Since its independence in 1991, Kazakhstan has made significant progress toward creating a market economy and has attracted significant foreign investment given abundant mineral, petroleum, and natural gas resources. As of January 1, 2021, the stock of foreign direct investment in Kazakhstan totaled USD 166.4 billion, including USD 38 billion from the United States, according to official statistics from the Kazakhstani central bank.
While Kazakhstan’s vast hydrocarbon and mineral reserves remain the backbone of the economy, the government continues to make incremental progress toward diversification. Kazakhstan’s efforts to remove bureaucratic barriers have been moderately successful, and in 2020 Kazakhstan ranked 25 out of 190 in the World Bank’s annual Doing BusinessReport. The government maintains an active dialogue with foreign investors through the President’s Foreign Investors Council and the Prime Minister’s Council for Improvement of the Investment Climate. Kazakhstan joined the World Trade Organization (WTO) in 2015. In September 2020, President Tokayev announced a New Economic Course – a reform agenda that, if implemented, aims to improve the investment climate.
Despite institutional and legal reforms, concerns remain about corruption, bureaucracy, arbitrary law enforcement, and limited access to a skilled workforce in certain regions. The government’s tendency to increase its regulatory role in relations with investors, to favor an import-substitution policy, to challenge the use of foreign labor, and to intervene in companies’ operations, continues to concern foreign investors. Foreign firms cite the need for better rule-of-law, deeper investment in human capital, improved transport and logistics infrastructure, a more open and flexible trade policy, a more favorable work-permit regime, and a more customer-friendly tax administration.
In July 2018, the government of Kazakhstan officially opened the Astana International Financial Center (AIFC), an ambitious project modelled on the Dubai International Financial Center, which aims to offer foreign investors an alternative jurisdiction for operations, with tax holidays, flexible labor rules, a Common Law-based legal system, a separate court and arbitration center, and flexibility to carry out transactions in any currency. Since 2019 the government has pursued a policy of using the AIFC as a regional investment hub to attract foreign investment to Kazakhstan. The government has recommended foreign investors use the law of the AIFC as applicable law for contracts with Kazakhstan. . In January 2021 the AIFC on behalf of Kazakhstan joined the Central Asia Investment Partnership initiated by the U.S. International Development Finance Corporation (DFC).
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.
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.
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.
8. Responsible Business Conduct
Entrepreneurs, the government, and non-governmental organizations are aware of the expectations of responsible business conduct (RBC). Kazakhstan continues to make steady progress toward meeting the OECD Guidelines for 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.
10. Political and Security Environment
There have been no reported incidents of politically motivated violence against foreign investment projects, and although small-scale protests do occur, large-scale civil disturbances are infrequent. 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.
11. Labor Policies and Practices
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.
Against the backdrop of the worst economic downturn since 1991, a looming debt crisis, and a deteriorating COVID-19 situation in the region, the Kyrgyz Republic faces daunting prospects in 2021 to stabilize the economy and recuperate investor confidence. In October 2020, the toppling of the government under former President Soorenbai Jeenbekov in a populist uprising against vote-buying and administrative corruption created the path for the installation of a populist administration under President Sadyr Japarov, who quickly reorganized the government and enacted sweeping constitutional reforms. The Japarov administration, while maintaining its partnerships with key economic partners Russia and China, also seeks financial support and foreign investment from the United States and other Western countries to support economic recovery. However, under the auspices of a sweeping anti-corruption campaign, detentions and aggressive tactics against private businesses have increased, raising serious concerns among foreign investors about the security of their investments. In May 2021, the government levied a $3 billion fine against the country’s largest foreign investor, Centerra Gold Inc, and installed external management for a three-month period. The government and Centerra Gold Inc. have entered into arbitration proceedings, but the matter will likely have long-lasting repercussions on the country’s already challenging investment climate.
The Kyrgyz economy significantly contracted by 8.6 percent of GDP in 2020, mainly due to decreases in construction, tourism, and non-gold exports. Total inbound foreign direct investment in 2020 shrank by over 50 percent, due to reduced inflows across the board among the country’s main investors: Canada, China, the United Kingdom, and Russia. The International Monetary Fund projected growth is expected to rebound in 2021 and with a full recovery to pre-pandemic levels by 2023, barring a severe resurgence of COVID-19 or political turbulence. The government’s focus on reducing public debt, which is currently 68 percent of GDP, may restrict fiscal space in the short to medium term to move forward on public investments and public private partnerships approved in 2019.
Corruption and government gridlock are major impediments to prospective investment and business development. Since February, the new government has undergone a mass re-structuring of ministries and state agencies, including re-organization of state bodies for economic policy formation such as the State Committee for Information and Communications Technology and the Investment Promotion and Protection Agency, as well as law enforcement oversight by disbanding the Financial Police. Until permanent leadership is assigned for new state bodies, the new government’s short-term priorities and internal capacity continue to be in a state of transition, which may increase some administrative costs for doing business. While the legal and regulatory framework is set up to be in accordance with international norms, poor implementation and weak enforcement, particularly with respect to intellectual property rights protection, and transparency in extractive licensing, are endemic problems. Since October 2020, President Japarov’s anti-corruption campaign resulted in a significant uptick in business investigations and detentions of business executives on criminal charges. Although the government extended the moratorium on business inspections until January 1, 2022, state security services are increasingly involved in economic crime cases, raising concerns about deteriorating transparency and oversight of business regulations.
The Kyrgyz Republic remains a frontier market, oriented towards higher-risk investors seeking to capitalize on the country’s minimal market entry barriers, lack of restrictions on foreign ownership, and export-oriented tax incentives to establish a foothold in Central Asia. Although FDI has historically targeted mining-related sectors, finance, and petroleum product manufacturing, the new government’s stated commitment to develop the country’s digital economy and to enhance regional trade integration presents numerous long-term investment opportunities in agribusiness and food processing, ICT infrastructure, energy, and transit and customs. The Kyrgyz Republic’s participation in the newly launched CASA-1000, a regional electricity transmission project, may increase the country’s export capacity and investment opportunities in the power sector. This also may catalyze political will to pursue energy tariff reform and leverage new investment with the country’s largely untapped hydro resources. In order to unlock these opportunities, it will be contingent on the new government to prevent backsliding in structural reforms to increase competitiveness and transparency in the investment climate to unlock these opportunities.
*Some information in the report may be subject to change upon date of publication and will be updated in the ICS 2022.
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.
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.
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.
8. Responsible Business Conduct
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).
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.
11. Labor Policies and Practices
There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens find 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.
Tajikistan is a challenging place to do business but presents potential high-risk, high-reward opportunities for foreign investors who have experience in the region, a long-term investment horizon, and the patience and resources to conduct significant research and due diligence. At the most senior levels, the Tajik government continues to express interest in attracting more U.S. investment, and in 2020 President Rahmon signaled the importance of outreach to U.S. companies by appointing the former head of the government’s Investment Committee as Tajikistan’s ambassador to the United States. Nevertheless, the poorest of the Central Asian countries harbors few U.S. investors and remains an uncompetitive investment destination.
President Rahmon publicly emphasizes the need to foster private-sector-led growth, and attracting investment is prioritized in the government’s 2016-2030 National Development Strategy and in-progress 2021-2025 Economic Development Strategy. Strategy documents notwithstanding, authoritarian policies, bureaucratic and financial hurdles, widespread corruption, a flawed banking sector, non-transparent tax system, and countless business inspections greatly hinder investors. The absence of private investment and the government’s decision to dedicate significant financial resources to the construction of the Roghun Dam hydropower plant, creates pressure for the Tax Committee to enforce or reinterpret arbitrary tax regulations in order to meet ever-increasing revenue targets. The government launched a tax reform project in 2019 to ease the burden for the private sector; it is intended to enter into force in 2022.
Politics also play a role. Tajikistan is saturated in opaque loans connected to China’s Belt and Road Initiative, and Chinese investments account for more than three-quarters of the country’s total Foreign Direct Investment. Tajikistan also reportedly continues to face pressure to join the Russian-led Eurasian Economic Union. Should it apply for and receive membership, firms could experience higher trade tariffs. Finally, despite Tajikistan’s 2013 accession to the World Trade Organization, the Tajik government has imposed trade policies to protect private interests without notifying its partners, notably in the poultry and mining sectors.
Additionally, the Tajik economy faces endemic challenges, and the novel coronavirus pandemic exposed a number of systemic economic weaknesses. Consumption, the major driver of Tajikistan’s economic growth, is driven by migrant remittance flows from Russia, where about one million labor migrants reside. In 2020, closed borders depressed both the flow of remittances and foreign trade, leading to a three percent contraction of Tajikistan’s Gross Domestic Product, and precipitating an 11-percent currency devaluation in the face of foreign exchange shortages. Tajikistan’s banking sector is plagued by politically directed, non-performing loans, high interest rates, and the absence of correspondent banking accounts in the West.
Despite these challenges and risks to potential investors, Tajikistan is pursuing greater trade links with its neighbors and has made modest progress on trade facilitation and increasing transparency in the extractives sector to improve its investment climate in past years. In 2020 authorities continued small steps towards compliance on intellectual property rights protections. Should the government pursue an economic reform path, opportunities in energy, agribusiness, food processing, tourism, textiles, and mining could prove promising.
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:
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 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.
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.
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.
8. Responsible Business Conduct
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.
10. Political and Security Environment
Tajikistan’s civil war lasted from 1992 to 1997 and resulted in the deaths of 50,000 people. Apart from a minor uprising in September 2015, however, political violence following the end of the civil war has been rare.
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.
11. Labor Policies and Practices
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.
Turkmenistan is slightly larger than the state of California but is sparsely inhabited, with abundant hydrocarbon resources, particularly natural gas. Turkmenistan’s economy depends heavily on the production and export of natural gas, oil, petrochemicals and, to a lesser degree, cotton, wheat, and textiles. The economy entered a deep recession following the late 2014 collapse in global energy prices. The COVID-19 pandemic put downward pressure on all Central Asian energy exporters in 2020 and further weakened the Turkmen economy. Endemic corruption, a weak commercial regulatory regime, and strict currency controls compromise the investment climate and discourage FDI. Turkmenistan is currently considered high risk for U.S. foreign direct investment. It does, however, offer numerous opportunities for the export of U.S. goods and services in certain sectors, including energy, food processing, agriculture, financial services, and IT services. The government recently announced a major digitalization effort for various sectors including banking and governmental operations.
Official figures from the government of Turkmenistan show that the country’s GDP at the official exchange rate was $45.25 billion in 2019 and $40.76 billion in 2018. The black-market exchange rate for dollars, which averaged over 5 times the official rate in 2019-2020, suggests the true GDP numbers are much lower. An official number for 2020 GDP was not yet available, though the government reported GDP growth of 5.4 percent in 2019. GDP growth in 2018 was reported as 6.2 percent. Most economic indicators released by the government are widely seen as unreliable.
The government has not taken serious measures to incentivize foreign direct investment outside the petroleum industry and there is no significant U.S. FDI in Turkmenistan. Most U.S. commercial activity in Turkmenistan is related to exports. Some companies, such as General Electric, Boeing, and John Deere, have established themselves as key suppliers of industrial equipment in certain sectors, but their business operations are largely limited to sales to the Turkmen government. Government delays in payment to foreign companies have occurred and some firms require upfront payment prior to delivery of goods.
A lack of established rule of law, an opaque regulatory framework, and rampant corruption remain serious problems in Turkmenistan. Contracts are often awarded to companies with close ties to the President’s family. The government strictly controls foreign exchange flows and limits on currency conversion make it difficult to repatriate profits or make payments to foreign suppliers. The official exchange rate is pegged at 3.5 manat (TMT)/dollar. Starting in 2015, the black-market value of the manat has steadily fallen against the dollar. In 2020 the average black market exchange rate was 22 TMT/dollar.
Although Turkmenistan regularly amends its laws to meet international standards, the country often fails to implement or consistently enforce investment-related legislation. There are no meaningful legal protections against government expropriation of assets and there is no independent judiciary. There have been reports in recent years of officials associated with the family of President Gurbanguly Berdimuhamedov seizing local companies. There have also been reports that local Turkmen business owners have been jailed using security-related laws as a pretext to reopen the business under new ownership.
Key issues to watch: developments in the financial sector, including the TMT/USD black market exchange rate and the severity of restrictions on currency conversion, will determine to some extent the health of the investment climate. The impact of COVID-19 on Central Asian economies remains to be seen. Forecasts from major international financial institutions estimate a contraction in 2020 of 1.7-2.1 percent in Central Asia, followed by positive but subdued growth in 2021 and 2022. Fundamental shifts in post-COVID-19 natural gas markets could add additional pressure on Turkmenistan’s hydrocarbon-dependent economy.
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.
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.
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.
8. Responsible Business Conduct
The government implements various policies and regulations that it states promote socially responsible business conduct (RBC), though there is no point of contact or ombudsperson for stakeholders to raise concerns about RBC. In the past, foreign companies operating in Turkmenistan were not required to implement social projects. Social welfare activities connected with doing business in Turkmenistan generally take the form of financial sponsorship of cultural or athletic events, providing academic scholarships to Turkmen students, or the construction of small-scale facilities, such as medical clinics, to benefit the locality around a company’s facilities. Some large foreign firms have felt pressured to make significant contributions to government construction projects. There are no independent NGOs, investment funds, worker organizations/unions, or business associations promoting or monitoring RBC.
In March 2013, Turkmenistan introduced mandatory environmental insurance for all types of enterprises and organizations (with the exception of government-financed entities) carrying out activities that are potentially hazardous to the environment. This insurance program was adopted to raise environmental awareness 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.
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.
11. Labor Policies and Practices
Labor issues are governed by the Labor Code of Turkmenistan (last amended in July 2009), the Social Welfare code, and a number of regulations approved by presidential resolutions. Turkmenistan joined the International Labor Organization in 1993. Unemployment and underemployment are major societal issues, particularly among Turkmenistan’s youth and in rural communities. Unofficial estimates of unemployment range from 10 to 50 percent. Due to a severe shortage of jobs and low salaries in the country, anecdotal evidence indicates that growing numbers of young Turkmen have emigrated or are emigrating to other countries, including Turkey, Russia, and other former Soviet republics. In order to stop outward migration, the State Migration Service of Turkmenistan on numerous occasions has arbitrarily denied exit to citizens at the airport and border points. In February 2016, President Berdimuhamedov signed a decree “On Matters of Registration of the Individuals Arriving in Ashgabat for Employment Purposes,” 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 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.
The pandemic and subsequent stagnation of the global economy had an impact on the economy of Uzbekistan and the dynamics of market reforms launched in 2016. Addressing public health and social support issues became a higher priority and required the mobilization of significant resources. Quarantine measures, domestic lockdowns, and travel restrictions led to the bankruptcy of a significant number of private businesses and an increase in unemployment, especially in the first half of the year. Mining, services, transportation, and tourism sectors suffered the most. In the second half of the year, however, business activity began to recover after quarantine restrictions were relaxed. The government has taken measures to mitigate the impact of the pandemic on business, including the introduction of temporary tax holidays, concessional lending, and other incentives.
In general, Uzbekistan’s economy demonstrated relative resilience in 2020 with 1.6% GDP growth. Despite 2020’s challenges, foreign direct investment (FDI) inflows continued – about $6.6 billion in 2020 compared to $9.3 billion in 2019 – which is undoubtedly the result of pre-pandemic reforms. Over 11,780 companies with foreign capital were operating in Uzbekistan as of January 1, 2021, including 1,399 created in 2020. While the government encouraged investors to develop processing and manufacturing industries in support of its import-substitution and export diversification policy, there was a notable increase of FDI in the service, retail, and banking sectors. In November, Uzbekistan successfully placed $750 million in dual-tranche sovereign international bonds denominated both in U.S. dollars and Uzbekistani so’m on the London Stock Exchange.
In 2020, Uzbekistan’s leadership continued to implement reform policies targeted at boosting economic growth and improving public welfare by creating a supportive climate for private and foreign direct investment and reducing the share of the public sector in the economy. To further develop anti-corruption measures, Uzbekistan established an Anti-Corruption Agency to inspect governmental bodies and legal entities, including state-owned banks, and to prevent and combat corruption in public procurement based on the ISO 37001 standard. President Mirziyoyev signed a decree to reduce government involvement in the economy, prohibiting the establishment and operation of state-owned enterprises (SOE) in commodity markets, where SOEs might compete with private firms or have conflicts of interest. The decree also called for compliance with anti-monopoly statutes by nine large SOEs, including the national airline, car producers, and energy companies. In October, Mirziyoyev announced plans to perform internal corporate governance reforms at 39 SOEs and privatize 548 SOEs, including strategic assets in the oil and gas, mining, chemical, transportation, banking, and manufacturing industries which had been considered off-limits in previous rounds of privatization. The pandemic delayed the process of SOE reorganization and privatization, and slowed further liberalization and development of Uzbekistan’s capital market.
During the reporting period, foreign businesses continued reporting cases of non-transparent public procurement practices, and cases where government agencies and state-owned enterprises inconsistently complied with official policy guidelines and regulations. Enforcement of legislation on protection of intellectual property rights also remains insufficient. Uzbekistan has the potential to become one of the most successful economies in Central Asia, but to achieve this goal, it needs to ensure that market reforms become entrenched by improving legislation and ensuring laws are then properly enforced.
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.
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.
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.
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).
8. Responsible Business Conduct
There is no legislation on responsible business conduct (RBC) in Uzbekistan, and the concept has not been widely adopted, though many companies are active in charitable and corporate social responsibility activities, either through their own initiative or because they were mandated by local government officials.
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.
Uzbekistan does not have a history of politically motivated violence or civil disturbance. There have not been any examples of damage to projects or installations over the past ten years. Uzbekistani authorities maintain a high level of alert and aggressive security measures to thwart terrorist attacks. The environment in Uzbekistan is not growing increasingly politicized or insecure.
11. Labor Policies and Practices
During 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;
formation and joining of labor unions;
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;
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.