Ample natural resources make Kazakhstan the growth economy of Central Asia
Kazakhstan, which became independent in 1991, is the largest inland country in the world and has immense natural resources. However, corruption, stiff bureaucracy, and constantly changing legislation make foreign companies' operations difficult.
The Helsinki School of Economics Center for Markets in Transition (CEMAT) has published a study on Kazakhstan as a business environment from the Finnish point of view. Approximately thirty Finnish companies operate in the country, and a third of these work in the construction sector.
Finnish companies typically operate in Kazakhstan through sales representatives. The first investment into production capacity, the construction of a factory by Nokian Tyres in the capital Astana, is postponed until the end of the year 2010 because of the economic recession.
Kazakhstan is considered the most developed country in Central Asia. In the 21st century the economy, which is based on fossil fuels and metals, grew by an average annual rate of ten per cent. The living standard of the 15 million inhabitants is comparable with Russia, Ukraine and Belarus, although nearly 30 % of citizens live without sanitation and 14 % without clean water.
The economic recession can also be seen in Kazakhstan, although its economy is expected to recover faster than the economies of neighboring countries. Because the country's exports are mainly oil, iron ore and other metals, economic growth largely depends on the development of world market prices for raw materials.
Imports into Kazakhstan mainly consist of machinery, equipment, and transportation vehicles. Oil industry investments have accelerated the demand for investment goods and the flow of oil dollars into the country has boosted consumer demand.
In the 21st century Finnish exporters of machinery and equipment have found the Kazakhstan market, although the economic crisis has caused a temporary slump in exports. Correspondingly, the value of imports of oil to Finland from Kazakhstan was nearly half a billion Euros last year.
The oil industry has also been an engine of growth for foreign investments made in Kazakhstan. Last year over half of the direct investments made in the country concerned drilling and quarrying of oil or geological research. The United States has been the largest investor, but some well-known offshore-countries like the Virgin Islands are also among the top investing countries. The investments coming from these off-shore locations are estimated to be mostly returning capital from either Kazakhstan or Russia.
Finnish companies have invested in Kazakhstan to the same extent as other Nordic countries. Last year the share of Kazakhstan was about half per mil of all Finnish investments abroad, while the share of Russia for example was about five per cent.
Stable, but susceptible to changes
Kazakhstan is politically more stable than several of the other Central Asian states, but tensions that can change the situation in the future are present. One of them is Kazakhstan's geopolitical situation as a neighbor of Russia and China. Kazakhstan has close economic relations with Russia, but trade with China is growing fast.
- China is a threat because China naturally tries to buy Kazakhstan for itself. It can just be seen, estimated one of the Finnish companies' representatives, whom CEMAT interviewed.
On the other hand, the space centre Baikonur Cosmodrome, which was founded during the Soviet Union, is situated in the country's territory. This can become a problematic issue with Russia.
Clan and tribe traditions, which are typical of Central Asian countries, bring susceptibility to changes too. It is not certain what the withdrawal of president Nursultan Nazarbaev, who has been in power since Kazakhstan became independent, will mean to the different clans' balance of power. The threat is that with the change of power conflicts and disagreements between different population groups will become critical.
A downside of stability, the state of democracy and human rights in Kazakhstan is weak. Still, the country's foreign policy is characterized as successful because relations with both next-door neighbors and other parts of the world, including the EU and the United States, are good.
Under president Nazarbaev's leadership economic reforms have been made in Kazakhstan and foreign investments, especially in the country's weathered infrastructure, are encouraged. Financing for infrastructure projects is available both from domestic investment funds maintained with oil and gas proceeds and from international development bank projects. Special economic regions have also been founded in the country to stimulate investments into industrial production and technology development.
Corruption and red tape
Kazakhstan is considered one of the most corrupt countries in the world, even though the country's government has set the fight against corruption as its top priority. It is estimated that corruption is most prevalent among customs officials, traffic policemen, and tax authorities.
- It is everywhere, in principle nothing works here without money. I have never been in a country as corrupt as the one I am in now, Kazakhstan.
Companies are also annoyed by authorities' inspections, which momentarily interrupt operations and can lead to fines or other claims. It is often a question of requests for bribes, which are masked as official payments. Legislation, which is unclear and open to various interpretations, and the complexity of demands made upon companies' documents prove favorable grounds for corruption.
According to Finnish companies' experiences, business progresses when authorities' requirements are met exactly.
- Documents have to be without any mistakes, no mistakes in paragraphs, miscalculation, nothing is allowed. It is an official document - it may not include any mistakes.
Everything has to be listed in a customs declaration, even an extra screw or an empty strip of paper.
- If you just think that let's add a few extra screws which might be needed on the assembly site, it will not get through the customs, because it is smuggling.
Because of the burdensome bureaucracy, some Finnish companies have outsourced the handling of red tape to local customs brokers or other intermediaries. A company often needs to prepare to wait a long time for official documents.
- To get this kind of license, so that we were at least able to offer a certain product here, took us seven months.
Finnish companies' visibility increases
At least for now, Kazakhstan has not suffered from the same kind of overheated labor market as the growth centers in Russia during the years of economic growth. However, it may be difficult to find employees for management and expert positions, and training staff to Western companies' methods of operation may be arduous. Working culture and mentality are described in many ways as "Soviet".
- Maybe the biggest problem is that they do not really have any idea how European firms operate [...] They have a strong belief that European companies operate the same way as the Russian companies were operating during the old Soviet Union. It is very difficult to disprove this belief.
Getting work permits is also complicated and can easily take half a year. Jobs have to be announced in the four main local papers and if a suitable local candidate is not available, a foreign one can be hired.
Competition is tough in many fields of business and it's no use going to Kazakhstan if your products are not up to standard. One really has to get to know the practical aspects of the market too.
- If a product competes well on the world market, I think it is of course worth going to Kazakhstan but it requires resources. It requires work, it requires travelling, otherwise nothing will come of it.
In spite of the challenges of the business environment, Finnish companies have a positive view of business opportunities in Kazakhstan. This autumn Finland will open an embassy in the country's new capital Astana. One of the embassy's main duties will be to support Finnish companies. Finpro, on the other hand, is present in the country's financial centre, the old capital Almaty.
Text: Päivi Kapiainen-Heiskanen
Translated by Riitta Ristolainen / Tuomas Mäkelä
Publication:
Timo Eklund - Petri Järvikuona - Tuomas Mäkelä - Päivi Karhunen
Kazakstan suomalaisyritysten toimintaympäristönä
HSE Publications B-105