.S. investors since 2016.

By law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control. In the last two years, there were no known cases of sector-specific restrictions, limitations, or requirements applied to foreign ownership and control. In April 2017, amendments to the “Law on Mass Media” to limit foreign ownership of television (excluding radio and print media) broadcasters to 35 percent, was signed by the President and entered into force in June 2017.

Post is unaware of any formal investment screening processes in the Kyrgyz Republic.

Other Investment Policy Reviews

In 2016, the International Finance Corporation (IFC), a member of the World Bank Group, released a report on the Kyrgyz investment climate in January 2016. The report is available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/259411467997285741/investment-climate-in-kyrgyz-republic-views-of-foreign-investors-results-of-the-survey-of-foreign-investors-operating-and-non-operating here.

The Investment Policy Review (IPR) of The Kyrgyz Republic for 2016 by UNCTAD is available at https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1436.

Business Facilitation

Starting a business in the Kyrgyz Republic has become easier following the elimination of the minimum capital requirement for business registration, abolition of certain registration fees, and decreases in registration times. The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The Kyrgyz Republic ranked in the top quintile of the World Bank’s 2020 Doing Business report (42nd out of 190 countries surveyed) in “Starting a Business.” In 2018-2019, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business ( https://www.doingbusiness.org/en/reforms/top-reformers-2020).

Outward Investment

Post is not aware of host government efforts to promote outward investment from the Kyrgyz Republic, nor of any instances in which the government sought to restrict domestic investors from investing abroad.

The Kyrgyz Republic currently has bilateral investment treaties with the United States, Armenia, Azerbaijan, Belarus, China, Finland, France, Georgia, Germany, India, Indonesia, Iran, Kazakhstan, the Republic of Korea, Lithuania, Malaysia, Moldova, Mongolia, Pakistan, Sweden, Switzerland, Tajikistan, Turkey, United Kingdom, Ukraine, and Uzbekistan.

The U.S.-Kyrgyz Republic Bilateral Investment Treaty entered into force in 1994. Since 1993, the Kyrgyz Republic has been a beneficiary of the U.S. Generalized System of Preferences (GSP) program, enabling the country to export approximately 3,500 products duty-free to the United States. These include most manufactured items; inputs used in manufacturing; jewelry; many types of carpets; certain agricultural and fishery products; and, many types of chemicals, minerals and marble.

In June 2004, the Kyrgyz Republic signed a Trade and Investment Framework Agreement (TIFA) with the United States, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan. The objective of the TIFA is to provide a forum for addressing trade issues and enhancing trade and investment between the United States and Central Asia. The TIFA also provides a platform to address regional trade issues that hamper intra-regional trade, economic development and investment. The TIFA creates a United States-Central Asia Council on Trade and Investment, which is designed to consider a wide range of issues that include, but are not limited to, intellectual property, labor rights, environmental issues and enhancing the participation of small- and medium-sized enterprises in trade and investment.

In August 2015, the Kyrgyz Republic fully acceded to the Eurasian Economic Union (EAEU), joining Russia, Belarus, Kazakhstan, and Armenia in the trade bloc giving access to 180 million population market. Though regulations are still being harmonized, free movement of labor, capital, and goods forms the basis of the EAEU.

The U.S.-U.S.S.R. treaty on double taxation, which was signed in 1973, remains in effect between the U.S. and the Kyrgyz Republic. The Kyrgyz Republic has also signed double taxation treaties with Armenia, Austria, Belarus, Canada, China, Finland, Germany, India, Iran, Kazakhstan, Lithuania, Malaysia, Moldova, Mongolia, Pakistan, Poland, Russia, Switzerland, Tajikistan, Turkey, Ukraine, and Uzbekistan.

Transparency of the Regulatory System

The legal and regulatory system of the Kyrgyz Republic remains underdeveloped, and implementation regulations and court orders relating to commercial transactions remain inconsistent with international practices. Heavy bureaucracy, lack of accessibility among decision-makers responsible for investment promotion, and frequent changes in leadership due to political instability all undermine investor confidence. Moreover, there is a significant capacity gap between the capital (Bishkek) and regional municipalities, particularly in remote, rural areas, in terms of institutional legal expertise andlocal officials and local law enforcement capacity, which hinders the conduct of business especially in the regions of Kyrgyzstan.

There have been no known cases of U.S. investors facing discrimination.

Rule-making authority is vested in the Kyrgyz Parliament – Jogorku Kenesh, which has established robust committees that oversees legislation and regulations affecting several areas of the economy, including: the Committee on Economic and Fiscal Policy; the Committee on Fuel, Energy, and Subsoil Management; the Committee on Transport, Communications, Architecture, and Construction; and the Committee on Budget and Finance. The Office of the Prosecutor General is the supreme legal and regulatory enforcement body in the Kyrgyz Republic. The State Service on Financial Market Regulation and Supervision (Financial Supervision), the State Service on Financial (Financial Intelligence) and the State Service on Combating Economic Crimes (Financial Police), which was dissolved this year, have played important regulatory roles

Accounting procedures tend to adhere to internationally recognized accounting rules, such as the International Financial Reporting Standards (IFRS), and audits are conducted regularly, often in compliance with agreements with international financial institutions (IFIs). Audit results of state organizations tend to be publicly available, unlike those of private organizations.

There have been lapses in the public consultation process, and significant reductions in transparency of Parliamentary committee meetings and failure to circulate draft bills for public review, including the draft new constitution that will be voted on in the April 11 referendum.

Draft bills or regulations are to be posted on Parliament’s web site and open to public comment for 30 days prior to consideration by Parliament and its committees. Parliament is required by regulation to hold public hearings on draft legislation, and has historically been open to the participation of representatives of civil society organizations and the business community in relevant hearings when held.

The IPPA assists investors with regulatory compliance. However, the efficacy of this office in assisting firms with setting up shop is limited since official bureaucratic procedures comprise only some of the hurdles to opening a business. Investment councils, under the auspices of the Office of the President, Parliament and Prime-Minister respectively, exist to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for bribe solicitation in order to complete normal bureaucratic functions. As often in the Kyrgyz Republic, the legal and regulatory framework is largely sound, but implementation and enforcement are weak.

In February 2021, the government structure underwent “optimization,” which resulted in the significant downsizing of ministries and the dissolution and re-organization of several independent state regulatory bodies. The State Committee for Industry, Energy and Subsoil Use is under the supervision of the Ministry of Energy and Industry and, among its core functions, oversees mining licensing. The State Committee of Information and Communications Technology, responsible for implementation of the Digital Transformation Strategy 2019-2023 was dissolved in 2021 but will re-emerge under a new state body that is still undergoing transition. still in transition. The government also eliminated the State Service of Combating Economic Crimes (Financial Police) and will transfer its authority to investigate economic crimes to a new state body within the combined Ministry of Finance and Economy.

International Regulatory Considerations

In August 2015, the Kyrgyz Republic acceded to the Eurasian Economic Union (EAEU), whose current members also include Russia, Kazakhstan, Armenia, and Belarus. The Kyrgyz Republic continues to harmonize its laws to comply with regulations set by the Eurasian Economic Commission, the executive body of the EAEU. However, the Kyrgyz Republic has yet to secure the benefits of increased bilateral trade with EAEU member countries, citing unilaterally imposed trade barriers restricting the flow of Kyrgyz exports. Numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, preventing local exporters from fully accessing the wider EAEU market.

The United States and other international partners provided substantial technical assistance to the Kyrgyz Republic in support of its accession to the WTO in 1998, and the country’s regulatory system reflects many international norms and best practices. The Law on the Fundamentals of Technical Regulation in the Kyrgyz Republic, which provides for standardization principles under the WTO Technical Barriers to Trade Agreement, entered into force in 2004. To Post’s knowledge, the Kyrgyz government notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). In 2016, the Kyrgyz Republic ratified the WTO Trade Facilitation Agreement.

Legal System and Judicial Independence

The government’s self-stated principles of the reformed legal system of the Kyrgyz Republic are “ideological and political pluralism, a socially oriented market economy, and the expansion of individual rights and freedoms.” Major barriers to foreign investment stem largely from a lack of adequate implementation rather than gaps in existing laws.

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

The weak Kyrgyz judicial system often fails to act as an independent arbiter in the resolution of disputes. Since most disputes are lodged by foreign investors against the Kyrgyz Government, local courts often serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system. International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic (ICA)^.and the Central Asian Alternative Dispute Resolution Center provide mediation services for public-private disputes, which remain a protracted and often impartial process in the Kyrgyz Republic.

Laws and Regulations on Foreign Direct Investment

The Kyrgyz Republic’s main legal framework for foreign direct investment remains
the “2003 Law on Investments,” including multiple amendments up until December 2020 (http://cbd.minjust.gov.kg/act/view/ru-ru/1190). The justice system in the Kyrgyz Republic is inefficient and lacks independence, and cases can take years to be resolved. The Kyrgyz Republic does not have a business registration website. The Investment Promotion and Protection Agency of the Kyrgyz Republic (IPPA) maintains the country’s main website for investment queries, https://invest.gov.kg/.

Competition and Antitrust Laws

The State Agency for Anti-Monopoly Regulation of the Kyrgyz Republic conducts unified state antitrust price regulation in the economy. The main tasks of the State Agency are to develop and protect competition, to control compliance with legislation in the field of anti-trust, price regulation, to protect the legal rights of consumers against manifestations of monopoly and unfair competition, to ensure observance of legislation on advertising. To Post’s knowledge, there have been no developments in any significant competition cases over the past year.

Expropriation and Compensation

According to the Law on Investments in the Kyrgyz Republic, investments shall not be subject to expropriation, except as provided by Kyrgyz laws when such expropriation is in the public interests and is carried out on a non-discriminatory basis and pursuant to a proper legal procedure with the payment of timely, appropriate, and feasible reparation of damages (including lost profit).

Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of the distinction between historical book value, replacement value, and actual market value, which brings into question whether the government would provide fair compensation in the event of expropriation. In the mining sector, there is a long history of investment disputes related to government seizure, revocation, or suspension of mining licenses. In May 2021, the Canadian mining company Centerra Gold Inc., the parent company of the subsidiary Kumtor Gold Company, initiated binding arbitration proceedings against the Kyrgyz government, following the government’s ownership takeover of the Kumtor gold mine and levying of a $3 billion fine against the company for alleged environmental damages. Arbitration proceedings remain ongoing.

In April 2016, the government expropriated four Uzbek-owned resorts on Lake Issyk-Kul on the grounds of the claimant’s failure to make payment to the Kyrgyz Social Fund. Post has no information on whether fair market value compensation was offered following expropriation. (The Kyrgyz Law on Investment specifies that the amount of reparation shall be equivalent to the fair market price of the expropriated investment, and that the reparation must be feasible and shall be payable in a freely convertible currency within the term agreed on by the parties.) In December 2017, the Kyrgyz Government returned the resorts to the claimant and extended the temporary rental of the lands on the basis that the claimant withdrew its claim filed to international arbitration, improved infrastructure at the resorts, and guaranteed that 80 percent of labor force will be Kyrgyz citizens.

Dispute Settlement

ICSID Convention and New York Convention

The Kyrgyz Republic is a member of the International Center for the Settlement of Investment Disputes (ICSID). It signed the ICSID agreement on June 9, 1995, and ratified it on July 5, 1997. The Kyrgyz Republic became a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on March 18, 1997.

Investor-State Dispute Settlement

The Code of Arbitration Procedure specifies that, if an international treaty of the Kyrgyz Republic establishes the rules of court procedure, other than those, provided by the legislation of the Kyrgyz Republic, rules of the international treaty shall apply. The U.S.-Kyrgyz BIT outlines procedures by which parties may consent to binding arbitration.

Post is unaware of any claims made by U.S. investors under the agreement since it entered into force. Between 2014 and 2018, twenty lawsuits were filed against the Kyrgyz Republic totaling over $2.2 billion in claims. Eleven international arbitration disputes totaling over $1.5 billion in claims have been awarded as of 2020.

The Kyrgyz government has a history of disputing UNCITRAL and other foreign arbitral awards in favor of the claimant. In a pending case in which a D.C. federal court has issued a default ruling enforcing the award, the Kyrgyz Republic has failed to appear for court appearances. The company has yet to receive compensation, and the Kyrgyz government has sought to undo this ruling.

International Commercial Arbitration and Foreign Courts

Code of Arbitration Procedures allows for international and domestic arbitration of disputes. Parties can agree to any judicial institution, including third-party courts within or outside of the Kyrgyz Republic, or domestic or international arbitration. If the parties fail to settle the dispute within three months of the date of the first written request, any investment dispute between an investor and the public authorities of the Kyrgyz Republic will be subject to settlement by the judicial bodies of the Kyrgyz Republic. Any of the parties may initiate a settlement by recourse to: the International Centre for Settlement of Investment Disputes under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or; arbitration or a provisional international arbitration tribunal (commercial court) established under the arbitration procedures of the UNCITRAL. Recognition and enforcement of international arbitration awards in the Kyrgyz Republic is carried out in accordance with the New York Convention and Kyrgyz laws. However, there are a number of features related to the recognition and enforcement of arbitration awards. In particular, Kyrgyz law expands a list of the grounds for refusal of recognition and enforcement of foreign arbitration awards in comparison with a list of the grounds referred to in the New York Convention.

Bankruptcy Regulations

The Kyrgyz Republic has a written law governing bankruptcy procedures of legal persons and insolvent physical persons (Law of the Kyrgyz Republic “On Bankruptcy” September 22, 1997 with multiple amendments in December 30, 1998, July 1999, September 2000, June 2002, March and August 2005, January and July 2006, June 2007, July 2009, April 2015, June, July and December 2016, May 2017, and December 31, 2019), which covers industrial enterprises and banks, irrespective of the type of ownership, commercial companies, private entrepreneurs, or foreign commercial entities. Bankruptcy proceedings are conducted by the court of arbitration competent for the district in which enterprise is located. The procedure of liquidation can be carried out without the involvement of the judicial bodies if all creditors agree on out-of-court proceedings. Chapter 10 of the law on bankruptcy provides for the possibility of an amicable or peaceful settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank ranked the Kyrgyz Republic 78 out of 190 countries in “Resolving Insolvency” in its 2020 Doing Business report.

Investment Incentives

The Kyrgyz Government has reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors. The Ministry of Economy and IPPA often express the government’s willingness to discuss potential incentives, including access to land, with specific foreign investors. To attract investment in the IT sector, the Kyrgyz government has created a “zero-tax zone” at the High Technology Park of the Kyrgyz Republic, which waives tax burden for companies in which 80 percent of total products and services are exported.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek, Naryn, Karakol (Issyk-Kul province), Leylek (Batken province) and Maimak (Talas province). Each is situated to make use of transportation infrastructure and/or customs posts along the Kyrgyz borders. Government incentives for investment in the zones include exemption from several taxes, duties and payments, simplified customs procedures, and direct access to utility suppliers. The production and sale of petroleum, liquor, and tobacco products in FEZs are banned. Additional information on FEZs can be found at https://invest.gov.kg/free-economic-zones/.

Performance and Data Localization Requirements

While there are no formal legal requirements for local employment, most major international investors are subject to tremendous public pressure to support threshold local employment, particularly in the mining and construction sectors. New investors may find local employment quotas included in potential investment agreements, mandating numbers for boards of directors, senior management, and/or other employees. The Kyrgyz Government does not enforce any “forced localization” policies. There are no known government/authority-imposed conditions on permission to invest. The U.S.-Kyrgyz Bilateral Investment Treaty ensures that investments are guaranteed freedom from performance requirements, including requirements to use local products or to exports local goods. Foreign investors may freely transmit customer or other business-related data outside the country’s territory upon their own need as long as it does not contradict with local law on investments.

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

Real Property

Inviolability of property rights is written in the Kyrgyz Constitution and the Civil Code. In the National Development Strategy for 2018-2040, the Kyrgyz Government identified property rights as one of the priority areas for strengthening investment climate in the Kyrgyz Republic. The Kyrgyz Republic was first among its neighboring Central Asian states to introduce private property rights for land ownership. The Kyrgyz Republic is among the easiest countries in which to register property, ranking 7^th out of 190 countries (ranked 8^th in 2017, 2018 and 2019) in the World Bank’s 2020 Doing Business report.

Mortgages and liens are common in the Kyrgyz Republic and operate according to relevant legislation. The State Registration Service is the major operator of a recording system (database) on property under mortgage/lien commitments. When providing mortgages, local banks must request a reference from the State Registration Service that confirms the property is not under lien. However, several have questioned the reliability of the recording system, and the Service itself is frequently subject to allegations of corruption.

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

• Foreign persons may not own or use agricultural land.
• Foreign persons may not own or use any land except residential land, which has been foreclosed under a mortgage loan agreement in accordance with Kyrgyz Pledge Law. Foreclosed agricultural land may belong to foreign banks and specialized financial institutions but only for the period of two years (http://cbd.minjust.gov.kg/act/view/ru-ru/386).
• Foreign persons may use non-residential land transferred thereto by way of universal succession, except agricultural and mining use land, subject to permission of the Kyrgyz Government, for the period of up to 50 years.
• Foreign persons who have acquired ownership of land by way of universal succession (inheritance, reorganization) must transfer such land to a Kyrgyz national or legal entity within one year from the date of acquiring such ownership.

Intellectual Property Rights

The Kyrgyz Republic has robust legislation protecting intellectual property (IP)  and the country is a signatory to several IP related international treaties; enforcement remains problematic. The State Service for Intellectual Property and Innovation under the Government of the Kyrgyz Republic (“Kyrgyzpatent”) is the authorized body of the Executive Branch that issues documents to certify intellectual property. Kyrgyzpatent establishes the Appeal Council that is the primary body to hear intellectual property related disputes. The judicial system remains underdeveloped and lacks independence and the appeals process can be lengthy.

The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. The Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. The Kyrgyz Republic was not included in the 2019 Special 301 report but was listed on the 2019 U.S. Trade Representative’s Notorious Markets report, due to the availability of counterfeit goods sold at the massive Dordoi bazaar – Central Asia’s largest market. Counterfeit goods imported from China are also re-exported to Russia and Kazakhstan. No specific action has been taken against Dordoi market. The Kyrgyz Republic did not pass any new IPR related laws or regulations in 2020.

IPR-related codes, laws and regulations of the Kyrgyz Republic are listed on Kyrgyzpatent’s website. The few pending IPR bills listed on the Parliament’s website are mainly aimed to make minor changes into the existing governmental IPR-related decrees ( http://patent.kg/ru/sample-page-5-4/sample-page-2-2-3/). Criminal liability for violation of IPR is listed in the Criminal Code. Unfortunately, enforcement is lax and according to sources, there have been no successful prosecution for IPR violations in the history of the Kyrgyz Republic. The Kyrgyz Republic is not known as a major producer of counterfeit goods but sale/re-export of imported counterfeit goods remains prevalent. The State Customs Service regularly publishes alerts and notifications on the recent seizure of counterfeit goods on its official website. There is no central database of official statistics on the seizure of counterfeit goods to date. IPPA has a whole chapter on its website dedicated to IPR.

Resources for Rights Holders

Contact at Mission:
Munara Niiazova
Commercial Assistant
+996 312 59 76 07
NiiazovaME@state.gov

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

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

The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have quadrupled.  The number of bank payment cards in use increased by 2.5 times and e-wallets 10 times in the last five years. The Kyrgyz Republic maintained its B2 sovereign credit rating with Moody’s, which downgraded its outlook in November 2020 from stable to negative due to political instability. The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic. There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange of the Kyrgyz Republic), but all transactions are conducted through the Kyrgyz Stock Exchange. In 2020, the total value of transactions amounted to 11.83 billion Kyrgyz soms (approximately USD 140 million). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations. Foreign investors are able to acquire loans on the local market if the business is operating on the territory of the Kyrgyz Republic and collateral meets the requirements of local banks. The average interest rate for loans in USD is between 10-15 percent.

Money and Banking System

The National Bank of the Kyrgyz Republic (NBKR) is a nominally independent body whose mandate is to achieve and maintain price stability through monetary policy. The Bank is also tasked with maintaining the safety and reliability of the banking and payment systems. The NBKR licenses, regulates, and supervises credit institutions. The penetration level of the banking sector is 48.4 percent.

According to the IMF, the Kyrgyz banking system at present remains well capitalized with still sizeable, non-performing loans (NPLs). NPLs increased from 8.0 percent to 10.5 percent in 2020, with restructured loans of about 25 percent. Net capital adequacy ratio increased from 24.1 percent to 24.9 percent in 2020. Total assets in the Kyrgyz banking system in 2020 equaled approximately USD 3.4 billion. As of June 2020, the Kyrgyz Republic’s three largest banks by total assets were Optima Bank (approximately USD 430 million), Aiyl Bank (approximately USD 353 million), and Kyrgyz Investment and Credit Bank (KICB; approximately USD 328 million).

There are currently 23 commercial banks in the Kyrgyz Republic, with 312 operating branches throughout the country; the five largest banks comprise more than 50 percent of the total market. No U.S. bank operates in the Kyrgyz Republic and Kyrgyz banks do not maintain correspondent accounts from U.S. financial institutions, following widespread de-risking in 2018. There are ten foreign banks operating in the Kyrgyz Republic: Demir Bank, National Bank of Pakistan, Halyk Bank, Optima Bank, Finca Bank, Bai-Tushum Bank, Amanbank, Kyrgyz-Swiss Bank, Chang An Bank,and Kompanion Bank are entirely foreign held. Other banks are partially foreign held, including KICB and BTA Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development (EBRD), Economic Finance Corporation, the Aga Khan Fund for Economic Development and others.

The micro-finance sector in the Kyrgyz Republic is robust, representing nearly 10 percent the market size of the banking sector. Trade accounted for 37.5 percent of the total loan portfolio of the banking sector, followed by agriculture (29 percent) and consumer loans (12.5 percent). The microfinance sector in the Kyrgyz Republic is rapidly growing. In 2020, around 140 microfinance companies, 92 credit unions, 220 pawnshops and 421 currency exchange offices operated in the Kyrgyz Republic. Over the last five years, the three largest microfinance companies (Bai-Tushum, FINCA, and Kompanion) transformed into banks with full banking licenses.

Foreign Exchange and Remittances

Foreign Exchange

Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. While the som is a floating currency, the NBKR periodically intervenes in the market to mitigate the risk of exchange rate shocks. Given significant currency fluctuations among Post-Soviet countries in 2020, the Kyrgyz som was one of the most stable currencies, with the dollar exchange rate rising 18.9 percent over the year. In 2020, the NBKR conducted 29 foreign exchange interventions and in total, sold USD 265.9 million. The NBKR conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day. Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out.

Remittance Policies

Remittances typically account for 25-30 percent of GDP. In 2020 net remittances reached $2.37 billion, a 1,25 percent reduction from 2019. In January 2020, the Central Bank of Russia increased the cap on monthly money transfers to the Kyrgyz Republic to 150,000 rubles. (Note: In July 2019, the Central Bank of Russia had lowered the cap on money transfers per month to the Kyrgyz Republic to 100,000 ruble.)

In May 2019, the follow up assessment by the Financial Action Task Force (FATF) concluded that the Kyrgyz Republic demonstrated political commitment in improving its anti-money laundering and countering financing of terrorism, and in addressing technical compliance deficiencies identified in the 2018 Mutual Evaluation Report (MER) assessment. However, the country still lacks a comprehensive national risk assessment and underlying risk-based approach for monitoring and identifying suspicious activities.

Sovereign Wealth Funds

The Kyrgyz Republic’s Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77.4 million shares of the company, which are currently valued at USD 836 million.

There are approximately 106 SOEs in the Kyrgyz Republic that play a significant role in the local economy. However 51 SOEs out of them are not profitable. The State Property Management Fund of the Kyrgyz Republic (www.fgi.gov/kg) is the public executive authority representing the interests of the state. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. Information on allocations to and earnings from SOEs is included in budget execution reports and is published (in Russian) by the Ministry of Finance and Economy (www.minfin.kg).

Information on SOE assets, earnings, profitability, working capital, and other financial indicators is available on the State Property Management Fund’s website (http://finance.page.kg/index.php?act=svod_profit), though the website is not actively maintained. The State Property Management Fund also reviews the budgets for the largest SOEs, while the Accounting Chamber reviews the accounts of all SOEs and publishes audit reports on their website (www.esep.kg ).

The Kyrgyz Republic does not fully adhere to the OECD Guidelines on Corporate Governance of SOEs. Cronyism and corruption within SOEs are a major obstacle to the Kyrgyz Republic’s economic development. The Heritage Foundation’s 2017 Index of Economic Freedom report noted, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. Positions on boards of directors are frequently used as rewards for political support, and the dynamic has reinforced the patronage system and resulted in poor economic performance and public service delivery. As of February 2021, the presidential decree on “State Personnel Hiring Policy” authorizes the State Personnel Service to direct all state agencies and SOEs to verify the qualifications of all candidates, including education and professional experience, as the basis for personnel appointments.

The government has attempted to improve transparency on contracts and bidding processes. Due to widespread corruption, there are common complaints that only individual government officials have access to government contracts and bidding processes. SOEs purchase goods and services from the private firms and usually place the calls for bids either on their websites or in public newspapers, as required. Private enterprises have the same access to financing as SOEs and are subject to the same tax burden. In some cases, SOEs have preferential access to land and raw materials.

In 2019, the Kyrgyz government established the National Managing Company JSC, a central holding company, to manage all 106 SOEs. The National Managing Company is wholly-owned by the Kyrgyz Government with a charter capital of USD 1.3 million. The intention of the centralized management system is to support poor-performing SOEs by facilitating more effective decision-making aimed at attracting management talent, additional resources, and investments in strategic SOE enterprises. Based on government assessments, as of November 2019, 51 companies out of 106 SOEs and 22 JSCs out of 52 were operating at a loss.

Privatization Program

The Kyrgyz government periodically auctions rights to subsoil usage and broadcasts tender announcements, including disseminating information to diplomatic missions, in order to attract foreign investors. There are no restrictions on foreign investors participating in privatization programs. The privatization process is not well defined and is subject to change. There is ongoing deliberation on the privatization of other state-owned assets, such as the postal service and the capital’s international airport, but lack of interest by private partners has stalled any potential moves.

The Kyrgyz government is no longer actively pursuing sale of its 100 percent stake in Megacom, the country’s largest telecommunications company. In 2015, the Kyrgyz government agreed to privatize AlfaTelecom (operating as MegaCom). In February 2017, the government authorities arrested the head of Parliament’s leading opposition faction, charging him with corruption based on allegations that he received a bribe from a Russian businessman in connection with the sale of a MegaCom stake in 2010. After years of delays, the Kyrgyz government announced it would auction its 100 percent stake in MegaCom in July 2017. To date, the Kyrgyz government has been unable to divest itself of the telecommunications firm.

Foreign investors – both companies and individuals – are generally able to participate in public auctions of state-owned properties unless specifically prohibited in the terms and conditions. There are, however, some land legislation restrictions concerning the property rights of foreigners. Information about terms and conditions of SOE sales are posted on the State Property Management Fund’s website (www.fgi.gov.kg).

The Kyrgyz Government does not factor responsibility business conduct (RBC) policies or practices into its procurement decisions. Historically, the mining sector has been a lightning rod for public controversy concerning RBC violations. From 2017-2019, local residents staged rallies to protest against small gold mining operations owned and operated by Chinese and other foreign-owned mining companies based on claims of their detrimental impact on the environment.

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

The Kyrgyz Republic is a member of the Extractive Industries Transparency Initiative (EITI). According to the online license register of the State Committee on Industry, Energy, and Subsoil Use, the Kyrgyz Republic currently has 2413 active extractive licenses, and EITI covers more than 95 percent of mining revenues in the Kyrgyz Republic. The EITI Board in September 2020 decided that Kyrgyz Republic has made meaningful progress with considerable improvements in implementing the 2016 Standard.

Child labor is still used in the country especially in the country’s sizeable shadow economy which includes agriculture, bazaars (transportation of goods, shoes cleaning, sales of beverages and food etc), service sector and construction. In 2019, the Kyrgyz Republic made minimal advancement in efforts to eliminate the worst forms of child labor, though a regressive moratorium on business inspections severely limits the labor inspectorate’s capacity to investigate child labor violations. The government passed a policy package that established a National Referral Mechanism for victims of human trafficking, and drafted a new National Action Plan for 2020–2024 on the Prevention and Eradication of Child Labor.

There are a number of private security companies in Kyrgyz Republic, including around 50 private security companies. The Kyrgyz Republic is not currently a member of the Montreux Document on Private Military and Security Companies, and is not a supporter of the International Code of Conduct or Private Security Service Providers, nor a participant in the International Code of Conduct for Private Security Service Providers’ Association (ICoCA).

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor;
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World  and;
• Comply Chain

Corruption remains a serious problem at all levels of Kyrgyz society and in all sectors of the economy. All companies are recommended to establish internal codes of conduct, above all, to prohibit the bribery of public officials. There are laws criminalizing the giving and accepting of bribes, establishing penalties ranging from a small administrative fine to a prison sentence. However, the government’s enforcement of anti-corruption legislation has been notoriously uneven and often politically motivated.

According to Transparency International’s 2020 Corruption Perception Index, the Kyrgyz Republic ranked 124 out of 176 countries rated, climbing from its position of 132 in 2016. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem has been difficult to fight. Moreover, many in the Kyrgyz Republic view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices. The Kyrgyz Republic is a signatory of the UN Anticorruption Convention but is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The anticorruption service within the State Committee for National Security has taken action against a limited number of ministers and parliamentarians. Over the past year, instances of corruption-related arrests against public figures from the political opposition have increased, and since October 2020 state law enforcement agencies detained nearly 60 people on corruption charges.

In recent years, anti-corruption campaigners and Kyrgyz journalists involved in investigating corruption have been subject to intimidation and physical assault, as well as detention on unrelated charges. Such incidents are rarely investigated thoroughly by law enforcement.

In October 2020, the government instituted a policy of “economic amnesty” for corruption, if the perpetrator returns stolen assets. The legality of such amnesty has been disputed by international experts, and a number of high-profile arrests have resulted in swift release following payment of fines.

U.S. companies seeking to do business in the Kyrgyz Republic, regardless of their size, should assess the business climate in the relevant sector in which they will be operating or investing, and conduct due diligence to ensure full compliance with measures to prevent and detect corruption, including bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the Kyrgyz Republic and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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

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

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

Contact at “watchdog” organization:

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

The Kyrgyz Republic has a history of political upheaval, most recently in October 2020 when violent election protests ultimately resulted in the annulment of the election results and removal of former President Jeenbekov, who was replaced on an interim basis by current President Sadyr Japarov, who was elected in January 2021. Since independence, the Kyrgyz Republic has had 30 different prime ministers, often necessitating a change in cabinet members with the introduction of each new head of government. In 2005, 2010, and 2020 mass protests against government corruption precipitated the ouster of the country’s elected president. From 2010, the country experienced a period of relative political stability, and in October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. Another Constitutional Referendum is scheduled for April 2021.

In the days following the October 2020 toppling of the government and installation of the interim government led by Sadyr Japarov, political instability spilled over into the commercial sector; following the election protests, local marauders looted and raided the offices and facilities of multiple foreign-joint venture mining enterprises. In the recent past, the extractive resources companies have been the target of localized instability in 2018 and 2019, after relative calm in 2015 and 2016.

The Kyrgyz government has used aggressive tactics for political or economic leverage in negotiations with international companies. In May 2021, the Kyrgyz government assumed full control of the Kumtor Gold Company, a wholly owned subsidiary of the Canadian gold mining company Centerra Gold Inc, following a local court ruling that fined the Canadian company $3 billion for environmental damages. Foreign-affiliated companies have been subjected to local protests, at times resulting in vandalism and violence. In 2019, the majority Chinese company Zhong Ji Mining suspended operations at the Solton-Sary gold mine following violent clashes with hundreds of local residents who blamed the company for environmental degradation. In December 2019, hundreds of protestors demanded local authorities of the Naryn Free Economic Trade Zone to cancel the land lease of a Chinese-Kyrgyz enterprise, resulting in the suspension of a major customs and trade logistics complex. Chinese investment projects continue to be treated with more significant scrutiny and pushback by local residents, relative to Russian, Korean, Japanese, and Western investment initiatives. Since the October incidents, local and foreign businesses show increasing concern about the government’s commitment to ensure the protection of private property and assets.

Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated organizations and business interests. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, in addition to causing extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to return Kyrgyz citizens from conflicts in Iraq and Syria are ongoing. Interethnic tensions persist in the southern part of the country but remain relatively contained from the rest of the country. In the Batken region, demarcation along portions of the Kyrgyz-Uzbek and Kyrgyz-Tajik borders are in dispute. These disputed areas occasionally experience skirmishes between border guards that have resulted in crossfire violence, sometimes involving civilians.

The political and security climate in the Kyrgyz Republic remains fraught with uncertainty as the Japarov administration pursues sweeping constitutional changes to strengthen the powers of the presidency. A resurgence of COVID-19 could not only damage the country’s fragile economy, it may also be the catalyst for further political instability.

There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens find more lucrative job opportunities abroad, and the nation’s education system has largely failed to keep pace with advancing educational needs within many sectors. International organizations are generally able to employ competent staff, often bilingual in English or other languages. However, a shortage of highly qualified local candidates in IT, mining, energy, and manufacturing, forces international organizations to rely on expatriates for these skills. The official unemployment rate is approximately seven percent, though experts estimate the number of actual unemployed individuals exceeds this figure. Approximately one million Kyrgyz citizens work abroad because of limited opportunities in the Kyrgyz Republic.

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

Workers have the right to form and join trade unions. The law allows unions to conduct their activities without interference, organize, and bargain collectively. Workers may strike, but the requirement to receive formal approval has made striking difficult and complicated. The law prohibits government employees from striking, but the prohibition does not apply to teachers or medical professionals. The law does not prohibit retaliation against striking workers. Labor disputes are settled by Commission for Labor Disputes (established within all organizations with 10 or more employees), by the authorized state body, or by courts of the Kyrgyz Republic. The employee has the right to choose one of these bodies to settle the dispute. However, in March 2021, the Parliament hastily approved a controversial bill that will require all trade unions to be affiliated with the government sanctioned Federation of Trade Union. If signed by the President, the bill would violate the principle “freedom of association” enshrined in international labor rights, and the principle of independence of trade union organizations.

Safety and health conditions in factories are generally poor and weakly enforced by the government. Workers in the informal economy, which makes up 25-35 percent of the economy have neither legal protection nor mandated safety standards. The law establishes occupational health and safety standards, and the State Labor Inspectorate is responsible for protecting workers and carrying out inspections in the event that worker safety and well-being is compromised. Limited staffing and the temporary moratorium on all business inspections from January 1, 2019 until January 1, 2022, inhibits unannounced workplace site-visits. See more at: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper

The Labor Code of the country complies with all required international laws and treaties, but gaps remain in protecting the rights of individuals employed by private companies. Many employees are hired based on basic or even oral agreements and lack knowledge of their rights.

In January 2017, amendments to the Labor Code of the Kyrgyz Republic entered into force that strengthened labor rights and protections for people under the age of 18. The law now prohibits people under the age of 18 from being sent on business trips, engaging in overtime work, night shifts, and working on days off or official holidays. However, child labor laws are not uniformly enforced.

The U.S. Embassy is unaware of the Kyrgyz government’s efforts to implement OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas or OECD or UN Guiding Principles on Business and Human Rights.

The United States signed a bilateral OPIC (predecessor to DFC) agreement with the Kyrgyz Republic in 1992. OPIC financed part of the campus expansion of the American University of Central Asia in Bishkek and the University of Central Asia in Naryn.

Bank lending and international donor financing remain the primary mechanisms by which businesses in the Kyrgyz Republic seek to fund expansion projects. Few investment funds exist and operate in the Kyrgyz Republic. There are no new DFC-funded projects in the Kyrgyz Republic to date, but the lower-middle income country is considered a priority for DFC funding opportunities. The DFC currently supports two portfolio loan guarantees with two local banks to increase lending to Kyrgyz businesses. DFC products have the potential to facilitate social and commercial infrastructure developments, expand small and medium enterprise lending and assist the development of private equity funds in the Kyrgyz Republic, which are currently few in number.

*Source for Host Country Data: National Statistics Committee of the Kyrgyz Republic: http://www.stat.kg; http://www.stat.kg/ru/opendata/category/2315/; http://www.stat.kg/ru/opendata/category/4428/; http://www.stat.kg/ru/statistics/investicii/

Table 4: Sources of Portfolio Investment
Data not available. The Kyrgyz Republic has limited stock and bond markets for portfolio investors. The country is not listed on the IMF’s Coordinated Portfolio Investment Survey (CPIS) site. It is unlikely the country has any large portfolio investors.

Policies Towards Foreign Direct Investment

The Tajik government is consistent in its calls for greater U.S. investment. Despite this, Tajikistan has traditionally courted state-led investment and external loans from China and Russia.  In 2020, overall Foreign Direct Investment (FDI) to Tajikistan fell 53 percent to USD 162 million, and Chinese investments, which account for three-quarters of all FDI, fell 50 percent to USD 120.3 million.  Russia (USD 13.9 million) was the second largest source of FDI last year, followed by Cyprus (USD 8.2 million) and Turkey (USD 7.8 million).

Tajikistan’s Investment Law (Article 7) guarantees equal rights for both local and foreign investors.  According to this law, foreigners can invest by jointly owning shares in existing companies with other Tajik companies or Tajik citizens; by creating fully foreign-owned companies; or by concluding agreements with legal entities or citizens of Tajikistan that provide for other forms of foreign investment activity.  Foreign firms may acquire assets, including shares and other securities, as well as land leasing and mineral usage rights.  Foreign firms may also exercise all property rights to which they are entitled, either independently or shared with other Tajik companies and citizens of Tajikistan.  Most of Tajikistan’s current international agreements provide most-favored-nation status.

Tajikistan’s legal code does not discriminate against foreign investors by prohibiting, limiting, or conditioning foreign investment.  To receive permission and licenses for operation, however, a foreign investor must navigate a complicated, cumbersome, and often corrupt bureaucratic system.

Several Tajik government agencies are responsible for investment promotion, but they frequently have competing interests.  The State Committee on Investments and State Property Management (https://www.investcom.tj/) chiefly facilitates FDI.  In addition, state-owned enterprise Tajinvest under the State Committee on Investments and State Property Management is responsible for attracting investment into Tajikistan (https://www.tajinvest.tj.)

Tajikistan has established several formal mechanisms to maintain open channels of communication with existing and potential investors.  With donor support, the government established a Consultative Council on the Improvement of the Investment Climate in 2007.  This annual council provides a formal venue for dialogue with donors, international financial institutions, and members of the private sector (http://investmentcouncil.tj/en).  Nevertheless, investors continue to claim that many of their complaints to the government go unheeded.

Limits on Foreign Control and Right to Private Ownership and Establishment

Tajikistan’s legislation provides a right for all forms of foreign and domestic ownership to establish business enterprises and engage in remunerative activity.  There are no limits on foreign ownership or control of firms and no sector-specific restrictions that discriminate against market access.  Local law considers all land and subsoil resources to belong exclusively to the state, although initial efforts to establish a private land market are underway.

Tajikistan’s legislation allows for 100 percent foreign ownership of local companies.  In the context of jointly owned companies, local partners generally seek to possess a controlling share (51 percent or more) at the initial stage of business development and in some cases may seek to increase their stake over time.

All sectors of Tajikistan’s economy are open to foreign participation except for aviation, defense, security, and law enforcement, which require special government permission for the operation of such types of businesses or services.  Tajikistan does not restrict foreign investment; it does not mandate local stakeholder equity positions or local partnership.  In some cases, the government requires specific licenses.  There are no mandatory IP/technology transfer requirements.

Tajikistan’s government maintains an investment screening mechanism for inbound foreign investments involving government interests, including investments into its five Free Economic Zones, issuing approval or rejection statements in particular for investments requiring government financial support or state guarantees.  The State Committee on Investments and State Property Management is responsible for filing and coordinating foreign investment project proposals as they pass through the review pipeline.  The government takes particular interest in determining whether the proposed project may impact the county’s national security and/or economic performance.

Investors must submit their proposals for screening to all relevant government agencies.  This process can be lengthy and cumbersome.  The State Committee on Investments and State Property Management circulates the investor’s proposal among the relevant government offices and ministries with instructions to review and then provide a formal opinion.  If a ministry objects to the proposed investment activity, it submits an official note to the State Committee on Investments and State Property Management.

Screening proposals often involve background checks on the company, the person(s) representing the company, and identification of a financial source to comply with anti-money laundering regulations.  U.S. businesses have not identified screening mechanisms as a barrier to investment.

The purpose of the investment screening process is to ensure that a proposed project does not violate Tajik laws.  The review process could reject the proposal and the Tajik government may flag it as “incomplete.”  Applicants may appeal the government’s decision by submitting a claim to the Tajik Economic Court.

Other Investment Policy Reviews

The COVID-19 outbreak forced the postponement of Tajikistan’s first WTO Trade Policy Review, which had been scheduled for March 2020.  Additionally, the OECD launched a 2020 Peer Review of Investment Promotion in Tajikistan, and has suggested that Tajikistan enhance communication with existing investors and establish a clear investment strategy that articulates economic objectives and agency roles.

Business Facilitation

Although the Tajik government has simplified the business registration process by adopting a single-window registration system for investors in 2019, that process still requires significant legal and human resources, government connections, and time.  The Tax Committee is the primary agency responsible for business registration (www.andoz.tj).  In addition to obtaining state registration through a single-window, a company must also register with the Social Protection Agency (www.nafaka.tj); Statistics Agency under the President of Tajikistan (www.stat.tj); Ministry of Labor, Migration, and Employment (www.mehnat.tj); Sanitary-Epidemiological Service at the Ministry of Health (www.moh.tj); as well as with local authorities, municipal services, and other agencies.  According to the country’s regulations, registering a business should take less than five business days; in reality, it may take several days weeks or even months due to the inappropriate or illegal actions of registering agencies.

The Tajik Tax Code recognizes three types of enterprises: small-scale (up to USD 100,000 annual turnover), medium scale (up to USD 2.5 million annual turnover), and large-scale (above USD 2.5 million annual turnover).  The international donor community, in coordination with the government, funds a number of projects that stimulate development of small and medium enterprises in Tajikistan.

Outward Investment

The Tajik government does not promote outward investments.  Private companies from Tajikistan have invested in Kazakhstan, Uzbekistan, the Kyrgyz Republic, Turkey, Russia, the United Kingdom, the United States, and the UAE, primarily in trade, food processing, real estate, and business development. The Tajik government does not restrict domestic investors from investing abroad.

Tajikistan does not have a bilateral Free Trade Agreement with the United States and does not participate in United States Trade Representative (USTR)’s Generalized System of Preferences program.

Based on the principles of succession, the Convention between the United States of America and the Union of Soviet Socialist Republics on Matters of Taxation is currently in force. The convention can be found here: https://www.irs.gov/businesses/international-businesses/tajikistan-tax-treaty-documents.  The Tajik government does not recognize this treaty and has requested a double taxation treaty with the United States.  In 2004, Tajikistan became a signatory to the U.S.-Central Asia Trade and Investment Framework Agreement (TIFA) along with the United States, Uzbekistan, Turkmenistan, the Kyrgyz Republic, and Kazakhstan.

Tajikistan signed bilateral investment treaties (BITs) with Austria, Azerbaijan, Belarus, Belgium, China, the Czech Republic, France, Germany, India, the Islamic Republic of Iran, Kazakhstan, the Republic of Korea, Kuwait, Lithuania, Luxembourg, the Republic of Moldova, Mongolia, the Netherlands, Pakistan, Slovakia, Spain, Switzerland, and Turkey.  It has also signed BITs that are awaiting parliamentary approval with Algeria, Armenia, the Belgium-Luxembourg Economic Union, Indonesia, the Kyrgyz Republic, Qatar, the Russian Federation, the Syrian Arab Republic, Thailand, Turkmenistan, Ukraine, the United Arab Emirates, and Vietnam.  BIT information is available at:  https://investmentpolicy.unctad.org/country-navigator/213/Tajikistan.

Tajikistan’s other investment agreements include: the Eurasian Investment Agreement with Belarus, Kazakhstan, the Kyrgyz Republic, and the Russian Federation; the European Community-Tajikistan Partnership Agreement with the European Union; the Commonwealth of Independent States Investor Rights Convention with Armenia, Belarus, Kazakhstan, the Kyrgyz Republic, and the Republic of Moldova; the Energy Charter Treaty; and the Organization of the Islamic Conference Investment Agreement.  Another signed agreement, the Economic Cooperation Organization Investment Agreement, has not yet entered into force.

Tajikistan does not have a Free Trade Agreement or an Association Agreement in force with the European Union.  Tajikistan, however, is a beneficiary of the EU’s Generalized System of Preferences (GSP) program, a bilateral trade arrangement through which the EU provides preferential access to its market to developing countries and territories in the form of reduced tariffs for their goods when entering the EU market.  Tajikistan is also considering filing an application to the EU’s GSP+ program, which will provide it additional preferences when trading with EU countries.  Preferential imports from Tajikistan are heavily concentrated in two sectors, industrial products – such as base metals – and textiles.

Tajikistan currently has bilateral agreements to avoid double taxation with Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Brunei, China, Czech Republic, Finland, India, Indonesia, the Islamic Republic of Iran, Japan, Kazakhstan, Kuwait, Kyrgyz Republic, Latvia, Luxembourg, Moldova, Pakistan, Poland, Romania, the Russian Federation, South Korea, Switzerland, Thailand, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, and the United Kingdom.  The provisions of double tax agreements prevail over Tajik domestic law.  The list of bilateral agreements to avoid double taxation can be found here: https://andoz.tj/docs/mejdunarodnie-soglasheniya/agreement%20with%2025%20states_ru.pdf.

Although Tajikistan is not a member of the Eurasian Economic Union (ECC), and therefore not a party to its trade agreements, it nevertheless pledged in 1992 to uphold certain USSR treaty obligations, including an Income Tax Treaty that entered into force in 1976.

Tajikistan’s burdensome current tax code was adopted in 2013, and a 2019 tax reform project is scheduled for implementation in 2022.  Investors should be aware that financial transfers from parent companies to branches within Tajikistan will be taxed as revenue.

Investors who qualify for a value-added tax (VAT) exemption on imported materials should be aware that they must submit applications for exemption no later than January 1 and that any exemption granted will expire December 31 of that year.   Often, the government does not grant exemptions until October, leaving a short window to file.  While the exemption applies retroactively for the calendar year, the Tajik government has said the tax code has no legal mechanism to authorize refunds of VAT paid prior to the date the government granted the exemption.

According to Article 110 of Tajikistan’s Tax Code, companies that produce goods are profit tax exempt for 12 months from the date of state registration.  Further profit tax breaks are staggered based on the size of the investment: two years for USD 200,000-500,000, three years for USD 500,000-2 million, four years for USD 2-5 million.  Should the government change its tax code after an investment is made, the investor has the right to keep the initial conditions.

Transparency of the Regulatory System

Tajikistan’s regulatory system lacks transparency.  Despite recent improvements to allow access to presidential decrees and laws online, governmental instructions, ministerial memos, and regulations are often inaccessible to the public.  Businesspeople and investors must purchase access to Adliya, a commercial legal database, to obtain updated legal and regulatory information – http://www.adlia.tj/.  Each ministry has its own set of unpublished regulations and these may contradict the laws and/or regulations of other ministries.

The Tajik government rarely publishes proposed laws and regulations in draft form for public comment.  Although the Tajik government solicited public comment on the 2013 Tax Code, it did not modify the draft law based on the input received.  The government has provided a period for public comment on its ongoing tax reform project.

TajikStandard, the government agency responsible for certifying goods and services, calibrating and accrediting testing laboratories, and supervising compliance with state standards, lacks experts and appropriate equipment.  TajikStandard does not publish its fees for licenses and certificates, or its regulatory requirements.

Ongoing assistance from the World Bank’s Public Financial Management Modernization Project helps the Ministry of Finance and some parastatals adopt International Public Sector Accounting Standards (IPSAS) and International Financial Reporting Standards (IFRS) in order to comply with the government’s 2011 Accounting Law.

The Tajik central government is the highest rule-making and regulatory authority.  On a case-by-case basis, this office may delegate regulatory functions to regional or district levels.  The Office of the General Prosecutor, Anti-Corruption Agency, the Tax Committee, and the State National Security Committee oversee government and administrative procedures.

The Tajik government did not announce any regulatory system or enforcement reforms in 2020.  Government agencies submit proposed draft regulations to government commissions.  Once cleared, draft regulations receive final review by the relevant ministries and the Executive Office of President.  Legally, the public has the right to review and monitor the enforcement process.  In practice, however, Tajikistan does not regularly enforce or review regulations. Tajikistan archives its laws, regulations, and policies at www.mmk.tj.

Although the government has taken steps to improve its fiscal transparency, publicly available budget documents fall short of internationally accepted standards. International assessments recommend that Tajikistan break down data by ministry and include information about debt held by State-Owned Enterprises.

International Regulatory Considerations

Tajikistan is a member of the CIS (Commonwealth of Independent States).  Government officials are still studying the prospect of membership in the Eurasian Economic Union.  The regulatory system that governs Tajikistan’s cotton sector incorporates CIS and U.S. technical norms.

Tajikistan became a WTO member in 2013 and notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Tajikistan has a civil legal system in which parties to a contract can seek enforcement by submitting claims or disputes to Tajikistan’s Economic Court.  Tajikistan has written laws on commercial activities and contracts.

Nominally, the judicial system is independent.  In practice, the executive branch interferes in judiciary matters.  The current judicial process is neither fair nor reliable.  Outcomes tend to favor the government’s executive branch.

By law, regulation and enforcement actions are appealable and the national court system adjudicates appeals.  In practice, national courts typically carry out executive preferences, leaving business and commercial interests vulnerable to government interference.

Laws and Regulations on Foreign Direct Investment

Several government websites provide information on laws/regulations:

• Presidency – www.president.tj
• Parliament – www.parlament.tj/ru
• Government media – www.jumhuriyat.tj
• Tax Committee – www.andoz.tj
• Ministry of Finance – www.minfin.tj
• National Bank of Tajikistan – www.nbt.tj

The Tajik government regulates investments through a number of laws, inter alia, the Law on Investment Agreement, Law on Concessions, Law on Resources, Law on Legal Status of Foreigners, Law on Free Economic Zones, Law on Investments, Concept of State Policy on Investments and Protection of Investments, Law on Natural Resources Tenders, and Law on Privatization of Housing.  Historically, inspections lack justification and are a means to extract fines and revenue from the private sector.

The Tajik government’s “one-stop-shop” Single Window website for investors launched in 2019: https://investcom.tj/en/investments/single-window/ .

Competition and Antitrust Laws

The Antimonopoly Service under the Government (http://www.ams.tj) is responsible for regulating prices for products of monopolistic enterprises, preventing and eliminating monopolistic activity, and monitoring potential monopolistic abuse and unfair competition.  The agency’s decisions are subject to a legal appeals process, although there are few instances in which decisions have been overruled.

Expropriation and Compensation

The Tajik government can legally expropriate property under the terms of Tajikistan’s Law on Investments, Law on Privatization, civil code, and criminal code.  The laws authorize expropriation if the Tajik government identifies procedural violations in privatizations of state-owned assets or determines a property has been used for anti-government or criminal activities, as defined in the criminal code.  Under the Law on Joint Stock Companies, the government may request that a court cancel the private purchase of shares in SOEs if it determines that there was a violation to the procedure within the original sale.

Tajikistan has a history of expropriating land that was illegally privatized following independence.  After an investigation by government anti-corruption, anti-monopoly, and other law enforcement agencies, the State Committee for Investments and State Property Management can issue a finding that the asset was illegally privatized, and request that the Tajik court system order its return to government control.  Domestic law requires owners be reimbursed for expropriated property, but the amount of the compensation is usually well below the property’s fair market value.

In several cases, Tajik officials have used government regulatory agencies to pressure businesses and individuals into ceding properties and business assets.  The Tajik government has not shown any pattern of discrimination against U.S. persons by way of illegal expropriation.  All privately owned operations are vulnerable to expropriation actions.

The Tajik government may threaten to impose inflated and baseless taxation charges on companies, and use this as leverage to negotiate the transfer of some share of a company to the government.  In cases of expropriations, claimants and others have generally had no access to due process.

Dispute Settlement

ICSID Convention and New York Convention

Tajikistan is not a member state of the International Centre for the Settlement of Investment Disputes (ICSID) Convention.

Tajikistan became the 147th country to sign and ratify the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), and acceded to the Convention on August 14, 2012.  The convention entered into force on November 12, 2012 – 90 days after depositing the signed text at the UN in accordance with Article XII (2) of the Convention.

Nonetheless, Tajik courts have overturned arbitral awards in favor of connected officials.  Tajikistan signed the Convention with a number of reservations regarding types of arbitration agreements and decisions that Tajikistan can recognize and implement.  One of the reservations established that Tajikistan does not apply the provisions of the Convention to disputes with immovable property – Norway has established a similar reservation.  Another reservation established that Tajikistan applies the Convention only to disagreements and decisions “arising after the entry into force of the Convention and to decisions made in the territories of third countries.”

Investor-State Dispute Settlement

In 2011, Tajikistan joined the Cape Town Convention on International Interests and Mobile Equipment.  This convention and its protocol on Matters Specific to Aircraft Equipment is intended to standardize transactions involving movable property, particularly aircraft and aircraft engines.  The treaty creates international standards for registration of ownership, security interests (liens), leases, and conditional sales contracts, and various legal remedies for default in financing agreements, including repossession and the effect of a particular state’s bankruptcy laws.

Disputes involving foreign investors have primarily centered on the implementation of tax incentives.  In the last ten years, numerous foreign investors have reported difficulty utilizing promised value-added tax exemptions on imported items to Embassy officials.  Tajik procedures require businesses to submit in January of the calendar year a list of goods to be imported, and the exemption then expires at the end of December in that same year.  According to Tajikistan’s Economic Procedural Code, dispute resolution decisions take 30-60 days after the process begins.  In practice, companies say the process typically takes much longer.

International Commercial Arbitration and Foreign Courts

Tajik law recognizes the role of local courts in dispute resolution and arbitration but in reality, there is no reputable arbitration institution for resolving disputes domestically among individuals and businesses.  In practice, local courts are primarily used to resolve disputes over agricultural plot demarcations as part of the land reform process, and do not serve as venues to resolve non-agricultural commercial disputes.  State-owned enterprise TALCO lost an international dispute process in 2013, and eventually came to terms on the dispute settlement in 2017.

Tajikistan has signed bilateral agreements with several countries on arbitration and investment disputes, but local domestic courts do not always properly enforce or recognize these rulings.

Bankruptcy Regulations

Under Tajikistan’s 2003 Law on Bankruptcy, both creditors and debtors may file for an insolvent firm’s liquidation.  The debtor may reject overly burdensome contracts, and choose whether to continue contracts supplying essential goods or services, or avoid preferential or undervalued transactions.  The law does not provide for the possibility of the debtor obtaining credit after the commencement of insolvency proceedings.  Creditors have the right to demand the debtor return creditors’ property if that property was assigned to the debtor less than four months prior to the institution of bankruptcy proceedings.  Tajik law does not criminalize bankruptcy.

Investment Incentives

According to statements by President Rahmon, there are 240 tax, regulatory, and legal incentives for businesses.  According to the IFC Business Regulation and Investment Policy project, there are 97 incentives for investments.  In practice, businesses and investors cannot access or utilize most of these incentives.

The Tajik government has officially expressed an interest in attracting FDI and in recent years the government has issued state guarantees for joint projects, principally with Chinese investments.  In 2016, Tajikistan’s government approved an ambitious National Development Strategy 2016-2030, which highlights the critical role of private sector investment.  According to 2016-2030 strategy, the Tajik government plans to attract as much as  USD 55 billion in FDI by 2030.  Given the country’s business and tax environment, however, this plan appears to be more aspirational than realistic.  The State Committee on Investments and State Property Management’s website lists government-promoted investment opportunities (https://map.investcom.tj/).

Foreign Trade Zones/Free Ports/Trade Facilitation

The Tajik government has established five Free Economic Zones (http://www.fez.tj) which offer reduced taxes and customs fees to both foreign and domestic businesses.  To be eligible for preferential tax treatment, manufacturing companies must invest a minimum of USD 500,000, trading companies USD 50,000, and service and consulting companies USD 10,000.  The newest Free Economic Zone was created in March 2019, in Kulyob.

Performance and Data Localization Requirements

According to the Tajik Law on Audits, 70 percent of a local company’s workforce must be made up of local employees.  If the CEO of the company is foreign, then the percentage of local staff should be at least 75 percent.  The Tajik government can waive this requirement.

In June 2015, the Minister of Labor, Migration and Employment announced that for large-scale projects implemented in Tajikistan, which are signed between the Tajik government and either a company registered in another country or a government of another country, at least 80 percent of the workforce must be locally hired.  Depending on the qualifications of the local labor force, Tajik authorities may increase this requirement to 90 percent.

Tajik legislation permits foreigners to hold senior management and directorial positions.  It is possible to obtain visas and residence/work permits, but applicants are required to provide documentary support, and most permits cannot exceed one year.  According to Article 3 of government resolution #529 (foreign worker permission procedures,) investors and depositors with more than USD 500,000 in investments do not require work permits for one year from the date of state registration.

The government does not practice forced data localization.  The Tajik government requires all telecommunication service providers to install surveillance equipment.  Russia provides the equipment and technology as a part of the Collective Security Treaty Organization agreement.  Since 2017, Tajikistan’s Telecommunication Agency sends all internet traffic through its unified communication center.  The government does not impede the transmission of customer or other business-related data outside the country’s territory unless the data violates anti-terrorist and anti-extremist laws.  Growing the digital economy remains a priority for Tajik policymakers, who in recent years announced plans to create an Agency on Innovation and Digital Technologies and implement projects from the government’s Digital Economy 2040 concept note.

Real Property

The Tajik government uses a cadaster system to record, protect, and facilitate acquisition and disposition of property, but it needs improvement.  Even when secured interests in property do exist, enforcement remains an issue.  Investors should be aware that establishing title might be a more involved process than in Western countries because title histories can be difficult to find.

Since 2007, the U.S. government has provided significant, sustained, and focused support to the Tajik government on market-driven land reforms.  Most recently, Tajikistan’s Land Market Development Activity (LMDA) successfully launched “one-stop shops” for land registration throughout Khatlon, cutting wait times from 15 to four days.  The activity also supports the launch of a new automated registration system designed to centralize records, streamline procedures, and further simplify land registration.   In 2020, LMDA supported government implementation of single-window principles in land management, and developed a land appraisal law approved by the government to regulate appraisals and better-define land market value.

According to domestic law, all land belongs exclusively to the state; individuals or entities may be granted first or second-tier land-use rights.  The government restricts foreigners’ first-tier land-use rights to 50 years, while Tajik individuals and entities may have indefinite first-tier land-use rights.  Foreigners may request second-tier land-use rights from the government similar to the first-tier rights of Tajik individuals and entities, for periods of up to 50 years.  Tajik first-tier land-use rights holders may also grant foreigners lease agreements for up to 20 years.  Ownership of rural land-use rights can be particularly opaque, since many nominally privatized former collective farms continue to operate as a single entity.  Many of the new owners do not know where their land is and do not exercise their property rights.

Tajik law does not allow the sale of land.  In 2008, however, the government passed mortgage legislation that allows parties to use immovable property as collateral.  All land is the property of the state.  If leaseholders do not use land in accordance with the purpose of the lease, then authorities can revert it to other owners.

Intellectual Property Rights

Tajikistan is a signatory to several international conventions that protect intellectual property rights (IPR), including the World International Property Organization (WIPO) Convention.  Tajikistan has signed 17 WIPO administered treaties.  IPR-related laws, regulations, and treaties are listed here:

– http://www.ncpi.tj/index.php/ru/pravila/zakony

– http://www.wipo.int/wipolex/en/profile.jsp?code=TJ

Although the novel coronavirus pandemic drained resources and attention away from IPR issues, the Tajik government is actively working to improve IPR protection.  A presidential decree mandating that the government use licensed software led to the September 2019 creation of an interagency working group — chaired by the Ministry of Economic Development and Trade, with participation from the Ministries of Foreign Affairs, Internal Affairs, and Culture, as well as the Customs Service and the Department for the Protection of State Secrets — to develop processes to enforce intellectual property rights.  In 2020, the IPR working group met with donors and the private sector and reported data on court cases related to IPR violations.  Additionally, the working group produced the first draft of the administration’s in-progress National Strategy for the Development of Intellectual Property.  Tajikistan was removed from the USTR Special 301 Watch List in 2019 and is not included in the Notorious Markets List.

Notwithstanding the gains Tajikistan has made in the past couple years, numerous challenges remain as the government lacks the technical capacity to effectively protect patents, copyrights, and other intellectual property.  Despite the IPR protections enshrined in international agreements as well as in Tajikistan’s criminal and civil codes, infringement is widespread and enforcement remains weak. Following a seven-year hiatus between 2012-2018 in which the government declined to share enforcement data, the Ministry of Internal Affairs reported 54 intellectual property rights violations in 2020, and initiated 11 administrative and 43 criminal cases.

At present, IP does not represent a sizeable portion of the Tajik economy, although estimates indicate over 90 percent of software and other media products sold in the country are unlicensed copies, and many “brand name” consumer goods are counterfeit.  Counterfeit goods available in Tajik markets are principally manufactured in China, and most purveyors are independent operators and small traders rather than organized criminal groups.

Tajikistan amended Article 441 of its customs code during WTO accession to provide ex officio authority for customs officers to seize and destroy counterfeit goods.  The Department on Disclosing and Seizing of Counterfeit Products within the Customs Service of Tajikistan has the responsibility to detect IPR-related violations.  Currently, the Customs Service has only three IPR products registered in its customs registry.  Tajikistan’s Law on Quality and Safety of Products requires IPR violators to pay all expenses for storage, transportation, and destruction of counterfeit goods.

To register a patent or trademark with the National Center for Patents and Information (NCPI), applicants must submit an application with all relevant information on the IP and pay a fee.  The NCPI (www.ncpi.tj) will search its records for conflicts and, if none is found, register the IP within 30 days from the time the application is received.  In general, the issuance of a trademark might take four to seven months, while obtaining a patent for an invention could take up to two years.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders:

U.S. Embassy
Economic Section
Dushanbe-ICS@state.gov

American Chamber of Commerce in Tajikistan
+992 (93) 577 23 23 +992 (93) 577 29 29
Director@amcham.tj
Info@amcham.tj

Public list of local lawyers:
https://tj.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/

Capital Markets and Portfolio Investment

Foreign portfolio investment is not a priority for the Tajik government, and the country lacks a securities market.  According to government statistics, portfolio investment in Tajikistan totaled USD 502.5 million at the end of 2020.  This includes the USD 500 million Eurobond the National Bank of Tajikistan issued in 2017.  The National Bank of Tajikistan has made efforts to develop a system to encourage and facilitate portfolio investments, including credit rating mechanisms implemented by Moody’s and S&P.  Apart from these initial steps, however, Tajikistan has not established policies to facilitate the free flow of financial resources into product and factor markets.

Tajikistan does not place any restrictions on payments and transfers for current international transactions, per IMF Article VIII.  It regards transfers from all international sources as revenue, however, and taxes them accordingly.  Commercial banks apply market terms for credits, but are also under considerable pressure by governing elites and their family and friends to provide favorable loans for commercially questionable projects.  The private sector offers access to several different credit instruments.  Foreign investors can get credit on the local market, but those operating in Tajikistan avoid local credit because of comparatively high interest rates.

Money and Banking System

According to the latest National Bank of Tajikistan (NBT) report from December 2020, 69 credit institutions, including 18 banks, including one Islamic bank, 18 microcredit deposit organizations, five microcredit organizations, and 27 microcredit funds, function in Tajikistan.  Tajikistan has 356 bank branches, an eight percent increase from 2019.

Tajikistan’s banking system is on a recovery path following a 2015 financial crisis.  AgroInvestBank and TojikSodirotbank, two of Tajikistan’s largest, are in fact collapsed banks awaiting liquidation.  Tajikistan’s banking sector has assets of USD 2.32 billion as of December 2020, a 2.2 percent increase from 2019.  Total liabilities in 2019 were unchanged from 2018, reaching USD 1.6 billion.  Banking-sector capital adequacy and liquidity indicators exceed the NBT’s minimum requirements. Although authorities report 23.4 percent of commercial loans are non-performing, other estimates range as high as 50 percent.

The NBT is Tajikistan’s central bank and, in recent years, has pursued policies to strengthen financial inclusion and cashless payments.  Foreign banks can establish operations but are subject to National Bank of Tajikistan regulations.  United States commercial banks discontinued correspondent banking relations with Tajik commercial banks in 2012.  To establish a bank account, foreigners must submit a letter of application, a passport copy, and Tajik government-issued taxpayer identification number.

Foreign Exchange and Remittances

Foreign Exchange

Tajikistan places no legal limits on commercial or non-commercial money transfers, and investors may freely convert funds associated with any form of investment into any world currency.  However, businesses often find it difficult to conduct large currency transactions due to the limited amount of foreign currency available on the domestic financial market.  Investors are free to import currency, but once they deposit it in a Tajik bank account it may be difficult to withdraw.

In 2015, the National Bank of Tajikistan reorganized foreign currency operations and shut down all private foreign exchange offices in Tajikistan.  Since that time, only commercial bank exchange offices may exchange money and transactions require customers to register with an identity document.  In 2019, the National Bank of Tajikistan launched a national money transfer center that centralizes the receipt of all remittances from abroad.

The government’s policy supports a stable exchange rate but remains susceptible to changes in the Russian ruble due to the high volume of remittances.  During 2020, the Tajik somoni fell 16.6 percent against the U.S. dollar to TJS 11.3 for 1 U.S. dollar.  Defending the somoni’s rate to the dollar puts pressure on Tajikistan’s foreign currency and gold reserves and leads to differences between the official exchange rate and the non-bank market rate.

Remittance Policies

Beginning in 2016, the National Bank of Tajikistan mandated that commercial banks disburse remittances in local currency.  There are no official time or quantity limitations on the inflow or outflow of funds for remittances.  Tajikistan’s tax code classifies all inflows as revenue and taxes them accordingly; however, the Tajik government does not tax remittances from labor migrants.

Sovereign Wealth Funds

Tajikistan does not have a sovereign wealth fund.  The country does have a “Special Economic Reforms Fund,” but, according to official statistics, it is empty.

World Bank and IMF reports indicate there are 920 state-owned enterprises (SOEs) (up from 583 in 2004) which employ 24 percent of the labor force, use 50 percent of all available credit, and account for 17 percent of the country’s economic output.

SOEs are active in travel, transportation, energy, mining, metal manufacturing/products, food processing/packaging, agriculture, construction, heavy equipment, services, finance, and information and communication sectors.  The government divested itself of smaller SOEs in successive waves of privatization but retained ownership of the largest Soviet-era enterprises and any sector deemed to be a natural monopoly.

The government appoints directors and boards to SOEs but the absence of clear governance and internal control procedures means the government retains full control.  Tajik SOEs do not adhere to the Organisation for Economic Co-operation and Development (OECD) Guidelines on Corporate Governance for SOEs.  When SOEs are involved in investment disputes, it is highly likely that domestic courts will rule in favor of state enterprises.  Court processes are generally non-transparent and discriminatory.

The State Committee for Investments and State Property Management maintains a database of all SOEs in Tajikistan, but does not make this information publicly available.

Major SOEs include:

• Travel: Tajik Air, Dushanbe International Airport, Kulob Airport, Qurghonteppa Airport, Khujand Airport, and Tajik Air Navigation;
• Automotive & Ground Transportation: Tajik Railways;
• Energy & Mining: Barqi Tojik, TajikTransGas, Oil, Gas, and Coal, and VostokRedMet;
• Metal Manufacturing & Products: Tajik Aluminum Holding Company (TALCO), and several TALCO subsidiary companies;
• Agricultural, Construction, Building & Heavy Equipment: Tajik Cement; Food Processing & Packaging: Konservniy Kombinat Isfara;
• Services: Dushanbe Water and Sewer, Vodokanal Khujand, and ZhKX (water utility company);
• Finance: AmonatBonk (state savings bank), TajikSarmoyaguzor (state investments), TajikSugurta (state insurance);
• Information and Communication: Tajik Telecom, Tajik Postal Service, and TeleRadioCom

In sectors that are open to private sector and foreign competition, SOEs receive a larger percentage of government contracts/business than their private sector competitors.  In practice, private companies cannot compete successfully with SOEs unless they have good government connections.

SOEs purchase goods and services from, and supply them to, private sector and foreign firms through the Tajik government’s tender process.  Tajikistan has undertaken a commitment, as part of its WTO accession protocol, to initiate accession to the Government Procurement Agreement (GPA).  At present, however, GPA does not cover Tajik SOEs.

Per government policy, private enterprises cannot compete with SOEs under the same terms and conditions with respect to market share (since the government continually increases the role and number of SOEs in any market), products/services, and incentives.  Private enterprises do not have the same access to financing as SOEs as most lending from state-owned banks is politically directed.  Local tax law makes SOEs subject to the same tax burden and tax rebate policies as their private sector competitors, but the Tajik government favors SOEs and regularly writes off tax arrears for SOEs.

Privatization Program

The Tajik government conducted privatization on an ad-hoc basis in the 1990s, and then again in the early 2000s.  Following a World Bank recommendation, in 2020 the government continued implementing its plan to split national electrical utility Barqi-Tojik into three public/private partnerships, responsible for generation, transmission, and distribution but progress has been slow.

Foreign investors are able to participate in Tajikistan’s privatization programs. There is a public bidding process, but the privatization process is not transparent.  Privatized properties have been subject to re-nationalization, often because Tajik authorities claim an illegal privatization process.

In 2020 Tajikistan’s lower house of parliament approved amendments to the state privatization law that remove the Roghun energy project and TALCO aluminum company from the list of state facilities precluded from foreign investment.

The Tajik government has given no guidance on responsible business conduct for companies, and does not promote OECD or UN recommendations on these issues. There are no standards on corporate governance, accounting, or executive compensation to protect shareholders.  There are no independent NGOs, investment funds, worker organizations/unions, or business associations in Tajikistan that promote or monitor responsible business conduct.

Authorities protect consumer rights through the Law on Consumer Protection.  Citizens may file lawsuits against violators of consumer rights with the court system.  Tajikistan’s state labor union is responsible for safeguarding labor and employment rights.  In practice, no enforcement is in place.  The Tajik government does not fairly enforce domestic law to protect individuals from adverse business impacts.

Although there have been no high-profile allegations of labor rights concerns, in 2020 media reported that a foreign mining company did not allow its workers to leave its compound over COVID concerns.  The Tajik government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  In 2020, however, the Extractive Industries Transparency Initiative recognized significant progress implementing the EITI Standard in Tajikistan and lifted the country’s suspension, which had been in place since 2016.

Tajikistan has enacted anti-corruption legislation, but enforcement is politically-motivated, and generally ineffective in combating corruption of public officials.  Amendments to the criminal code in 2016 now allow individuals convicted of bribery-related crimes to avoid prison in return for payment of fines (roughly USD 25 for each day they would have served in prison had they been convicted under the previous criminal code).

Tajikistan’s anti-corruption laws officially extend to family members of officials and political parties.  Tajikistan’s laws provide conditions to counter conflict of interest in awarding contracts.  The Tajik government does not require private companies to establish internal codes of conduct that prohibit bribery of public officials.  Private companies do not use internal controls, ethics, or compliance programs to detect and prevent bribery of government officials.

Tajikistan became a signatory to the UN’s Anticorruption Convention in 2006.  Tajikistan is not a party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.  Tajik authorities do not provide protection to NGOs involved in investigating corruption.

U.S. firms have identified corruption as an obstacle to investment and have reported instances of corruption in government procurement, awards of licenses and concessions, dispute settlements, regulations, customs, and taxation.

Resources to Report Corruption

Sulaimon Sultonzoda, Head
Agency for State Financial Control and Fight with Corruption
78 Rudaki Avenue, Dushanbe
992 37 221-48-10; 992 27 234-3052
info@anticorruption.tj; agenti@anticorruption.tj 

(The agency requests that contact be made via a form on their website – www.anticorruption.tj )

United Nations Development Program
39 Aini Street, Dushanbe
+992 44 600-56-00

Tajikistan’s civil war lasted from 1992 to 1997 and resulted in the deaths of 50,000 people.  Apart from a minor uprising in September 2015, however, political violence following the end of the civil war has been rare.

In 2020, President Rahmon won his fifth-consecutive term in office with 91 percent of the vote.  Earlier in the year, the President’s political party won 47 of 63 seats in parliament.  Tajikistan’s authoritarian ruler has consolidated power by silencing opposition voices and political parties.  As part of its security efforts, the Tajik government has placed numerous restrictions on religious, media, and civil freedoms.

The state, as an extension of the regime, furthers the interests of the ruling elite, often to the detriment of the business community.  Democratic reform is viewed by many elites as a threat to important political and financial interests.  Government institutions are often unwilling or unable to protect human rights, the judiciary is not independent, and the court system does not present Tajiks with a fair or effective forum in which to seek protection.  Law enforcement institutions often overuse their authority to monitor, question or detain a wide spectrum of individuals, and the State Committee on National Security (GKNB) exercises a wide degree of influence in all aspects of government.

The official unemployment rate at the end of 2020 was 1.9 percent, although the World Bank estimates the unemployment rate to be 10.9 percent.  Government unemployment statistics do not include the roughly one million citizens (12.5 percent of the population) that migrate in search of work in other countries – primarily to Russia.

According to information provided by the Ministry of Labor, Migration, and Employment, Tajikistan’s labor force is comprised of 5.2 million workers.  Due to demographic growth, the World Bank estimates that demand for jobs exceeds job growth by a ratio of two to one.

Unskilled labor is widely available, but skilled labor is in short supply, as many Tajiks with marketable skills choose to emigrate due to limited domestic employment opportunities.  Corruption in secondary schools and universities means degrees may not accurately reflect an applicant’s level of professional training or competency.  Foreign businesses and NGOs report difficulty recruiting qualified staff for their organizations in all specialties.

The Ministry of Labor, Migration and Employment is expanding its network of training centers at which Tajik workers can become more marketable.  The curriculum at these centers is primarily focused on the migrant community, offering training in English, Russian, culture, and history.  Centers also provide certification of a worker’s existing skills, and short-term vocational training as welders, electricians, tractor operators, textile workers, and confectioners.

The International Labor Organization in its 2021 annual report on the application of international labor standards requested additional information from Tajikistan on both the country’s labor inspection practices and legal framework related to trade unions due to concerns of non-compliance with various international regulations.  Article 36 of Tajikistan’s Labor Code gives employers the right to change workers’ contracts (remuneration, hours, responsibilities, etc.) due to fluctuating market conditions.  If the worker does not accept the amended contract, the employer may terminate the worker, but the worker can claim a severance payment equivalent to two months’ salary.

Tajikistan’s Labor Code does not include any provisions for waiving labor regulations to attract or retain investments, but the Tajik government has in some cases waived the requirement that Tajiks make up 70 percent of a company’s labor force.  There are no special regulations regarding treatment of labor in Tajikistan’s free economic zones.

The labor market favors employers.  Although the majority of workers are technically unionized, most are not aware of their rights, and few unions effectively advocate for workers’ rights.  The Tajik government controls unions.  The National Trade Union Federation has not had many disputes with the government.  Tajikistan has no formal labor dispute resolution mechanisms.  Although collective bargaining can occur, it is rare. During 2020, there were no significant labor strikes in Tajikistan.

Tajikistan’s labor code regulates employer-employee relations.  The domestic labor code includes reference to international labor standards but employers may frequently violate or misinterpret procedures.

* Source for Host Country Data:  

Source: TajStats

Comment: Tajikistan issued 500 million Eurobonds in 2017. European and U.S banks and funds are key shareholders of the Eurobonds.

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.

Historically, the most promising areas for investment are in the energy, agricultural, financial services, 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. 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.

State owned enterprises dominate Turkmenistan’s key industries. The Union of Industrialists and Entrepreneurs (UIE), however, has asserted that the private sector share of the economy reached 70 percent during 2020, but there are no independent estimates to verify this claim. The hydrocarbon sector, estimated to be as much as 35 percent of GDP, remains largely state controlled. 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.

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 $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 $4.1 billion loan from CDB to further develop the Galkynysh field. In October 2016, the government announced that the Islamic Development Bank would provide a $710 million loan to finance the Turkmenistan segment of TAPI. If successful, the project would have a transformative impact on the region, but adequate financing remains an open question. The project is currently estimated to cost $8-10 billion.

Screening of FDI

Foreign companies with approved government contracts and wishing to operate in Turkmenistan generally receive government support and 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.

Competition Law

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, however, the government has only allowed foreign ownership and foreign direct investment in the energy 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 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).

Moreover, there are several ways for the government to discriminate against investors, including 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. 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) trade policy review. In July 2020, Turkmenistan became an observer to the WTO. The WTO grants observer status for five years and observer governments are expected to take a decision on accession within that period of time.

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: https://minjust.gov.tm/ .

Turkmenistan has introduced measures 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).

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 the development of its Caspian Sea coast. It granted some tax incentives to those willing to invest in the construction of hotels and recreational facilities. 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 $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 Ministry of Foreign Affairs 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 U.S. companies interested in identifying potential local partners and 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. Turkmenistan closed its borders to international commercial air travel in early 2020 due to the COVID-19 pandemic (domestic flights are still available). It is unclear when scheduled international commercial flights will resume. Foreign embassies and some foreign companies routinely arrange charter flights into and out of the country. However, these flights are not permitted to land at Ashgabat International Airport and instead must land and take off from Turkmenabat Airport, roughly 400 miles from Ashgabat. Private citizens are currently subject to quarantine upon entry, which may vary based on whether the traveler can show proof of vaccination against COVID-19. All travelers should refer to travel.state.gov for the most up-to-date information on travel restrictions and quarantine measures.

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.

According to UNCTAD, Turkmenistan has signed bilateral investment agreements with 28 countries, including Armenia, Azerbaijan, Bahrain, Belgium, China, Egypt, France, Georgia, Germany, India, Indonesia, Iran, Israel, Italy, Luxembourg, Malaysia, Pakistan, Romania, Russian Federation, Slovakia, Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, and Uzbekistan. In 2009, the European Parliament passed a resolution on the EU-Turkmenistan Interim Trade Agreement, reasoning that economic and trade engagement with the country would stimulate political reforms in Turkmenistan.

The United States government considers the Convention with the Union of Soviet Socialist Republics on Matters of Taxation, which entered into force in 1976, to still be in effect between the United States and Turkmenistan. There is no bilateral investment treaty between Turkmenistan and the United States.

Turkmenistan is one of the former Soviet Republics which are now covered by the 1973 income tax treaty with the Commonwealth of Independent States (CIS).

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. There is no information available on whether the government conducts any market studies or quantitative analysis of the impact of regulations. Regulations often appear to follow the government’s “try-and-see approach” to addressing issues.

Some U.S. firms, including Boeing, General Electric, and John Deere, have established themselves as key suppliers in some 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.

Bureaucratic procedures are confusing and cumbersome. The government does not generally provide informational 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 limited number of 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.

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 the transition to International Financial Reporting Standards (IFRS). State-owned agencies began the transition to IFRS in 2012 and fully transitioned to National Financing Reporting Standards (NFRS) in January 2014, which is reportedly in accordance with IFRS. While IFRS may improve accounting standards by bringing them into compliance with international standards, they have 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.

International Regulatory Considerations

Turkmenistan pursues a policy of neutrality (acknowledged by the United Nations in 1995) and generally does not join regional blocs. 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 Eurasian Economic Union. In July 2020, Turkmenistan became an observer to the WTO.

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 parliament adopts around 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 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. In February 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. According to the 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.

In February 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. According to the 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.

• 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.

• 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.

• 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 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 the Ministry of Finance and Economy. The procedure applies not only to 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, 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, Russian cell phone service provider MTS suspended its operations after the state-owned Turkmen Telecom cut the company 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.

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 both pre-contractual and post-contractual disputes, 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

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. A foreign investor is defined in the law as an entity owning a minimum of 20 percent of a company’s assets.

There are several examples, as recently as 2017, of Western companies being unable to enforce contracts or prevail in state-level 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.

International Commercial Arbitration and Foreign Courts

Turkmenistan does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with an investment chapter with the United States.

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. We urge U.S. companies 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 (ICSID) and the Arbitration Institute of the Stockholm Chamber of Commerce. In 2020, Turkish construction firm Setta Insaat Taahhüt initiated an ICSID claim against the Turkmen government for $27 million over the state’s alleged expropriation of several projects. In 2018, German company Unionmatex registered a $43.5 million ICSID claims against the Turkmen government alleging non-payment of invoices and expropriation of company assets by the state. Also in 2018, Turkish company SECE Insaat brought a similar ICSID claim against Turkmenistan for unjustified termination of contracts and non-payment of invoices.

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. 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.

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. 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 ($5.70) 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 $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.

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. The law 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

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. Some 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. Access to the internet is heavily restricted and the government blocks most VPN services. Some U.S. companies have reported difficulty doing business in-country due to the severe internet restrictions and inability to access many websites. 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% 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% 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% 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 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. Turkmenistan has been on the United States government’s Special 301 Watch List  since 2000. Turkmenistan is not, however, listed in USTR’s notorious market report.

The Law on Foreign Investment guarantees the protection of intellectual property of foreign investors, including literary, artistic, and scientific works; software; databases; patents; and other copyrighted items. 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) 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. The government reportedly completed a 2021-2025 Action Plan for IPR, but copies of the text or information about the plan have not been released.

In August 2020, Turkmenistan acceded to the 1961 WIPO Rome Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations. In October 2020, Turkmenistan acceded to the 2013 WIPO Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired, or Otherwise Print Disabled. The State Agency for Intellectual Property reported that Turkmenistan had intended to accede the 2000 WIPO Patent Law Treaty in 2020, but as of April 2021 the country had not yet done so.

Turkmenistan has also joined the Eurasian Patent Organization, created for CIS countries as part of WIPO. 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.  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.

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/ .

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.

There are also four foreign commercial banks in the country: a joint Turkmen-Turkish bank (joint venture of Dayhanbank and Ziraat Bank), 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; they do not provide general banking services. The National Bank in Pakistan is permanently closing its Ashgabat branch as part of a larger restructuring of its international operations.

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. 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 33.9 billion ($9.7 billion at the official exchange rate) as of December 31, 2019. 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 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. 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.

Foreign Exchange

The government tightly controls the country’s foreign exchange flows. 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 $15 per day and $150 per month.). The government has also imposed administrative procedures that make withdrawals more cumbersome (e.g., proof of residency is now required). In January 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 3.5 manat per 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. 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.

Turkmenistan imports the 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. The official exchange rate is TMT 3.5/USD. During the 2020 calendar year covered by this report, the average black-market exchange rate was TMT 22.2/USD.

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.

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 most economic sectors. 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 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.

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.

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.

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 has offered some agricultural land for 99-year leases to farmers. As of 2019, 40 such leases existed. There was no information publicly available on the number of such leases in 2020.

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 and hold industries and businesses accountable for violating environmental laws and regulations.  The mandatory environmental insurance regulation includes a list of hazardous work and facilities subject to such insurance. The insurance is also required 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.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

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 the 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.

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,” making 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.

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 Department of State’s 2020 Human Rights Report for Turkmenistan is available at: https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/turkmenistan/

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, however, 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.

Government data on many economic indicators, including foreign direct investment, 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).

* Source for Host Country Data: 2020 Statistical Yearbook of Turkmenistan, State Committee of Statistics of Turkmenistan

** Statistics not available. Amount is either zero or is grouped with other countries under in the source data.

Table 3: Sources and Destination of FDI

UNCTAD has limited data on FDI for Turkmenistan: http://unctadstat.unctad.org/countryprofile/generalprofile/en-gb/795/index.html 

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

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 2020, the GOU improved the business environment by creating additional tax incentives for enterprises affected by the pandemic, reducing government involvement in the economy, promoting public-private partnership projects, announcing plans to reorganize and privatize SOEs, and implementing additional anti-corruption measures. 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. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, guaranteed unrestricted transfer of funds out of Uzbekistan and the protection of investments from nationalization. Established in November 2019, the Presidential Council of Foreign Investors became a new enhanced platform of communication with foreign investors, experts and the business community, though pandemic restrictions forced postponement of its planned plenary session with the president.

The government has yet to address several fundamental problems reported by businesses and investors, such as the lack of transparency in public procurements, its poor record of enforcing public-private contracts, poor protection of private property rights, and insufficient enforcement of intellectual property rights. Uzbekistan is ranked 179 in Transparency International’s Corruption Perceptions Index, and ranked 69 in 2020 Ease of Doing Business (DB) with a DB Score indicator of 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 and at these events officials stress their interest in seeing new companies establish operations in Uzbekistan. To improve direct communication with foreign businesses, international financial institutions, banks, and other structures operating in Uzbekistan, the GOU has established the Council of Foreign Investors, which operates as an institutional advisory body. The GOU established the Institute of the Business Ombudsperson (IBO) in 2017 to protect the rights and legitimate interests of businesses and provide legal support. The Law on Investments and Investment Activities, which entered into force on January 27, 2020, obliges Uzbekistan state bodies, diplomatic missions and consular institutions abroad to provide advisory and informational assistance to investors. The Law also obliges the IBO to assist foreign businesses in resolving emerging disputes through extrajudicial and pre-trial procedures.

During the reporting period, various GOU officials attended dozens of in-person and virtual meetings with representatives of U.S. companies, business facilitation agencies, the U.S. International Development Finance Corporation (DFC), and other American entities. Earlier, in 2019, Uzbekistan hosted the first U.S. Department of Commerce Certified Trade Mission, supported by the American Chamber of Commerce in Uzbekistan. The event provided 35 representatives of 13 U.S. companies with an opportunity to meet senior GOU officials and their Uzbekistani business counterparts.

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 is still 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 2020, President Mirziyoyev ordered measures to reduce government involvement in the economy, including enforcement of an antimonopoly compliance system in SOE operations, reorganization for optimized corporate governance of 39 SOEs, and privatization of 548 SOEs and state-owned assets. This ambitious SOE reorganization program covers large state-owned monopolies, including the largest mining company, national monopolies in the energy sector, the information, technology and communications sector and postal operators, chemical plants, national air and railway companies, automotive companies, banks, insurance firms, and other formerly off-the-table state assets. President Mirziyoyev formally ended SOE Uzpaxtasanoat’s monopoly over the raw cotton trade, giving private investors the right to create integrated value chain systems, called clusters, in the cotton sector. The clusters allow businesses to manage cotton cultivation, harvesting, processing, and exports independently of SOE-run supply chains. 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 2020) 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 Uzbekistan’s law, local companies with at least 15% foreign ownership can qualify as having foreign investment. The minimum fixed charter-funding requirement for a company with foreign investment is 400 million s’om ($1 equals about 10,600 s’om as of March 2021). The same requirement for companies registered in the Republic of Karakalpakstan and the Khorezm region is 200 million s’om. Minimum charter funding requirements can be different for business activities subject to licensing. For example, the requirement for banking activities is 100 billion s’om; for activities of microcredit organizations – 2 billion s’om; for pawnshops – 500 million s’om; for production of ethyl alcohol and alcoholic beverages – 10,000 Base Calculation Rates (BCR) (one BCR equals 245,000 s’om or about $23, as of March 2021); lotteries – 200 million s’om; and for tourism operators – 400 BCRs. Foreign investment in media enterprises is limited to 30%.

The government may scrutinize foreign investment, with special emphasis on sectors of the economy that it considers strategic, such as mining, energy, transportation, banking and telecommunications. 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, such as a list created in 2020 of several hundred imported items banned from the public procurement process. 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 has been growing by over 200,000 people per year over the past decade. 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 12 industrial, seven pharmaceutical, two agricultural, and one tourism-focused free economic zones (FEZ), as well as 64 special small industrial zones (SIZ) in all regions of the country 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 BCR for local investors and 10 BCR for foreign investors (one BCR equals 245,000 s’om, or about $23, as of March 2021). Applicants receive a 50% 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% foreign-owned, or as an “enterprise with foreign investment” (EFI) if more than 15% foreign-owned and holding a minimum charter capital of 400 million s’om (about $38,000 as of March 2021). 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. The Ministry of Investments and Foreign Trade coordinates outward investments mainly in the form of bilateral economic cooperation engagements. 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, manufacturing, transportation, 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.

Uzbekistan has signed bilateral investment agreements with 51 countries, though the 1994 agreement signed with the United States has not been ratified, and those with several other countries, including Turkey, Bahrain, Belarus, and South Korea, have not yet entered into force. In 2004, Uzbekistan and Russia signed a Strategic Framework Agreement with free trade and investment concessions, and an alliance agreement in 2005. Uzbekistan has signed bilateral free trade agreements with 11 CIS countries (Russia, Belarus, Ukraine, Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Turkmenistan and Tajikistan). In 2004, Uzbekistan and Ukraine agreed to remove all bilateral trade barriers. Uzbekistan joined the CIS Free Trade Zone Agreement in 2014. In 2020, Uzbekistan assumed observer status in the Eurasian Economic Union (EAEU). In December 2015, the GOU officially announced that Uzbekistan would not join the Free Trade Zone within the Shanghai Cooperation Organization (SCO). See UNCTAD’s database for more details: https://investmentpolicy.unctad.org/international-investment-agreements/by-economy.

Since its independence in 1991, Uzbekistan has signed double taxation agreements with 55 countries, of which three have not yet entered into force. The U.S. Internal Revenue Service (https://www.irs.gov/businesses/international-businesses/uzbekistan-tax-treaty-documents) considers Uzbekistan to be one of the former Soviet republics now covered by a taxation treaty with the Commonwealth of Independent States (CIS), as the successor to the dual taxation treaty signed between the United States and the Union of Soviet Socialist Republics (USSR) (signed in 1973 and entered into force in 1976). However, the Government of Uzbekistan argues that this agreement cannot be considered in effect and has proposed signing a new double taxation treaty. Uzbekistan officially presented a draft of a new dual taxation treaty to the U.S. government in December 2017. In 2015, Uzbekistan and the United States signed the Intergovernmental Agreement to Improve International Tax Compliance with respect to the United States Information Reporting Provisions, commonly known as the Foreign Account Tax Compliance Act (FATCA). The FATCA agreement entered into force in July 2017.

Reform of the taxation system, which for many years had been considered discouragingly burdensome and inadequate, was among the most desired reforms by the new administration. President Mirziyoyev first announced tax reform initiatives in 2016, and active discussions on their parameters started in 2017. The new Tax Code went into effect on January 1, 2020. The tax reform has led to a notable decrease of the tax burden to businesses and simplification of tax reporting. Key changes included: the 8% social security contributions and all mandatory payments to various state funds were abolished; corporate and individual income taxes were reduced from a progressive rate of up to 24% to a single flat rate of 12%; the income tax rate on dividends was reduced from 10% to 5%; the VAT tax rate also decreased from 20 to 15%; and 13 forms of tax inspections were consolidated into two.

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 2019), 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 simplify and streamline the legislation, Parliament and the GOU adopted 35 laws and over 100 regulations on amendments to the legislation, which abolished nearly 1000 laws and regulations in 2020. For example, the Law on Changes in the Legislation for the Reduction of Bureaucracy (ZRU-638 of September 28, 2020) and the Presidential Decree on Improvement of the Business Environment through Systematic Review of Irrelevant Legislation (UP-6075 of September 27, 2020) abolished and simplified more than 600 outdated decrees, resolutions and regulations. 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.

Parliament and GOU agencies publish some draft legislation for public comment, including draft laws, decrees and resolutions on the government’s development strategies, tax and customs regulation, and legislation to create new economic zones. Public review of the legislation is available through the website https://regulation.gov.uz.

Uzbekistan’s laws, presidential decrees, and government decisions are available online. 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, interpretations, 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. In 2020, Uzbekistan adopted several laws and regulations to simplify and streamline business sector legislation and regulations, including eight decrees on providing additional support to the economy and entrepreneurs affected by the pandemic, and two decrees on the improvement of anti-corruption measures. In May 2020, the GOU said it planned to present 24 laws to the Parliament by the end of the year (Resolution 278 of May11, 2020), but its implementation was slowed by the pandemic. In general, 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 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.

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 the 2018-2021 fiscal years (FY) within the framework of Budget for Citizens project. In 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. The Law on the State Budget for 2021 introduced amendments to the Administrative Code, which establishes fines for senior officials of ministries and departments who fail to publish reports on the execution of budgets, off-budget funds and state trust funds, or commit other violations that undermine the transparency of the budget process.

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 began in 2020.

In line with the December 2019 Law on the State Budget, in 2020, government agencies, state trust funds, and the Reconstruction and Development Fund of Uzbekistan (FRDU) published quarterly reports on: distribution of budget funds by subordinate budget organizations; financial statements; implementation of budget funded projects; and all major public procurements. By law, such reports must be published within 25 days after the end of the reporting quarter. The GOU uses 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 and FY2020, 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. In 2020, Uzbekistan assumed 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 2014, 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 2020), and several other regulations.

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.

In December 2020, President Mirziyoyev approved additional measures to eliminate corruption in the courts and ensure the independence of judges (Decree UP-6127). Starting from February 1, 2021, these measures include the introduction of a transparent selection of judicial candidates with the process streamed online, electronic systems for assessment of their qualifications and performance evaluation. The Decree also creates new inspections for combating corruption in the judicial system.

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)
• Law on Public-Private Partnership (ZRU 537, 2019)

In 2020, Parliament, the President and the government of Uzbekistan adopted 62 laws, 125 decrees, and over 4,000 resolutions, regulations, and other judicial decisions. New legislation that could affect foreign investors includes:

The Law on the State Budget for 2021, (ZRU-657, adopted December 25, 2020). The law establishes Uzbekistan’s macroeconomic outlook and consolidated state budget parameters for FY 2021, and budget targets for 2022-2023. It also amends some tax regulations and introduces additional measures to improve fiscal transparency.

The Law on Innovative Activities (ZRU-630, adopted July 24, 2020). The law determines subjects and objects of innovation and establishes a conceptual framework with legal interpretation of innovation-related activities and other relevant terms. The text is available in English: https://lex.uz/docs/5155423.

The Law on Special Economic Zones (ZRU-604, adopted February 17, 2020). The law sub-categorizes special economic zones (SEZ) into free economic zones, special scientific and technological zones, tourism-recreational zones, free trade zones, and special industrial zones. It sets both general rules for SEZs and specific rules for each category of zones, with provisions for the creation, terms of operation, liquidation, management, customs regulation, taxation, land use, and the legal status of participants. The law also establishes local content requirements, such as a requirement to have at least 90% of the labor force sourced locally. The text is available in English: https://lex.uz/docs/4821319.

The Law on State Fees (ZRU-600, adopted January 6, 2020). The law specifies the state fee as a mandatory payment charged for the commission of legally significant actions and (or) the issuance of documents (including consular and patent) by authorized institutions and (or) officials. It also defines the rates of the fees.

The Law on Joining the International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto, May 18, 1973, as amended on June 26, 1999) (ZRU-654, adopted December 12, 2020).

The Law on Ratification of the Statute of the Hague Conference on Private International Law (The Hague, October 31, 1951) (ZRU-605, adopted March 2, 2020).

Presidential Decree on Measures to Reduce the Grey Economy and Improve the Efficiency of Tax Authorities (UP-6098, adopted October 30, 2020). The decree simplifies taxation for small businesses, real estate developers, and employers in the construction sector.

Presidential Decree on Measures for Accelerated Reform of Enterprises with State Participation and Privatization of State Assets (UP-6096, adopted October 27, 2020). The decree orders the optimization and transformation of the structure of 32 large SOEs, the introduction of advanced corporate governance and financial audit systems in 39 SOEs, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector.

Presidential Decree on Improvement of Licensing and Approval Procedures (UP-6044, adopted August 28, 2020). The decree cancels 70 (out of 266) licensing requirements and 35 (out of 140) permit requirements.

Presidential Decree on Measures for Development of the Export and Investment Potential of Uzbekistan (UP-6042, adopted August 28, 2020). The decree, along with GOU Resolution PKM-601 of October 6, 2020, orders the creation of the Governmental Commission for the Development of Export and Investment. The Commission, headed by the Deputy Prime Minister for Investments and Foreign Economic Relations, will coordinate investment attraction and ensure implementation of investment projects.

Presidential Decree on Measures for Development of a Competitive Environment and Reduction of State Participation in the Economy (UP-6019, adopted July 7, 2020). This document elevates the status of the Anti-Monopoly Committee and introduces requirements to improve the transparency of public procurements, among other provisions.

Presidential Decree on Cancellation of some Tax and Customs Privileges (UP-6011, adopted June 6, 2020). This decree abolished privileged groups’ exemptions from paying social tax and says that VAT exemptions for services procured from foreign entities shall not apply to services provided by foreign entities operating in Uzbekistan through permanent establishments. It also abolishes VAT privileges in compliance with the Tax Code and other legislation.

Presidential Decree on Banking Sector Reform Strategy (UP-5992, adopted May 12, 2020). The decree approves a five-year strategy for reforming the banking sector with a goal to reduce the state share in its capital from the current 85% to 40%. It also orders the privatization of six large state-owned banks in close cooperation with international financial institutes.

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 Antitrust 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 2020.

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 alleged 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 oftenfaced 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).

By law, foreign arbitral awards or other acts issued by a foreign country can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. According to new Law on International Commercial Arbitration (which will enter into force by September 2021), the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral agreements of Uzbekistan with foreign states and multilateral agreements.

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.

Since President Mirziyoyev came to power, investment disputes have been more limited in scope, but still exist: 1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward.

1) Following a two-year delay, during which the government refused to honor the terms of a power purchase agreement signed in 2018, stating that adhering to the terms would violate its fiduciary duty, the government agreed to honor the original contract terms. The project is now moving forward. 2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government’s new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market.

2) The government unilaterally cancelled an agricultural equipment purchase contract on the grounds that the imported equipment was more expensive than it had thought and did not meet the government’s new requirements for local content. The company has stated that it considers the matter closed and is focusing on bringing other products to the market. 3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment.

3) A chemical company in partnership with a SOE alleged that the SOE breached its contract obligations and violated Uzbekistani law by withholding dividends, intending to create leverage to buy out the U.S. investor at a reduced price. The U.S. firm has stated it is willing to leave, as long as it earns a reasonable return on its investment. 4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court.

4) An agricultural firm reported its farmland, on which it held a 99-year lease, had been illegally reassigned to other agricultural producers by the local government. Post assisted the company in raising its complaints to the attention of the Presidential Administration and the Supreme Court. 5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.

5) An invoice on a refinery remains unpaid, following the suspension of work on the project, despite the U.S. firm having passed the contractual threshold for work provided that would require payment.

Post is aware of a number of cases of commercial or investment disputes involving foreign investors which occurred nearly a decade ago.  These have included alleged asset seizures, alleged expropriations, or liquidations; lengthy forced production stoppages; pressure to sell off foreign shares in joint ventures; and failure to honor contractual obligations.  These cases have involved a variety of sectors, including food production, mining, telecommunications, agriculture, and chemicals.  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.

In September 2012, the Tashkent City Criminal Court seized the assets of a cellular telecom provider for financial crimes.  An appeals court reversed this decision in November 2012, but upheld the $600 million in fines imposed.  The company wrote off its total assets in Uzbekistan of $1.1 billion and left the market.  In 2013, the government transferred all of the company’s assets to a state-owned telecom operator after twice trying unsuccessfully to liquidate them.  In 2014, the company dropped legal proceedings against Uzbekistan and signed a settlement.

In October 2011, the government halted the production and distribution operations of a brewery owned by the Danish firm Carlsberg during a dispute over alleged tax violations.  The interruption of business lasted 18 months before the company re-opened.

Earlier in 2011, the government liquidated the Amantaytau Goldfields, a 50-50 joint venture of the British company Oxus Gold and an Uzbekistani state mining company.

In March 2011, government authorities also seized a large chain grocery store and approximately 50 smaller companies owned by Turkish investors.

By the Law on International Commercial Arbitration (will enter into force by September 2021), foreign arbitral awards, including those issued against the government, regardless of the country in which it was made, are recognized as binding, and must be enforced upon written application to the court. Foreign arbitral awards or other acts issued by a foreign country also can be recognized and enforced if Uzbekistan has a relevant bilateral or multilateral agreement with that country. If international arbitration is permitted, awards can be challenged in domestic courts.

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 and approved in February 2021, will enter into force by September 2021. It states that contractual and non-contractual commercial disputes can be referred to international commercial arbitration by agreement of the parties. The parties can determine the number of arbitrators and the language or languages that can be used in the arbitration. The interim measure prescribed by the arbitration court shall be recognized as binding. The award must be made in writing.

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.

The Law on International Commercial Arbitration was approved by Parliament in 2020 and signed by the president in February 2021. It will enter into force by September 2021. According to the law, the arbitral award, regardless of the country in which it was made, is recognized as binding, and must be enforced upon submission of a written application. Implementation of the law shall be in full compliance with existing bilateral and multilateral agreements of Uzbekistan with foreign states.

Most investment disputes involving Uzbekistan’s state-owned enterprises (SOEs) that were brought into Uzbekistan’s have either been decided in favor of the SOEs or have been settled out of court. 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, in February 2020 it was finally replaced by the Law on Special Economic Zones (SEZ) (ZRU-604), which entered into force May 19, 2020 (the text is available in English: https://lex.uz/docs/4821319 ). 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 following activities are prohibited within the SEZs:

• Businesses that violate environmental and labor protection standards.
• Businesses related to weapons and ammunition.
• Businesses related to nuclear materials and radioactive substances.
• Production of alcohol and tobacco products.
• Rawhide processing, livestock corrals, or slaughter of animals.
• Production of cement, concrete, cement clinker, bricks, reinforced concrete slabs, coal, lime and gypsum products.
• Processing, decomposition, incineration, gasification, chemical treatment, final or temporary storage or burial underground of all types of waste.
• Placement of oil refineries, nuclear power plants, nuclear installations, or radiation sources, or points and installations designed for storage, disposal, and processing of nuclear fuel, radioactive substances, and waste, as well as other radioactive waste.

The first Free Industrial and Economic Zone (FIEZ) was created in 2008 in the Navoi region. By the end of 2020, the GOU had created 12 industrial, seven pharmaceutical, two agricultural, and one tourism free economic zones, as well as over 143 special small industrial zones in all regions of the country. According to official statistics, about 380 investment projects have been implemented in these zones, creating nearly 31,000 new jobs.

Performance and Data Localization Requirements

The GOU considers attraction of foreign investments as one of the key instruments for addressing rural poverty and growing unemployment in Uzbekistan.

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. The Law on Special Economic Zones (ZRU-604) requires having at least 90% locally sourced labor force in projects operating within special economic and small industrial zones. 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% of the total number of employees, and additional foreign personnel can be hired only if there is no qualified local labor.

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.

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.

The government welcomes foreign investors mainly in the areas of localization, building local production capacities, and developing export potential. To support local producers, the GOU introduced a rule (GOU Resolution PKM-41, adopted January 29, 2021), which says import contracts of enterprises and joint ventures with at least a 50% state share exceeding 50,000 BCRs ($1,155,660 as of March 2021) are subject to mandatory review by the supervisory boards of these entities on a quarterly basis. The government also bans import of 529 categories of goods and certain services through public procurement processes. The list includes food products, construction materials, fertilizers, industrial products, textile and clothing products, footwear and leather goods, furniture, household goods, household electrical appliances, vehicles, paper and cellulose products, medical products, and others. The GOU also has established a procedure for public procurement of these imported goods through the portal website of the Center for Electronic Cooperation under the Ministry of Economic Development and Poverty Reduction.

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.

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% 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 s’om (about $38,000 as of March 2021).

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.

As of now, the legislation of Uzbekistan prevents or restrict companies from freely transmitting customer or other business-related data outside the country.

Transfers of technology or proprietary information are not required by the law and can be the subject of an agreement 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.

However, according to Article 55 of Uzbekistan’s Constitution, the land, its subsoil, waters, flora and fauna and other natural resources are national wealth, subject to rational use and are protected by the state. The Land Code also states that the land is state property (Article 16). Contradictions in the legislation are still to be resolved.

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) as critical to its economic goals. As Uzbekistan prepares for accession to the World Trade Organization (WTO), its leaders have further reiterated the importance of 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) (AIP, http://www.ima.uz/ ) in February 2019.

Uzbekistan’s Customs Code, entered into force April 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 its 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 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 recent years 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.

In December 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. In February 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 2020. In 2020, the AIP recorded 111 cases of trademark violations and many cases of trading counterfeit goods, including about 540 cases of selling counterfeit alcohol. The agency also recorded production and sale of counterfeit Head & Shoulders products (a brand owned by Procter & Gamble) and Mars candy bars. The Board of Appeal had reviewed cases of five American companies (Colgate-Palmolive Company, Under Armour Inc., Delta Hotels by Marriott, Apple Inc., and Emerson) and issued rulings in their favor.

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 U.S. 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, listed in USTR’s notorious market report.

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.

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 of October 22, 2019) fully liberalized currency operations, current cross-border and capital movement transactions.

In 2019, the GOU considerably simplified repatriation of capital invested in Uzbekistan’s industrial assets, securities, and stock market profits. According to the law (ZRU-531), 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.

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 January 2021, 32 commercial banks operate in Uzbekistan. Five commercial banks are state-owned, 13 banks are registered as joint-stock financial organizations (eight of which are partly state-owned), seven banks have foreign capital, and seven banks are private. Commercial banks have 884 branches and a network of exchange offices and ATMs throughout the country. State-owned banks hold 84% of banking sector capital and 85% of banking sector assets, leaving privately owned banks as relatively small niche players. The nonbanking sector is represented by 63 microcredit organizations and 64 pawn shops.

In May 2020, President Mirziyoyev approved a five-year strategy for reformation of the banking sector to address existing weaknesses of the banking sector, such as excessive share of state assets, insufficient competition, poor quality of corporate governance and banking services in comparison with best international standards, as well as a relatively low penetration of modern global technologies. The goal of the strategy is to reduce the state share in the sector from the current 84% to 60% and to increase the market share of the non-banking sector from current 0.35% to 4%. The government will privatize its shares in six banks and facilitate modernization of banking services in remaining state-owned banks.

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. Moody’s notes high resilience of the country’s banking system to the impact of the COVID pandemic in comparison with other CIS countries. The average rate of capital adequacy within the system is 18.4%, and the current liquidity rate is 67.4%. 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.

According to the Central Bank of Uzbekistan, the share of nonperforming loans out of total gross loans is 2.1% (as of January 1, 2021). The average share of nonperforming loans in state-owned banks is about 2.1% and 1.9% in private banks. A majority of Uzbekistan’s commercial banks have earned “stable” ratings from international rating agencies.

As of January 1, 2021, the banking sector’s capitalization was about $5.8 billion, and the value of total bank assets in the whole country was equivalent to about $37 billion. The three largest state-owned banks – the National Bank of Uzbekistan, Asaka Bank, and Uzpromstroybank – hold 46% of the banking sector’s capital ($2.7 billion) and 47.7% of the assets ($17.5 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 seven banks with foreign capital operating in the market, and five 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 (10,600 s’om per one U.S dollar as of March 2021). On February 15, 2015, trade sessions at the local FX Exchange transferred from the previous “fixing” methods to the combination of “call auction” and bilateral continuous auctions (“matching”). The CBU publishes the official exchange rate of foreign currencies at 1600 every business day for accounting, statistical and other reporting purposes, as well as for the calculation of customs and other mandatory payments in the territory of Uzbekistan.

After the almost 50% devaluation of the national currency in September 2017, the exchange rate had been relatively stable in 2018 with an average of 2.4% annual devaluation. In 2019, the devaluation of s’om accelerated to 14%, although the CBU reported it had made $3.6 billion in interventions in the forex market to support the local currency. In 2020, the annual devaluation was held below 10%. The local currency’s relative stability in 2020 was supported by reduced imports and strong FX reserves ($34.9 billion by January 1, 2021).

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. In 2020, the share of SOEs in the GDP was about 55%, and taxes paid by 10 largest SOEs contributed 63.3% of total state budget revenues.

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 .

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.

In certain sectors, private businesses have limited access to commodities, infrastructure, and utilities due to legislation or licensing restrictions. They also face more than the usual number of bureaucratic hurdles if they compete with the government or government-controlled firms. 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. There are cases when gaps in the legislation are used to ignore the rights of private shareholders (including minority shareholders and holders of privileged shares) in joint stock companies with a state share.

A May 2019 IMF Staff Report concluded 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 GOU has officially recognized the problem. President Mirziyoyev said strong involvement of the state in the fuel and energy, petrochemical, chemical, transport, and banking sectors was hampering their development. In 2020, he issued several decrees and resolutions to improve the competition environment and reduce the dominance of SOEs in the economy. New legislation has strengthened the role of the Anti-Monopoly Committee, overturned over 600 obstructing laws and regulations, abolished 70 (out of 266) types of licenses and 35 (out of 140) permits for various types of businesses. The Presidential decree on SOE reformation and privatization (adopted October 27, 2020) orders 32 large SOEs to optimize and transform their corporate structure, 39 SOEs to introduce advanced corporate governance and financial audit systems, the privatization of state-owned shares in 541 enterprises through public auctions, and the sale of 15 public facilities to the private sector. The reform covers large SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. Another decree orders large-scale privatization in the banking sector. In 2020, the government started projects to privatize six state-owned banks in cooperation with international financial institutions. In addition to privatization efforts, the GOU intends to attract private investments to the public sector through promotion of public-private partnerships (PPP). The new law on PPP, adopted in 2019, and a number of follow-up regulations introduced in 2020 create a more favorable environment for such partnerships.

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. In September 2020, the IMF staff noted, “The crisis should not delay the reform of the state-owned banks and state-owned enterprises—including by improving their governance—and the agricultural sector. As the crisis abates, the authorities should also continue with reducing the role of the state in the economy, opening up markets and enhancing competition, and improving the business environment.”

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.

The new public sector optimization policy was first announced in 2018. A special working group headed by the Prime Minister performed careful due diligence on about 3,000 enterprises with state shares and developed proposals for their reorganization and privatization. Based on the results, the GOU approved a program that covers over 620 SOEs in the energy, mining, telecommunications, transportation, construction, chemical, manufacturing, and other key industries. The program foresees privatization of 541 state-owned enterprises, six state-owned banks, and the sale of 15 public facilities to the private sector. In a longer-term perspective, the government plans to privatize over 1,115 SOEs and offer about 50 SOEs for public-private partnership projects. Companies that operate critical infrastructure and enterprises that qualify as companies of strategic importance will remain in full state ownership.

Senior government officials see privatization and public-private partnerships as a solution to improve the economic performance of inefficient large SOEs and as an instrument to attract private investments. 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 by introducing advanced corporate governance methods and restructuring the organization and finances of underperforming SOEs.

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. 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.

C. Do these programs have a public bidding process?  If so, is it easy to understand, non-discriminatory and transparent? Please provide a link to the relevant government website.

Privatization programs officially have a public bidding process. The legislation and regulations adopted in 2020 for acceleration of the privatization program are intended to ensure the transparency and fairness of the process, as well as facilitating greater involvement of international financial institutions and foreign experts as consultants. In the past, however, privatization procedures have been confusing, discriminatory, and non-transparent.  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. The State Assets Management Agency of Uzbekistan coordinates the privatization program (https://davaktiv.uz/en/privatization).

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.

Historically, the level of forced labor involved in the annual cotton harvest (September – November) was high, as citizens were pressed into service in the fields to meet government targets for cotton production. However, much has changed since President Mirziyoyev took office and the GOU has reversed course and worked hard to eradicate forced labor from the harvest and move away from Soviet-era cotton production targets. According to the International Labor Organization (ILO) 2020 monitoring reports, the total percentage of the approximately two million pickers recruited for the 2020 harvest who experienced some coercion fell from 6% to 4% – a year-over-year reduction from approximately 102,000 to 80,000 pickers.

Efforts to eliminate trafficking in persons and forced labor leaped forward in 2020 with the government’s February 2020 decision to end the state quota system for cotton. Dismantling the complex quota system required further development of the cluster system, first introduced in 2018 as a means to reduce forced labor. By the end of 2020, the number of clusters (privately operated, vertically integrated, cotton textile producing enterprises, including those with foreign capital) in Uzbekistan exceeded 90 and the percentage of land cultivated by or on behalf of private businesses grew considerably. With increased privatization of cotton production, the government ceded decisions about labor to private businesses.

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. In 2018, the GOU approved corporate governance rules for SOEs. Their introduction is in progress.

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. Some international organizations, like the Asian Development Bank, provide technical and advisory assistance to the government and local enterprises.

Uzbekistan adopted its Corporate Governance Code in 2015 as a voluntary requirement. The same year, the GOU set corporate governance requirements for joint-stock companies (Decree UP-4720).

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 prohibits the private security industry or use of private security companies within the country.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

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 June 29, 2020, Presidential Decree UP-4761 created an Anti-Corruption Agency. Subordinate to the president and reporting to Parliament, the agency is responsible for developing and implementing state policy to prevent and combat corruption. Earlier in 2019, the GOU adopted the 2019-2021 Anti-Corruption Program to strengthen the independence of the judiciary system, develop a fair and transparent public service system requiring civil servants to declare their incomes and establishing mechanisms to prevent conflicts of interest, and facilitate civil society and media participation in combating corruption.

Along with the Anti-Corruption Committee, the Prosecutor General’s Office of Uzbekistan (PGO) is the government arm tasked with fighting corruption. Since Mirziyoyev took office in September 2016, the number of officials prosecuted under anti-corruption laws has increased. According to official statistics, roughly 2,300 corruption-related crimes were registered in 2018-2019. In January-September 2020, Uzbekistani law enforcement agencies initiated 838 corruption related criminal cases and prosecuted 647 government officials, including, six tax collectors, 57 healthcare managers, 89 police officers, 140 education officials, 184 SOE managers, and seven deputy governors. By preliminary assessments, the damage caused by budget embezzlement crimes in 2020 exceeded $24 million, while corruption cost over $20 million. Punishment has varied from fines to imprisonment with confiscation of property.

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. In May 2020, the GOU published a new draft of the Law on State Civil Service. It requires obligatory income and asset declaration by all civil servants and their families. The requirement applies to the president, deputies of the Legislative Chamber, members of the Senate, the Central Election Commission, the Ombudsman, deputies of the Parliament of the Republic of Karakalpakstan and local representative bodies of state power, as well as judges. The draft version caused heated discussions among the public and government officials. In October 2020, Director of the Anti-Corruption Agency stated that all waivers must be excluded from the draft of the law. The law is still under consideration.

C. Does the country/economy have laws or regulations to counter conflict-of-interest in awarding contracts or government procurement?

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.

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.

Corruption is still a notable factor in the economy and social sphere of Uzbekistan due to the insufficiency of law enforcement practices and relatively low wages in the public sector. Recognizing the issue, the country’s leadership has initiated legislative and institutional reforms, which has already raised Uzbekistan’s rating in Transparency International’s Corruption Perceptions Index from 157 (out of 180 rated countries) in 2017 to 146 in 2020. 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 Anti-Corruption Agency, 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 the Anti-Corruption Agency of Uzbekistan:

• Address: 8A, Shota Rustavely St., 100070, Tashkent, Uzbekistan
• Website: https://anticorruption.uz/en/item/report-corruption
• Hotline telephone numbers: +998(71) 202-0400 (Ext 709), 271-1007
• Email: info@unticorruption.uz

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, 202-0486

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, 262-9245б 207-0443
• E-mail: info@adliya.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 2020, the population of Uzbekistan increased by 653,113 people (1.8%) to 34,558,913. According to publicly available statistics, about 30% of the population is under 16 years old; 60% is working age (16-60); and 10% are 60 years old and older. Uzbekistan’s State Statistics Agency reports indicate the total number of laborers, as of January 1, 2021 was 19,142,300 people (0.7% increase year-on-year). 13,239,600 of them were considered employed (0.2% increase year-on-year). The share of the non-agricultural workforce is about 73.1%. There are about two million Uzbekistani citizens who work abroad as labor migrants. The official number of unemployed is 1.55 million people, or 10.5%. Note: The accuracy of given statistics is based on records of the residents’ registration offices and studies conducted by the Ministry of Labor, but does not always reflect the actual situation in the country. The next national census in Uzbekistan is expected in 2023, while the last one was in 1989. End note.

It is relatively easy to find qualified employees in Uzbekistan, and salaries are low by Western standards. According to both government and independent analysts’ statistics, about 12-15% of the population live below the poverty level, and approximately 48% of the employed population have low-productivity and low-income jobs. Accordingly, Uzbekistan is one of the largest suppliers of labor migrants among former Soviet Union republics.

At 99%, 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. Businesses registered within special economic and industrial zones must have at least 90% locally sourced labor force.

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 special economic and industrial 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 37,659 primary organizations and 14 regional trade unions, with official reports of 6.1 million 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;

• 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% 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 and petrochemical industries and workers involved in various public projects conducted strikes, protesting against salary payment delays and demanding improvement of their working conditions. Reportedly, ministerial and local government officials met with strike initiators and promised to resolve 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. 17 conventions and one Protocol of the UN’s International Labor Organization (ILO) are officially in force in Uzbekistan:

17 conventions and one Protocol 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;
• Labor Inspection Convention;
• Employment Policy Convention;
• Labor Inspection (agriculture) Convention;
• Tripartite Consultation (International Labor Standards) Convention;
• Forty-Hour Week Convention;
• Holidays with Pay Convention;
• Maternity Protection Convention [Revised];
• Workers’ Representatives Convention;
• Collective Bargaining Convention; and
• Protocol of 2014 to the Forced Labor 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 2020, Uzbekistan adopted a number of labor related laws and regulations, including:

• The Law on Employment of the Population (ZRU-642, adopted October 20, 2020, entered into force January 21, 2021). This law applies to citizens of Uzbekistan, foreign citizens, and individuals without citizenship, as well as foreign citizens permanently residing or employed in the country. The law obliges government bodies to pursue a policy of developing the labor market and ensuring employment, developing family entrepreneurship, handicrafts, agricultural production on personal subsidiary plots, and home-based employment. The law establishes the status of a self-employed person, the procedure for their taxation, and their rights to have benefits. The law also specifies the rights of unemployed people.

• The Law on Persons with Disabilities (ZRU-641, adopted October 15, 2020, entered into force January 16, 2021). The law defines the rights of persons with disabilities, and stipulates issues of their education, vocational training, advanced training, and employment.

• The Law on Ratification of the Statute of the Hague Conference on Private International Law (The Hague, October 31, 1951) (ZRU-605, adopted March 2, 2020, entered into force March 3, 2020).

• The Law on Special Economic (ZRU-604, adopted February 17, 2020). The law establishes local content requirements, such as a requirement to have at least 90% labor force sourced locally.

• The Law on Amendments to the Criminal Code and the Administrative Code of Uzbekistan (ZRU-673, adopted February 12, 2021). The amendments establish direct criminal liability for child forced labor in any form.

* Source for Host Country Data: BEA and the World Bank