2017 Investment Climate Statements: Kyrgyz Republic

Policies Towards Foreign Direct Investment

The Kyrgyz Republic is open to foreign direct investment and the government publicly recognizes that foreign direct investment is an important component to growing the economy. Laws exist that make the investment climate more favorable than in the past for foreign companies. Application of these laws, however, is inconsistent, which can cause problems for and deter foreign investors. In addition, government activities, including demands for renegotiation of operating contracts, invasive and time-consuming audits, levies of large retroactive fines, and disputes over licenses, are impediments to foreign investment.

Since 1993, the United States has a bilateral investment treaty with the Kyrgyz Republic that encourages and offers reciprocal protection of investment.

The Kyrgyz Republic has an Investment and Trade Promotion Agency under the Ministry of Economy. The agency participates in the development and implementation of measures to attract and stimulate investment activity. Its mandate is to coordinate with state bodies, local municipalities, business entities, and non-state actors to promote investment in the Kyrgyz Republic, including private investment and public-private partnerships. The Agency has investor support programs to help guide investors through the registration process and conducts outreach aimed at helping create an environment conducive to foreign investment. The Agency often coordinates with international donor organizations on hosting round tables discussions, exchanges, and capacity building workshops in the field of economic development.

The Agency serves as a vehicle for maintaining an ongoing dialogue with foreign investors. At present, the Kyrgyz Republic does not have an Ombudsman with oversight on foreign investment. In 2017, the Kyrgyz Parliament created a Business and Entrepreneurship Development Council whose primary function is to strengthen cooperation between the country’s legislative body and business entities. The Council consists of MPs, business community representatives from across sectors of the economy, and members business associations. It meets on a regular basis to discuss measures to improve the investment, promotion of entrepreneurship, and legislation to facilitate doing business in the Kyrgyz Republic.

The Kyrgyz government also interacts with the business community via a number of local associations that serve as a voice for entrepreneurs and corporations, including the American Chamber of Commerce in the Kyrgyz Republic (AmCham), and the International Business Council (IBC), among others. The Ministry of Economy, Parliamentary Business and Entrepreneurship Development Council, and other government bodies often seek the opinion of these associations during the formulation of policy. In 2016, the Washington, DC-based U.S.-Kyrgyz Business Council relaunched under new leadership. The Business Council, which counts major U.S. multinational corporations among its charter members, seeks to strengthen economic and commercial ties between the United States and the Kyrgyz Republic.

Limits on Foreign Control and Right to Private Ownership and Establishment

While there are no official limits on foreign control, a large investor in a politically sensitive industry may find that the government imposes investor-specific requirements such as a high percentage of local workforce employment or a minimum number of local seats on a board of directors. Foreigners have the right to establish and own businesses. In 2016, U.S. investors did not allege any restrictions on market access.

According to the law, the Kyrgyz Republic guarantees equal treatment to investors and places no limit on foreign ownership or control. In 2016, there were no known cases of sector-specific restrictions, limitations or requirements applied to foreign ownership and control. In March 2017, the Kyrgyz Parliament passed the draft “Law on Mass Media” in its second reading that would limit foreign ownership of television broadcasters to 35 percent (Note: For a bill to become law, it must pass three readings in the Kyrgyz Parliament and be signed by the President. End Note.) These proposed amendments would not affect print media or radio stations.

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

Other Investment Policy Reviews

In 2014, the World Trade Organization (WTO) reviewed Kyrgyzstan. In 2016, the International Finance Corporation (IFC), a member of the World Bank Group, released a report on the Kyrgyz investment climate. The report is available here .

Business Facilitation

The Kyrgyz Republic does not have a business registration website. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice. State registration of a legal entity is completed within three business days from the date of filing the necessary documents for a specified fee. The Kyrgyz Republic ranked in the top quintile of the World Bank’s 2017 Doing Business report (30^th out of 190 countries surveyed) in “Starting a Business.”

Outward Investment

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

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

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

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

The Kyrgyz Republic has a Bilateral Investment Treaty with the United States, which entered into force in 1993.

Transparency of the Regulatory System

Although many laws and regulations in the Kyrgyz Republic were developed with technical assistance from donors and are consonant with international best practices, the legal and regulatory system of the Kyrgyz Republic continues to develop slowly. The process of implementing regulations and court orders relating to commercial transactions remains inconsistent. Some court decisions, which appear to contradict established procedures, can be implemented expeditiously in certain cases and are subject to outside influence. The Kyrgyz system is heavily bureaucratic and investors must overcome a great deal of red tape in order to conduct business.

After the former president was deposed in 2010, the interim government established observation committees in ministries, state agencies, and state committee. These bodies are typically comprised of representatives from non-state actors, including business associations, rights organizations, the media, and independent experts. The objective of these committees is to provide citizen oversight of policy formulation and execution, though their efficacy remains in question. There have been no known facts where US Investors had been discriminated against during the reporting period.

Rule-making authority is vested in the Kyrgyz Parliament, which features robust committees that oversees legislation and regulations affecting several areas of the economy, including: the Committee on Economic and Fiscal Policy; the Committee on Fuel, Energy, and Subsoil Management; the Committee on Transport, Communications, Architecture, and Construction; and 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 and the State Service on Combating Economic Crimes both play important regulatory roles.

Accounting procedures tend to adhere to internationally recognized accounting rules, such as the International Financial Reporting Standards (IFRS), and audits are conducted regularly, often in compliance with agreements with international financial institutions (IFIs). Audit results of state organizations tend to be publicly available, unlike those of private organizations. Draft bills or regulations are posted on Parliament’s web site and are typically open to public comment for 30 days prior to consideration by Parliament and its committees. Parliament often holds public hearings on draft legislation, and is open to the participation of representatives of civil society organizations and the business community in relevant hearing.

The Investment Promotion Agency, under the Ministry of Economy, assists investors with bureaucratic procedures. This agency also consolidates information about potential investment projects in the Kyrgyz Republic. 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 and Parliament respectively, exist to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for bribe solicitation in order to complete normal bureaucratic functions. As often in the Kyrgyz Republic, the legal and regulatory framework is largely sound but implementation and enforcement are weak.

In July 2016, the Kyrgyz government issued a decree to restructure several state regulatory bodies. The decree abolished the State Agency for Geology and Resource Management, replacing it with the State Committee for Industry, Energy and Resource Management, and dissolved the State Agency for Communications and Centre for e-Governance, merging its functions into the State Committee of Informational Technology and Communications. The decree also expanded the Ministry of Agriculture’s functions to include food industry development, and assigned oversight of the exploitation of mineral resources to the State Inspection for Environment and Technical Security. Also in July 2016, President Almazbek Atambaev approved several reforms aimed at streamlining law enforcement bodies. Among other things, the reforms dissolved the State Drug Control Service, and transferred authority to investigate economic crimes from the State Committee on National Security to the State Service of Combating Economic Crimes.

Regulatory enforcement bodies are known to conduct periodic inspections according to standards defined by law. However, businesses often complain about the uneven application of rule of law in the Kyrgyz Republic. Businesses that do not meet legally defined standards are often fined depending on the severity of the violation, and the enforcement process is reviewable through the judicial system.

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, and adopted the Union’s b. 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, transition-related issues continue to persist, and numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, which act as barriers that prevent some 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 formal legal system of the Kyrgyz SSR largely mirrored that of other union republics. The legal system has undergone a dramatic transformation since the breakup of the Soviet Union. The general principles of the reform encourage ideological and political pluralism, a socially oriented market economy, and the expansion of individual rights and freedoms. Major barriers to foreign investment derive from a lack of adequate implementation rather than gaps in existing laws.

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

The key problem in the resolution of disputes is a weak Kyrgyz judicial system that fails to act as an independent arbiter. Since most of these disputes are between foreign investors and the Kyrgyz Government, local courts serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system.

Laws and Regulations on Foreign Direct Investment

The Kyrgyz Republic’s main legal framework for foreign direct investment remains
the 2003 “Law on Investments.” 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 Ministry of Economy’s Investment Promotion Agency maintains the country’s main website for investment queries, www.invest.gov.kg . The site also contains information regarding current legislation and regulations affecting potential investors. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice.

Competition and Anti-Trust Laws

The State Agency for Anti-Monopoly Regulation of the Kyrgyz Republic conducts unified state antitrust price regulation in the economy. The main tasks of the State Agency are:

• to develop and protect competition
• to control compliance with legislation in the field of anti-trust, price regulation
• to protect the legal rights of consumers against manifestations of monopoly and unfair competition
• to ensure observance of legislation on advertising.

To Post’s knowledge, there have been no developments in any significant competition cases over the past year.

Expropriation and Compensation

According to the Law on Investments in the Kyrgyz Republic, investments shall not be subject to expropriation (nationalization, requisition, or other equivalent measures, including actions or omissions by the government bodies of the Kyrgyz Republic which have resulted in forced withdrawal of investors’ funds or in depriving them of an opportunity to gain on the investments’ results), except as provided by Kyrgyz laws when such expropriation is in the public interests and is carried out on a non-discriminatory basis and pursuant to a proper legal procedure with the payment of timely, appropriate and feasible reparation of damages, including lost profit.

In April 2016, the government of the Kyrgyz Republic expropriated four Uzbek-owned resorts on Lake Issyk-Kul and announced plans to do the same to several Kazakh-owned resorts in the same area. The resorts trace back to the Soviet Union, when the neighboring socialist republics of Uzbekistan and Kazakhstan built resorts to help boost the region’s tourism potential. It is unknown how the Kyrgyz Republic will legally transfer the properties, though press reports highlighted that several of the resorts owe contributions to the Kyrgyz Social Fund. The 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. However, Post is unaware of the financial terms of the aforementioned acts of expropriation.

The Kyrgyz government spent much of 2013 and 2014 renegotiating the agreement underpinning foreign investment in the Kumtor gold mine and many aspects of the dispute remain unresolved. In 2016, a Kyrgyz court issued an interim ruling that prevents Kumtor Gold from transferring property or assets, declaring or paying dividends, or making loans to its parent company, Centerra Gold, Inc. While the order does not prohibit the company from continuing to use its cash resources to operate the Kumtor mine, cash generated from mining operations (a reported $237 million in 2016) continues to be held by Kumtor Gold and is not being distributed to Centerra. Citing this action by the Kyrgyz judicial system, Centerra has suspended its dividend payments to shareholders.

Both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of the distinction between historical book value, replacement value, and actual market value, which brings into question whether the government would provide fair compensation in the event of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

The Code of Arbitration Procedure specifies that, if an international treaty of the Kyrgyz Republic establishes the rules of court procedure, other than those, provided by the legislation of the Kyrgyz Republic, rules of the international treaty shall apply. The U.S.-Kyrgyz BIT outlines procedures by which parties may consent to binding arbitration. Post is unaware of any claims made by U.S. investors under the agreement since it entered into force.

A weak and judicial system fails to act as an independent arbiter in investment disputes. Since most of these disputes are between foreign investors and the Kyrgyz government, local courts serve as the executors of the authorities’ political agenda.

In January 2017, a local media outlet, citing the Kyrgyz government’s center for legal representation, reported that, between 2014 and 2016, fourteen lawsuits were filed against the Kyrgyz Republic totaling over $1.8 billion in claims, with nine arbitration disputes total over $1.5 billion in claims have been settled to date.

The most well-known investment dispute centers around the Kumtor gold mine. Since the mine began commercial production in 1997, the Canadian company, Centerra Gold, whose local subsidiary Kumtor Gold operates the mine has renegotiated the terms of their investment with the government more than three times at the request of the Kyrgyz Government. In December 2015, both sides tabled the talks without resolution. In 2016, Kyrgyz law enforcement officials raided the Bishkek headquarters of Kumtor Gold on accusations of financial irregularities, and prevented expatriate officials from exiting the country. A local court issued an injunction to preclude the company from making financial transfers to Centerra, and later fined Kumtor for nearly $98 million in alleged environmental damages. Shortly afterward, Centerra elevated its dispute with state corporation KyrgyzAltyn over environmental, dividend, and land use claims to a court of international arbitration.

Stans Energy Corporation, a Toronto-based resource development company focused on mining rare earth metals, has also been involved in a long running, high profile investment dispute with the Kyrgyz Republic. In 2009, Stans acquired a 100 percent stake in the Kutessay II rare earth mine in the Kyrgyz Republic. Claiming the acquisition process was tainted, a Kyrgyz parliamentary committee revoked the company’s permits, prompting Stans to file a lawsuit against the Kyrgyz government claiming it took expropriatory actions against the firm’s interests. In June 2014, an international arbitration court in Moscow awarded Stans a $118 million judgment. The company has yet to receive compensation, and contends the Kyrgyz government has sought to undo this ruling. Canadian courts rejected Stans efforts twice, preventing the miner from seizing shares of Centerra Gold belonging to state-owned company KyrgyzAltyn as compensation.

International Commercial Arbitration and Foreign Courts

The Code of Arbitration Procedures allows for international and domestic arbitration of disputes. If feasible, the arbiter and the terms of arbitration should be identified in the initial contract. Establishing the terms for arbitration beforehand may prevent further complications in the event of a dispute. According to local media, five arbitration claims against the Kyrgyz Republic totaling $253 million remain unresolved. The outcome of these cases is uncertain, as is whether the Kyrgyz Government would respect or enforce any final decision.

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 UN Commission for International Trade Law (UNCITRAL)

Bankruptcy Regulations

The Kyrgyz Republic has a written law governing bankruptcy procedures of legal persons and insolvent physical persons (Law of the Kyrgyz Republic “On Bankruptcy” September 22, 1997 and amended December 30, 1998) which covers industrial enterprises and banks, irrespective of the type of ownership; commercial companies; private entrepreneurs; foreign commercial entities. Bankruptcy proceedings are conducted by the court of arbitration competent for the district in which enterprise is located. The procedure of liquidation can be carried out without the involvement of the judicial bodies if all creditors agree on out-of-court proceedings. Chapter 10 of the law on bankruptcy provides for the possibility of an amicable settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank has ranked the Kyrgyz Republic 130 out of 190 countries in “Resolving Insolvency” in its 2017 Doing Business report.

Investment Incentives

The Kyrgyz Government has reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors. The Ministry of Economy often expresses the government’s willingness to discuss potential incentives, including access to land, with specific foreign investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek (two), Naryn, Karakol, and Maimak. Each is situated to make use of transportation infrastructure and/or customs posts along the Kyrgyz borders. Government incentives for investment in the zones include exemption from several taxes, duties and payments, simplified customs procedures, and direct access to utility suppliers. The production and sale of petroleum, liquor, and tobacco products in FEZs are banned.

Performance and Data Localization Requirements

While there are no formal legal requirements for local employment, most major international investors are subject to tremendous public pressure to hire as many local employees as possible. New investors may find local employment quotas included in potential investment agreements, mandating numbers for boards of directors, senior management, and/or other employees. There are no known barriers to mobility of foreign investors and their employees or any conditions on permission to invest. The Kyrgyz Government does not enforce any “forced localization” policies. There are no known government/authority-imposed conditions on permission to invest. The U.S.-Kyrgyz BIT ensures that investments are guaranteed freedom from performance requirements, including requirements to use local products or to exports local goods.

Foreign investors may freely transmit customer or other business related data outside the country’s territory upon their own need as long as it does not contradict with local law on investments. There are no known instances of requiring foreign IT providers to turn over source code and/or provide access to encryption. There is no legislation on maintaining data storage within the country.

Real Property

In its 2013-2017 National Strategy for Sustainable Development, the Kyrgyz Government identified property rights as one of the priority areas for strengthening investment climate in Kyrgyzstan. The Kyrgyz Republic was first among its neighboring Central Asian states to introduce private property rights for land ownership. According to government sources, there are no lands without a clear title. According to the World Bank, the Kyrgyz Republic is among the easiest countries in which to register property, ranking 8^th out of 190 countries in the Bank’s 2017 Doing Business report.

However, a study recently conducted by a local NGO revealed that, despite significant legislative amendments, the Kyrgyz government continues to lack capacity to properly enforce property rights. The study cited weak rule of law and the persisting need for judicial reform as among the primary factors.

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

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

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

Intellectual Property Rights

Intellectual property right protections are slowly emerging. The State Service for Intellectual Property and Innovation under the Government of the Kyrgyz Republic (“Kyrgyzpatent”) is the authorized body of the Executive Branch that issues documents to certify intellectual property. Kyrgyzpatent establishes the Appeal Council that is the primary body to hear intellectual property related disputes. While the Kyrgyz Republic has a robust body of laws, regulations, and rules governing protection of intellectual property, and while the country is a signatory to several international treaties on the subject, enforcement remains problematic. The judicial system remains underdeveloped and lacks independence. Due to the structure of the system, the appeals process can be lengthy and prolonged. Court actions can force the sale of property to enforce payments and other contractual obligations. The government does not pay a sum as compensation for these actions.

The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. The Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. Counterfeit goods made primarily in China, however, are widely available. Most software used is unlicensed, including by the government. The Kyrgyz Republic is not on the Special 301 report nor is it listed on the U.S. Trade Representative’s Notorious Markets report.

To Post’s knowledge, the Kyrgyz Republic did not pass any new IP related laws or regulations in 2016. There are no pending IP bills listed on the Parliament’s website. Criminal liability for violation of IPR is listed in the Criminal Code. Unfortunately, enforcement is lax and according to sources, there have been no successful prosecution for IP violations in the history of the Kyrgyz Republic. There are no official statistics on seizure of counterfeit goods. However, the State Customs Service regularly writes alerts and notifications on the recent seizure of counterfeit goods on its official website. Most counterfeit goods transit via the massive Dordoi bazaar – Central Asia’s largest market – from China en route to Russia and Kazakhstan. The Kyrgyz Republic is not known as a major producer of counterfeit goods.

Resources for Rights Holders

Contact at Mission:
Samat Toigonbaev
Commercial Assistant
+996 312 59 76 07
ToigonbaevSA@state.gov

Country/Economy Resources:
American Chamber of Commerce
191 Abdrakhmanov Street, Office #123
+996 312 623 389, 623 395
pa.amcham@gmail.com

memberservices@amcham.kg

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

Capital Markets and Portfolio Investment

The Kyrgyz government is generally open toward foreign portfolio investment, though experts from international financial institutions (IFIs) have noted that capital markets in the Kyrgyz Republic remain underdeveloped. The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards and transaction machines, have grown in recent years. In 2016, Moody’s Investors Services assigned the Kyrgyz Republic its first sovereign credit rating (B2). The government debt market is small and limited to short maturities, though Kyrgyz bonds are available for foreign ownership. Broadly, credit is allocated on market terms, but experts have noted that the presence of the Russian-Kyrgyz Development Fund subsidized sources of credit have introduced market distortions. Bank loans remain the primary source of private sector credit, and local portfolio investors often highlight the need to develop additional financial instruments in the Kyrgyz Republic.

There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange Kyrgyzstan), but all transactions are conducted through Kyrgyz Stock Exchange. In 2016, the total value of transactions amounted to 9.97 billion soms (approximately $146.6 million). The small market lacks sufficient liquidity to enter and exit sizeable positions. Since 1995, the Kyrgyz Republic has accepted IMF Article VIII obligations.

Money and Banking System

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

According to the IMF, the Kyrgyz banking system at present remains well capitalized. Non-performing loans increased from 7.1 percent to 8.8 percent in 2016, with restructured loans in excess of 20 percent. However, net capital adequacy increased from 22.4 percent to 24.8 percent in 2016. Total assets in the Kyrgyz banking system in 2016 equaled 178 billion som ($2.58 billion) in 2016. As of August 2016, the Kyrgyz Republic’s three largest banks by total assets were Kyrgyz Investment and Credit Bank (KICB; 24.0 billion som, approximately $347 million), Optima Bank (21.7 billion som, approximately $314 million), and Alkyl Bank (17.5 billion som, approximately $253 million).

There are currently 25 functioning commercial banks in the Kyrgyz Republic, with 324 operating branches throughout the country. There are ten foreign banks operating in the Kyrgyz Republic: Demir Bank, Bank of Asia, National Bank of Pakistan, Halyk Bank, FinanceCredit Bank, Optima Bank, and Kyrgyz-Swiss Bank are entirely foreign held. Other banks are partially foreign held, including KICB and Manas Bank. KICB has multinational organizations as shareholders including the European Bank for Reconstruction and Development, Economic Finance Corporation, the Aga Khan Fund for Economic Development and others. The micro-finance sector in the Kyrgyz Republic is robust, representing nearly half the market size of the banking sector. Agriculture accounted for half of the loans, followed by trade and consumer loans.

Although no U.S. bank operates in the Kyrgyz Republic, many Kyrgyz banks maintain correspondent relations with U.S. and other foreign banks to facilitate short-term commercial lending, such as letters of credit. Outside investors rarely seek financing from domestic banks. Bank lending is heavily biased towards short-term loans, although mid-term loans are also offered.

The National Bank of the Kyrgyz Republic exercised conservatorship of eight banks, including some since the mid-1990s. Four banks under conservatorship were liquidated in 2016, with the remaining four expected to be liquidated in 2017. In 2016, the Kyrgyz Parliament passed a reformed Banking Law praised by the IMF as an important step toward building a modern and effective regulatory framework. The amended law, which will enter into effect in June 2017, is expected, inter alia, to strengthen the NBKR’s ability to better quarantine problem banks from impacting the wider banking system.

Since March 2008, new banks must have a minimum charter capital requirement of 600 million soms ($8.3 million). Banking laws also require that banks maintain a 10 percent reserve with the National Bank. A deposit insurance system exists for the benefit of individual investors. With the support of the Kyrgyz Government, accounting systems in banks and enterprises are being converted to international standards. In addition, international assistance programs contributed to rapid progress in reaching these standards via accounting training and certification.

Foreign Exchange and Remittances

Foreign Exchange

Foreign exchange is widely available and rates are competitive. The local currency, the Kyrgyz som, is freely convertible and stable compared to other currencies in the region. The som is a floating currency, though the NBKR periodically intervening in the market to mitigate the risk of exchange rate shocks. As of March 31, 2017, the exchange rate is 68.6 som to the U.S. dollar.

The National Bank of the Kyrgyz Republic conducts weekly inter-bank currency auctions, in which competitive bids determine market-based transaction prices. Banks usually clear payments within a single business day. Complaints of currency conversion issues are rare. With occasional exceptions in the agricultural and energy sectors, barter transactions have largely been phased out.

Remittance Policies

The Kyrgyz economy remains heavily reliant on remittances, which typically account for 25-30 percent of GDP. There are no known plans to change remittance policies nor limitations on remittances. The country remains on the Financial Action Task Force (FATF) “gray list” and the Department of State’s Bureau of International Narcotics and Law Enforcement lists the Kyrgyz Republic as a “monitored” country with regard to money laundering and financial crimes. The State Department assessed the Kyrgyz Republic as “fiscally transparent”.

Sovereign Wealth Funds

The Kyrgyz Republic’s Sovereign Wealth Fund originated from proceeds of the Kumtor gold mine and is composed of shares in the parent company of the gold mine operator, Centerra Gold. The Kyrgyz Republic owns roughly 77 million shares of the company, which are currently valued at $ 464 million. The Fund was associated with the corrupt practices of deposed ex-President Kurmanbek Bakiev and the Bakiev family allegedly used it as their personal slush fund. Today, large percentages of the Fund are frozen due to several pending legal cases regarding Kumtor gold mine.

SOEs play a significant role in the Kyrgyz economy, The State Property Management Fund of the Kyrgyz Republic (www.fgi.gov/kg ) is the public executive authority representing the interests of the state as the owner of the state property. The purpose of the Fund is to ensure the efficiency of the use, management, and privatization of state property. The list of SOEs is available, but not comprehensive. Information on allocations to and earnings from SOEs is included in budget execution reports and is published (in Russian) on the Kyrgyz Treasury’s website, however information such as assets and employees, is generally not publicly available. The State Property Management Fund also reviews the budgets for the largest SOEs, and the parliamentary Accounting Chamber (www.esep.kg ) reviews the accounts of all SOEs. Within the framework of the Kyrgyz Republic current three-year extended credit facility (ECF) program with the IMF, the State Property Management Fund is required annually to submit the balance sheets of the ten largest SOEs to the Fund.

The State Property Management Fund executes corporate governance of SOEs and appoints members of the SOE boards of directors. The board, in return, appoints an executive director. In 2014, the Ministry of Economy established a working group that developed a draft project on reform of the system of SOE management.

According to the Heritage Foundation’s Index of Economic Freedom report, cronyism and corruption within SOEs presents a major obstacle to the Kyrgyz Republic’s economic development. In many cases, the Foundation noted, elected officials appoint company board members based on political loyalty rather than professional skills and corporate governance knowledge. Positions on boards of directors are frequently used as rewards for political support, and the dynamic has reinforced the patronage system and resulted in poor economic performance and public service delivery. Broadly, the country does not fully adhere to the OECD Guidelines on Corporate Governance of SOEs.

The government tries to practice an open and transparent policy when it comes to contracts and biddings. However, due to widespread corruption, there are common complaints that only individual government officials have access to government contracts and bidding processes. SOEs purchase goods and services from the private firms and usually place the calls for bids either on their websites or in public newspapers, as required. Private enterprises have the same access to financing as SOEs and are subject to the same tax burden. In some cases, SOEs have preferential access to land and raw materials. However, transparency initiatives attempt to hold the government accountable in such proceedings.

Privatization Program

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

In 2015, the Kyrgyz government agreed to privatize AlfaCom (operating as MegaCom), the country’s largest mobile telecommunications company. In February 2017, the leader of Parliament’s leading opposition faction was arrested and charged with corruption on allegations he received a bribe from a Russian businessman in connection with the sale of a MegaCom stake in 2010. After years of delays, the Kyrgyz government announced it will auction its 100 percent stake in MegaCom in July 2017.

There is a general awareness about responsible business conduct (RBC). The Kyrgyz Government does not factor RBC policies or practices into its procurement decisions. Kumtor, the largest gold mining company operating in the Kyrgyz Republic, often draws criticism for violating environmental regulations and thus damaging the living standards of the nearby villages, and was fined nearly $98 million by a Kyrgyz court in 2016 for environmental damages. However, these accusations often are used for political purposes rather than legitimate RBC concerns. Few NGOs work to promote RBC.

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), but is currently behind on several annual reports. According to the last report published in 2014, the Kyrgyz Republic has 1359 active extractive licenses, and EITI covers more than 95 percent of mining revenues in the Kyrgyz Republic. Post 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.

Corruption remains a serious problem at all levels of Kyrgyz society and in all sectors of the economy. According to Transparency International’s Corruption Perception Index, in 2016 the Kyrgyz Republic ranked 136^th out of 176 countries rated, falling from 123^rd in 2015. Kyrgyz politicians and citizens alike are aware of the systemic corruption, but the problem is deeply entrenched and difficult to fight. Moreover, many in the Kyrgyz Republic view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices.

The Kyrgyz Republic is a signatory of the UN Anticorruption Convention but not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The Kyrgyz Government has announced a number of initiatives to fight corruption. Current President Almazbek Atambaev has established an anticorruption service within the State Committee on National Security. The service has taken action against a limited number of ministers and parliamentarians. Over the past year, instances of corruption-related arrests against public figures from the political opposition have increased. The Kyrgyz Government encourages all companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials, but not all companies have effective internal controls. The Kyrgyz Republic has laws that criminalize giving and accepting a bribe, with penalties ranging from a small administrative fine to a prison sentence, but the government’s active enforcement of these laws is uneven. While senior government officials pledge strong support to anticorruption measures, a sustained effort would probably result in more consistent enforcement of the existing laws.

Businesses operating in the Kyrgyz Republic often encounter some or all of these practices. The Government of the Kyrgyz Republic issues special colored license plates to foreign business owners, which the police frequently target for regular stops. Foreign businesses may also find themselves the subject of frequent tax audits or a variety of inspectors consistently visiting their establishments. Each experience presents an opportunity to demand a bribe.

Public procurement remains an area prone to corruption; allegations of corruption in a $100 million Chinese-financed highway tender prompted the resignation of the Kyrgyz Prime Minister in April 2016. With support from international donors, in recent years the Kyrgyz government has prioritized advancements in e-governance, with the aim to increase transparency and, in part, combat corruption in public procurement. In 2016, the WTO noted progress in negotiations with the Kyrgyz Republic on acceding to the Government Procurement Agreement. Projects supported by IFIs and subject to their standards of transparency may present greater opportunities for prospective U.S. bidders in the Kyrgyz Republic.

Corruption, including bribery, raises the costs and risks of doing business in the Kyrgyz Republic. It has had a corrosive impact on both market opportunities for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines rule of law.

It is important for U.S. companies, regardless of their size, to assess the business climate in the relevant sector in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the Kyrgyz Republic and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

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

Resources to Report Corruption

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

BishkekZhibek-Zholu Street,
+996 (312) 660020
aks.gknb@gmail.com

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

The Kyrgyz Republic has a history of political upheaval, although recent years have seen greater stability. In 2005, and again in 2010, mass protests against government corruption precipitated the ouster of the country’s elected president. The country has experienced a period of relative political stability since 2010. The first peaceful, democratic turnover of presidential power in the nation’s history occurred with the inauguration of President Almazbek Atambaev in December 2011. The governing coalition changed peacefully in September 2012 and again in the spring of 2014 with no impact on foreign business or investment interests. In October 2015, the Kyrgyz Republic successfully conducted competitive national parliamentary elections, and a nationwide Constitutional Referendum was held in December 2016. Since independence, governments in the Kyrgyz Republic have frequently turned over (28 prime ministers in 25 years), though the transitions have occurred in accordance with Kyrgyz law with political stability maintained. Protests organized by opposition politicians are common, and have been occurring with greater frequency over the past year. Concerns about law enforcement abuses and human rights violations in the country remain.

Interethnic tensions persist in the southern part of the country, but did not have a destabilizing effect on the government in 2016. In 2016, ISIS efforts to recruit Kyrgyzstani fighters to Syria continued to generate headlines. Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement (ETIM) remain active in Central Asia. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. In August 2016, a suicide bomber, reportedly affiliated with ETIM and trained in Syria, detonated a vehicle-borne improvised explosive device inside the Chinese Embassy compound in Bishkek, located less than 200 yards from the U.S. Embassy. The attack reportedly killed the perpetrator and injured four others, and caused extensive damage. The United States has cooperated with the Kyrgyz Government to improve border and internal security and efforts to stem the flow of fighters to Syrian are ongoing.

In the recent past, the extractive resources companies have been the target of localized instability, though demonstrations against mine operators have dwindled in 2015 and 2016. Protestors have targeted various installations, at times resorting to vandalism and violence. The trouble caused by repeated protests prompted one large, international mining firm to sell its share of an exploration project in 2014 and leave the Kyrgyz market entirely.

The Department of State urges U.S. citizens to consider carefully travel to the Batken region along the Kyrgyz Republic’s border with Tajikistan. U.S. citizens planning to travel to the Kyrgyz Republic should refer to the U.S. Department of State for updated security information. This information is available on the Internet at http://travel.state.gov.

There is significant competition for skilled and educated individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens found 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. Literacy in the Kyrgyz Republic is approximately 97 percent. The official unemployment rate is approximately 8 percent, though experts estimate the number of actual unemployed individuals exceeds this figure. Additionally, approximately one million Kyrgyz citizens work abroad because of limited opportunities in the Kyrgyz Republic.

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

Workers have the right to form and join trade unions. The law allows unions to conduct their activities without interference, organize, and bargain collectively. Workers may strike, but the requirement to receive formal approval has made striking difficult and complicated. The law prohibits government employees from striking, but the prohibition does not apply to teachers or medical professionals. The law does not prohibit retaliation against striking workers. Labor disputes are settled by Commission for Labor Disputes (established within all organizations with 10 or more employees), by the authorized state body, or by courts of the Kyrgyz Republic. The employee has the right to choose one of these bodies to settle the dispute.

Safety and health conditions in factories are generally poor. The law establishes occupational health and safety standards, but to a large extent the Kyrgyz government did not enforce them. The State Labor Inspectorate is responsible for protecting workers and carrying out inspections for all types of labor problems, but its activities were limited, and business compliance was uneven. Workers in the informal economy had neither legal protection nor mandated safety standards. See more at: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper

While the Labor Code of the country complies with all required international laws and treaties, there is a gap in protecting the rights of individuals employed by private companies. Many employees are hired based on basic or even oral agreements and lack knowledge of their rights. In February 2015, the Ministry of Economy established a working group to amend the Labor Code with the goal of simplifying labor agreements and making them more common. The proposed amendments aimed to lower payment for overtime work and simplify firing processes. The bill was heavily criticized and eventually dropped.

In January 2017, President Atambaev signed into law amendments to the Labor Code of the Kyrgyz Republic that strengthen labor rights and protections of people under age of 18. The amended law 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 United States signed a bilateral OPIC agreement with the Kyrgyz Republic in 1992. OPIC recently financed part of the campus expansion of the American University of Central Asia in Bishkek and the University of Central Asia in Naryn. In 2016, OPIC approved $21 million in credit to Gazelle Finance for a special purpose investment fund to promote lending to small and medium enterprises in four countries in Eurasia, including the Kyrgyz Republic.

Bank lending and international donor financing remain the primary mechanisms by which businesses in the Kyrgyz Republic seek to fund their growth. There are few investment funds in the Kyrgyz Republic. OPIC products have the potential to expand small and medium enterprise lending and assist the development of private equity funds in the Kyrgyz Republic, which are currently few in number.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

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

Dominic McIntyre
Economic and Commercial Officer, U.S. Embassy in the Kyrgyz Republic
171 Prospekt Mira
Bishkek, Kyrgyz Republic 720016
+996-312-597-000