Comparative ENG 10.04

8/6/2019 Comparative ENG 10.04

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Comparave Report on Kazakhstan, Kyrgyzstan and UzbekistanNovember 2008

Contacts:

Robert Genkin

+1 212 792 95 95

[email protected]

Seyitbek Usmanov

+996 312 66 12 17

[email protected]

Kairat Kasymaliev

+996 312 66 12 17

[email protected]

Central Asia

The region is emerging as a major player in the internaonal arena, with

oil and metal reserves of Kazakhstan, gas reserves of Uzbekistan, and hy-

droelectric power of Kyrgyzstan all playing a key role in the regions de-

velopment. Although a slowdown is underway in Central Asia, it is

certainly not as severe as the current situaon in developed economies.Regional growth is forecast to fall to 7.6% in 2008 from 11.6% in 2007 be-

fore rising to 8% in 2009.

INTRODUCTION

This paper will compare Kazakhstan, Kyrgyzstan and Uzbekistan by their

economic freedom rankings, trade behavior, investment environment,

and polical stability. The aim of this report is to present an accurate pic-

ture of these three countries to enable financial market parcipants make

intelligent investment decisions.

Kazakhstan

Following the collapse of the Soviet Union, Kazakhstan became the sec-ond largest country in the CIS, behind Russia, in terms of landmass. It pos-

sesses one of the worlds largest fossil fuel reserves and rich supplies of

metals and minerals. Kazakhstan's industrial sector is based primarily on

the extracon and processing of these natural resources. It also has a

large agricultural sector including livestock and grains. In the 1990s, Kaza-

khstan, like other former Soviet states, experienced breakdown of its tra-

dional heavy industry producon, which resulted in a sharp contracon

of the economy, with the steepest annual decline occurring in 1994 (30%).

The countervailing measures of the Kazakh government, including eco-

nomic reform and privazaon of government enterprises in the late

1990s, brought inial posive results in 2000 when GDP grew by 9.6%.

Kazakhstan enjoyed nearly double-digit growth between 2000 and 2007

due to its booming energy sector, economic reform, good harvests, and

increased foreign investment into the economy. While increased oil prices

have paved the way for vibrant growth in the last eight years, the recent

credit crisis has significantly reduced domesc demand, triggered by

weakening investment and household spending. The credit crisis followed

a period of excessive external borrowing by private banks. This is reflected

in the performance of lending and heavy industry subsectors, where

growth has slowed significantly , parcularly in manufacturing and con-

strucon. Mining and quarrying, however, grew strongly, led by crude oil,

coal, and gas. Agricultural growth remains robust in contrast to other

countries in the sub-region.

GLOBAL RESEARCH DEPARTMENT

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Soaring inflaon, approximately 20% in June 2008, propelled by higher

food prices and public sector wage increases is a significant concern for

the government. The authories responded by banning wheat exports (aban that was rescinded on September 1, 2008). Core current account sur-

pluses for 2008 and 2009 are expected to be 3.8% and 0.6% of GDP, as-

suming oil prices remain above $60 per barrel. The trade and current

account balances were in surplus in the first quarter.

Part of Kazakhstans oil revenue is channeled into the Naonal Fund, its

Sovereign Wealth Fund, which is projected to reach $32.8 billion by year-

end. Most recently, Standard and Poors expressed disapproval that the

Government tapped its oil reserves to provide bailouts to the ailing banks.

The current structural reform agenda is focused on enhancing the super-

vision of the banking sector to ensure that excessive private sector foreign

currency borrowing that precipitated Kazakhstans financial crisis last year

does not recur. Aided by strong growth and foreign exchange earnings,Kazakhstan aspires to become a regional financial center.

Kyrgyz Republic

Kyrgyzstan is a small, mountainous country in the heart of Central Asia.

Coon, tobacco, wool, and meat are the main agricultural products, al-

though only tobacco and coon are exported in commercial quanes.

Industrial exports include gold, mercury, uranium, natural gas, and elec-

tricity. Following independence in August 1991, Kyrgyzstan was a pioneer

in implemenng market reforms such as a business friendly regulatory

system and land privazaon. Kyrgyzstan was the first Commonwealth of

Independent States (CIS) country to be accepted into the WTO in 1998.

GDP grew 8.2% in 2007, due to an improving business environment. The

economy is expected to grow 7.0% in 2008, and 6.5% in 2009. GDP growth

has slowed to 7.1% in the first half of 2008 from 8.8% in the same period

from the previous year, reflecng ontagion effect from neighboring Kaza-

khstan through trade, investment, and remiance channels.

The government made steady strides in controlling its substanal fiscal

deficit, nearly closing the gap between revenues and expenditures in

2006. In October 2008, the parliament enacted a business friendly tax-

code which reduced the number of taxes (down to eight from sixteen)

and their respecve rates (VAT, for example, was reduced from 20% to

12%). The country is making progress in fighng corrupon, restructuring

domesc industry and in aracng foreign investment.

Of increasing economic importance are tourism and hydroelectric power.

Kyrgyzstans mountains are a playground for climbers. Peak-baggers head

for the three giants over 7,000 meters. Every year holiday-makers from

Kazakhstan and Russia plunge into Lake Issyk-Kul. 2007 had a record 1.3m

visitors to the lake. The Kyrgyz Republics locaon and geographic fea-

tures also makes it one of the most promising hydro energy producers in

the world, only 10% of which is currently in use.

Uzbekistan

Uzbekistan is a dry, landlocked country 11% of which consists of intensely

culvated, irrigated river valleys. More than 60% of its populaon lives indensely populated rural communies. Uzbekistan is now the world's sec-

ond largest coon exporter and fih largest producer; it relies heavily on

coon producon as the major source of export earnings. Other major ex-

port earners include gold, natural gas, and oil.Page 2


Comparave Report on Kazakhstan, Kyrgyzstan and Uzbekistan

Kyrgyzstan was the first and only country

in Central Asia to join the WTO


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Following independence in September 1991, the government sought to

prop up its Soviet-style command economy with subsidies and ght con-

trols on producon and prices. In 2003, the government accepted Arcle

VIII obligaons under the Internaonal Monetary Fund, providing for full

currency converbility. However, strict capital controls have lessened the

effects of converbility and have also led to some shortages that have s-

fled economic acvity. The Central Bank oen delays or restricts con-

verbility, especially for consumer goods.

Soon aer the Andijon massacre, where up to a thousand demonstrators

were shot by Uzbek security forces, Vladimir Pun and Islam Karimov

signed an "alliance," which included provisions for military and business

cooperaon.

According to the Asian Development Banks September projecons, the

economy is projected to grow 8% for each of the next two years. The maingrowth drivers in the first quarter of 2008 were a favorable external en-

vironment for commodity and non-commodity exports, an increase in hy-

drocarbon-related foreign direct investment (FDI), and strong remiance

inflows from Russia. Inflaon is forecast to drop to approximately 11% in

2008. Wage and salary increases will be a source of inflaon pressures in

2008.

In the IMFs assessment, the naonal currency (sum) connues to be un-

dervalued and the authories need to allow it to appreciate. The current

account surplus will remain propped up by a large trade surplus. Export

growth fueled by price and volume increases will outpace import growth,

aributable in part to the trade policy regime.

CENTRAL ASIA IN RANKINGS

The first aribute used to compare the countries in the region is their

ranking in key economic surveys. The first such ranking is the Economic

Freedom of the Worldreport by the Fraser Instute which seeks to meas-

ure the consistency of instuons and policies of various countries with

regard to voluntary exchange and other dimensions of economic free-

dom. Every year it ranks 143 countries for economic freedom by five

major categories. Since their inclusion in the rankings in 2007 both Kyr-

gyzstan and Kazakhstan have performed relavely well, Uzbekistan is sll

excluded. In the latest 2008 edion Kyrgyzstan progressed from 68th to

60th, while Kazakhstan dropped from 34th to 42nd.

Kyrgyzstan and Kazakhstan received high marks for the size of govern-

ment and access to sound money. Government consumpon as a per-

centage of GDP was 16.33% in the Kyrgyzstan and 18.32% in Kazakhstan.

The passage of a flat 10% corporate and income tax and sector-wide cuts

in the number of civil servants in the Kyrgyz Rep. were a likely source of

such progress. The top corporate and personal income tax rates are 10%

in Kyrgyzstan and 20% in Kazakhstan.

The Kyrgyz Republic improved in the Access to Sound Money category for

keeping inflaon within five percent for the last five years (2008 data is

not reflected yet), while inflaon in oil-driven Kazakhstan remainedaround 10%. In a sub-category toAccess to Sound Money, Kyrgyz Rep. re-

ceived a low mark for capital controls, 5.00, while Kazakhstan received

an even lower mark of 1.54.

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Kyrgyzstan Kazakhstan

Category 2005 2006 2005 2006

Overall rank 68 60 34 42Size of

government7.93 8.05 8.22 7.77

Legal structure 3.73 4.61 6.07 6.21

Access to sound

money8.65 8.69 8.10 8.21

Rankings by the Fraser Instute

Rankings by the Heritage Foundaon

Category Kazakhstan Kyrgyzstan Uzbekistan

Business

Freedom 56 60 68Trade

Freedom 86 81 68

Freedom

from

Government80 94 88

Monetary

Freedom 85 76 58

Investment

Freedom 72 50 30

Financial

Freedom 60 50 20

PropertyRights 30 30 30


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The Heritage Foundaons Index of Economic Freedom also measures eco-

nomic freedom but the methodology is slightly different from the World

Economic Freedom Index. It rated Kazakhstan 60.5% free, giving it the

76th ranking. Kyrgyzstan was rated 61.1% free and was ranked 70th, and

Uzbekistan was rated 52.3% free and ranked 130th.

The report praised Kazakhstan and Kyrgyzstan for their low tariff rates,

1.9% and 4.3% respecvely, Uzbekistans are slightly higher at 5.8%. Sig-

nificant non-tariff barriers such as corrupon, customs inefficiency, and

the complexity of customs procedures sll inhibit trade. Kyrgyzstan has

the easiest access to world markets since it is a WTO member while Kaza-

khstan has one of the freest labor markets in the world where firing an

employee requires just nine weeks of compensaon, Kyrgyzstan requires

seventeen, both are beer than Uzbekistan which requires twenty two

weeks.

CENTRAL ASIAN TRADE

Kazakhstan

Prior to the collapse of the USSR, most of the goods that Kazakhstan pro-

duced for export went to the Russian markets. In 1990, 88.7% of Kaza-

khstan's exports followed this route, including more than 70% of

industrial producon and mining output, along with 27% of its agricul-

tural producon.

The tradional, Soviet era trade paerns have persisted: exports are

mostly raw materials, and imports are mostly manufactured goods. Fer-

rous and nonferrous metals mainly rolled steel, copper, ferroalloys, zinc,tanium, and aluminum account for 40% of export earnings, followed

by oil and petroleum products (33%) and chemicals (10%). Energy prod-

ucts are also the largest import category, mainly because of the ongoing

geographically determined exchange agreement that sends Russian oil

from western Siberia to refineries in eastern Kazakhstan and oil from

Kazakhstan's western oil fields to refineries across the border in Russia.

The imbalance of Kazakhstans domesc economy makes non-petroleum

producers vulnerable to compeon from imported goods.

Hydrocarbon related trade dominates Kazakhstans economy. Pipelines

through Russia connue to carry the largest volume of Kazakhstans ex-

ported oil, and Kazakhstan has also been connected to the BakuTbilisi

Ceyhan pipeline, bypassing Russia, in October 2008. In 2007 Belarus,

Kazakhstan, and Russia formed the Eurasian Economic Community

(EurAsEC), which also includes Kyrgyzstan, Tajikistan and Uzbekistan.

During the first ten years aer the collapse of the Soviet Union, Kaza-

khstan made outstanding progress and managed to quadruple its exports,

going from US$3.2 billion in 1994 to US$13.9 billion in 2003 to US$48.3

billion according in 2007. Since 1999, oil exports have enabled Kazakhstan

to maintain a substanal trade surplus.

In 2005, commercial relaons with China solidified due to the comple-

on of the 996km AtasuAlashankou oil pipeline into Xinjiang Province,

along with an agreement to export US$10 billion worth of electric power

to China. China also bought one of Kazakhstans largest oil companies,PetroKazakhstan and another major pipeline, the Kenkiyak-Aralsk-Kumkol

pipeline, is in the works.

Top Export

Commodies

Top Import

Commodies

Oil and oil productsMachinery &

Equipment

Ferrous Metals Metal Products

Chemicals Foodstuffs

Kazakhstan


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Kyrgyzstan

The end of the command economy in 1991 triggered the breakdown of

trade links among the former Soviet Union republics and a surge in infla-

on which led to shortages of basic products. However, by the end of the

90s, the Kyrgyz government largely succeeded in stabilizing the economy

and establishing rudimentary market instuons.

Kyrgyzstans progress is reflecve of the desire of its leaders to fully par-

cipate in the world economy. Three months aer its independence in

October 1991, the newly elected President, Askar Akaev, cut tariff barri-

ers to trade to about 2%, privazed key industries and enlisted Kyrgyzstan

into the WTO in 1998. As a result, the country has been increasingly more

integrated in the world economy. The mountainous terrain of the coun-

try has not hampered trade growth, and overall trade has increased rap-

idly, from US$0.7 billion in 1992 to US$1.1 billion in 1999 to US$3.4 billion

in 2008.

Sweeping economic reforms were implemented speedily, including pri-

vazaon, price deregulaon, and financial sector liberalizaon. Despite

being faced with substanal social and polical unrest, culminang in a

polical crisis in 2005 with the ousng of the founding president and the

collapse of the previous government, the administraon has remained

commied to democracy and to dismantling the command economy. Tar-

iffs remain relavely low, and the Government has resisted sectoral pro-

teconism. Encouragingly, recent proposals to apply export taxes on

construcon materials, to control rising domesc prices caused by Kaza-

khstan's building boom, have been dropped.

At the product level, the total number of exported products decreased

between 2000 and 2006, while the number of products exported at more

than $50,000 USD increased. This suggests an increase in the market

share of fewer products, hence a raonalizaon of the export process.

Indeed, to fully take advantage of economies of scale, exporng firms

need to specialize and increase their producon.

Given the non-governmental considerable trade barriers faced by Kyr-

gyzstan due to its landlocked locaon a realisc growth policy targeng

the short to medium term should first focus on increasing demand from

fast-growing China, Kazakhstan and Russia. Another one of Kyrgyzstans

major exports is gold, which is exported to Switzerland, as evidenced by

Switzerlands high share of the export market.

Uzbekistan

Uzbekistan has adopted a gradual approach to the transion from com-

munism, relying heavily on the use of state controls, trade and foreign

exchange restricons, and large public investments. Therefore, the trade

regime remains nontransparent, restricve, and complex.

Unlike the Kyrgyz economy, overall trade growth in Uzbekistan was driven

by export-led trade. Before 1993, export and import paerns were simi-

lar in size and each roughly accounted for 30% of GDP. As the government

transformed the economy, import-export rao fluctuated around one and

most of the me in favor of imports. Trade liberalizaon achieved resultsin early 2000s; exports reached 40% of GDP peaking in 2006, while im-

ports fell to 22%.

Top Export

Commodies

Top Import

Commodies

Mineral Products Mineral Products

Precious Metals & Stones Machinery & Equipment

Texles Chemicals

Kyrgyzstan


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Currency liberalizaon in 2003 led to significant increases in exports and

imports in recent years. Imports increased much less rapidly then exports

because Uzbekistans trade policy is based on import substuon. While

exports had more than doubled to US$6.5 billion by 2006, import levels

only reached US$4.5 billion, reflecng the impact of the government's

import substuon policies, which were designed to maintain hard cur-

rency reserves.

The mild and warm climate in Uzbekistan favors agricultural goods, which

make up the largest export sector. For example, coon and agricultural

food products contribute 21.0% and 7.9% respecvely to the total export

industry. Imported goods are led by machinery and equipment, which

constute 40.3% of all Uzbek imports. By 2006, overall trade almost dou-

bled and peaked at $10.8 billion.

Central Asian Trade Summary

When one compares the trade restricons among the three countries, it

becomes clear that the most liberal and open trade regime is in Kyrgyzs-

tan. The Kyrgyz Republic was the first former Soviet Union republic to join

the WTO and undertake crucial economic reforms in its trade policy. How-

ever, these quick steps to integrate the domesc economy in to the global

market did not bring the desired results as fast as was expected. Weak

infrastructure and complicated legislature as well as sff government bu-

reaucracy slowed the development process.

Uzbekistan ranks behind both Kyrgyzstan and Kazakhstan in trade free-

dom. This can be explained by its isolaonist trade policy coupled withexcessive taxes and trade restricons to prop up the import substuon

strategy. Overall, Uzbekistan is a self sufficient state rich in both agricul-

tural and energy potenal. However, with current trade policy trends

there is a risk that the country will not progress as rapidly as its more for-

ward-looking neighbors.

Investment Environments in Comparison

Kazakhstan, Kyrgyzstan and Uzbekistan successfully aract increasing

amounts of investments. Kazakhstan was the most successful at aracng

FDI, which reached a record $10.3 b in 2007, while Uzbekistan had $545m

and Kyrgyzstan had $437m. The deepening credit crisis will dampen in-

vestments for 2008. However, the relave aracveness of the region re-

mains high.

Kazakhstan

Kazakhstan has been a magnet for aracng investment. Among South-

east Europe and the Commonwealth of Independent States (CIS), only

Russia and Romania aract more investment, and only Hungary has

higher per capita FDI levels. Investment flows are predominately directed

towards tapping the countrys hydrocarbon reserves in the oil and gas

rich Atyrau, Aqtobe and Mangistau regions.

Despite a high rate of foreign investment, investors oen find that the

ways of doing business is reminiscent of Soviet days. Foreign companies

increasingly must use local firms in commercial operaons. No sector isclosed, but there is a 25% cap on foreign capital in banking and a 20%

ceiling on foreign ownership in media companies. Screening of foreign in-

vestment proposals is oen non-transparent, arbitrary and slow.

Top Export

Commodies

Top Import

Commodies

Mineral Products Mineral Products

Precious Metals & Stones Machinery & Equipment

Texles Chemicals

Uzbekistan

EXXON oil refinery in Aqtobe


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A convoluted legal code, legislave favorism toward Kazakh companies,

and government interference in commercial operaons further deter in-

vestment. Subject to restricons, foreign exchange accounts may be held

by residents and non-residents. Most capital transacons, payments, and

transfers are subject to government approval, quantave limits, and

strict documentary requirements. The prospects for foreign direct in-

vestment outside the energy and mining industries are bleak, largely be-

cause of an unfavorable and, in most cases, corrupt business

environment.

Privazaon

The official privazaon process in Kazakhstan started in 1991 and was

completed in 1998. Divided into four stages, it was aimed at the rapid de-

velopment of private business and market liberalizaon. The first stage,

inial privazaon, lasted two years and 6,198 enterprises, mostly in

trade and retail sectors, were sold. During the second stage, from 1992-1995, investors parcipated in the privazaon of over 3,500 large state-

owned-enterprises. By the end of the third stage, private market share

increased to 79.3% of overall economic acvity. Privazaon has been

gradual but successful, and much of the economy is now in private hands.

Kyrgyzstan

Like other former Soviet Republics, Kyrgyzstan is sll going through the

long process of developing a transparent and effecve business culture

that is aracve to foreign investment. Kazakhstan is the largest foreign

investor in Kyrgyzstan. Between 2004 and 2007 Kazakh investment in Kyr-

gyzstan grew eight-fold, from US$16 million per year in 2004, to US$133

million in 2007, making the sum total of Kazakhstan's investment in Kyr-gyzstan worth approximately US$475 million. Kazakhstans investments

amount to over 40% of total foreign investment in Kyrgyzstan.

The investments are spread across a wide array of businesses, ranging

from gold mining to sugar processing. Some specific investment projects

include a cement plant, an anmony factory in the south around Batken,

the construcon of a new highway from Almaty to the tourist resorts

around Lake Issyk-Kul, the building of hotels around the lake, and even

invesng in a factory producing kning needles. Investment began to

slow only in 2008 when the real estate market deteriorated in Kazakhstan.

Investments in the construcon sector have accelerated recently aer

fine-tuning in construcon licensing processes. The World Banks Doing

Business Report ranked Kyrgyzstan as the worlds top reformer in dealing

with construcon permits in 2007/08. Regulaons le over from Soviet

mes had required builders to obtain separate preapprovals from each

ulity authority. Now a one-stop-shop issues all approvals, including con-

strucon permits. Another big change: a presidenal decree eliminated

the locaon permit, which had required the signature of Bishkeks mayor

and took 60 days to obtain.

According to the same report, Kyrgyzstan is a global leader in regulatory

reforms for improving its business environment. The country reformed in

three of the ten areas studied. It ranked third among the global regulatory

reformers, for progressing in overall rank on the ease of doing business to68th from 99th. Akylbek Japarov, Minister of Economic Development,

hopes to see Kyrgyzstan in the top twenty in next years report.

Kumtor Gold Mine in Barskoon


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Over the past decade, Kyrgyzstan has made significant progress in trans-

forming its economy to create a more transparent, less regulated and

more market-driven business environment. Most of the economy is open

to foreign investment, there are guarantees against expropriaon or na-

onalizaon and investors may may parcipate in the privazaon

process on same foong as local firms. However, rules and regulaons

are not always applied consistently. Foreign corporaons may not pur-

chase land but rent it for 99 years. Residents and non-residents may hold

foreign exchange accounts. There are no restricons on payments and

transfers, but most capital transacons must be registered with the State

Financial Supervisory Authority ().

Privazaon

The government has launched two major programs to privaze state en-

terprises, which by 2003 had shied about 7,000 enterprises to the pri-vate sector. Since the Tulip Revoluon in March of 2005 the Kyrgyz

government has put enormous efforts in creang a favorable investment

climate. In 2007, the government restructured and liberalized over thirty

state-owned enterprises pushing the privazaon percentage in heavy

industry up to 88.4%. Many sectors have been heavily privazed, such as

construcon (59%), transportaon (61%), and services (97%). The re-

maining major state-owned assets, Kyrgyz Telecom, Kyrgyz Altyn, Naonal

Airport Manas, among others, are expected to be privazed within the

next year, since the law paving the way for further privazaon was

passed in early 2008.

UzbekistanUzbekistan, with a populaon of 27 mil, seems like a natural desnaon

for investments, as it is the most populous country in Central Asia. Dae-

woo Corporaon of South Korea constructed a car factory in Uzbekistan

with a producon capacity of 250,000 cars per year in the 90s; this fac-

tory is now owned by GM Uzbekistan. However, major investors other

than Daewoo have been lukewarm to invesng in the country. The coun-

try has managed to aract only slightly more investment than Kyrgyzs-

tan, a country with one-fih its populaon and half its territory. The main

FDI sectors are industry, metallurgy, natural gas and chemistry.

Officially, all sectors are open to foreign investment except for industries

the government deems "strategic." In pracce, investors face barriers

such as the cumbersome bureaucracy, the threat of expropriaon, un-

certain and arbitrary regulaon, corrupon, and polical unrest and vio-

lence. The government repealed tax breaks for all foreign companies in

mid-2006, bringing to an end several firms' operaons. Residents and

non-residents may hold foreign exchange accounts, subject to some re-

stricons. Payments and transfers face quantave limits and bona fide

tests. Some capital transacons, including credit operaons and real es-

tate transacons, are subject to controls.

Privazaon

Uzbekistans economy has retained many elements of Soviet economic

planning. Economic policy remains under state control; the government

has strictly limited foreign direct investment, and lile privazaon hasoccurred aside from small enterprises. However, to revive the sluggish

economy, the government has taken new course. Since 1998, the rapid

privazaon of industrial giants, enterprises in oil and

GM-Uzbekistan Car Factory


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and gas sector, chemical, metallurgical and machine-building industries

has begun, yet aracted lile foreign capital. Despite these expansionary

privazaon ambions, it is sll difficult to acquire a stake in state-owned

enterprises due to a strong inclinaon towards isolaonism and corrup-

on.

The size of the stake investors can acquire in to-be-privazed state en-

terprises varies is divided into five categories. Only one category offers

free of charge privazaon for investors, in which they can acquire

100% control. Usually, these are small and mid-size stagnant companies

on the edge of bankruptcy and represent only 9.8% of the total number

of privazed enes. Enterprises in other categories require a govern-

ment stake of at least 25%, which makes them very unaracve for po-

tenal investors.

INVESTMENT SUMMARYKazakhstan remains one of the most aracve investment desnaons

not only in Central Asia but also in the world. The oil sector proves to be

an aracve market due to its non-discreonary nature and consistent

and steady demand. Kyrgyzstan is aracng significant investments in

processing and heavy industry, mainly to supply the demand of the do-

mesc market, the growing Kazakh market and other CIS markets. In-

vestments are expected to rise substanally in the wake of the massive

privazaon which is expected to aract global mulnaonals and sov-

ereign wealth funds. Uzbekistan remains sealed to foreign investors al-

though the leadership is acvely seeking investments to reform the ailing

economy.

Polical Stability

Kazakhstan

Kazakhstan has been under the control of a single person, Nursultan

Nazarbayev, since even before the collapse of the Soviet Union. During

that me, governance has been destabilized by the dismissal of several

governments, a series of referenda that changed governmental pracce,

periods of rule by presidenal decree, and the establishment of two new

constuons. These events have concentrated power in the hands of the

president, liming the power of the legislature and the ministries.

Nazarbayev has acted to discourage opposion, although some opposi-

on pares do exist. Government corrupon has been a major issue. At

the same me, Kazakhstans internaonal presge has improved because

of its oil and gas resources, and its geographic importance in an-terror-

ism operaons.

Kyrgyzstan

In Kyrgyzstan the prospects for polical stability have improved in recent

years. The extra-parliamentary opposion is likely to connue to mount

occasional public protests, but the tenor of the opposions discourse has

become much less confrontaonal than it previously has been. The op-

posion is most likely to aempt to rally the public behind itself by con-

centrang on the more resonant issues of harsh economic condions and

privazaons. Public protests on such issues cannot be ruled out and

are even probable in the context of escalang living costs but the gov-

ernment is likely to be able to contain them. One approach adopted bythe government may include financial measures such increasing welfare

payments to support vulnerable groups, or via the already imple-

mented reducon in value-added tax (VAT) on basic foods.

Presidents Bakiev, Karimov and Nazarbaev


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Uzbekistan

The Constuon of 1992 calls for a secular, democrac system of gov-

ernment, freedom of expression and religion, and the rule of law. How-

ever, in pracce, the Presidency, a posion occupied by Islam Karimov

since independence, dominates all three branches of government. In the

post-Soviet era, much like his Kazakh counterparts, Karimovs power has

been enhanced by referenda, constuonal amendments, and the de-

velopment of a very strong internal security force. Opposion pares

have been sfled, and polical life revolves around Karimov rather than

around polical pares. The prime minister, the cabinet, and the parlia-

ment have very limited powers, and the judicial branch is fully subordi-

nate to the execuve branch. Corrupon is common in all government

branches and at all levels, and clan membership is a vital qualificaon for

posions. Concentraon of so much polical power in one persons hands

made opposion impossible and everything in Uzbekistan is done only

with the presidents consent.

Polical Stability Summary

Business disrupons due to certain governmental acons or polical in-

stability are a reality in nearly all froner markets as in the Central Asian

region. Shortcomings in legal codes, legislave favorism, and rampant

corrupon made it impossible for the countries to quickly transform into

global market players. However, the new states have learned from their

mistakes of the 1990s, and are now taking large steps towards growth

and development.

SUMMARY

All three countries share a similar cultural background and common his-tory, yet they remain very different in their economic development and

reforms. Kyrgyzstan, Kazakhstan, and Uzbekistan have implemented eco-

nomic reforms at different stages of their development. For instance, Kyr-

gyzstan was the first country in the Central Asian region to liberalize its

trade, accepng all WTO pre-condions while Kazakhstan is currently in

advanced stages of joining and Uzbekistan expresses no desire of joining.

The fast growing Kazakhstan, is leading the way towards progress and

economic prosperity backed by its rich natural resources which have been

aracng foreign capital. The slow but steady process of transformaon

and privazaon has put Kazakhstan among the top five fastest growing

countries in the world. The most liberal out of all three, Kyrgyzstan, does

not possess large deposits of mineral resources like its neighbors, but, it

makes up for it by implemenng the policies of open economies and a

free-society.

Uzbekistan has great potenal to become one of the leaders in the Cen-

tral Asian market if it were to follow the footsteps of its neighbors and

implement more of their reforms. The almost totalitarian regime is the

main destrucve force for both the republics presge and its investment

climate. The Governments need to control the key industrial sectors leads

to old Soviet inefficiency.


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Countries need to be flexible and create world-class investor environ-

ments. While, Kazakhstan can afford to flout investor-friendly treatment

from me to me helped by its oil wealth, Kyrgyzstan needs to adopt a

more progressive stance in order to aract FDI on steady and connuous

basis. Kyrgyzstan and Kazakhstan are working to open up their economies

to more trade, to increase the inflow of foreign capital and to provide the

highest level of investor protecon in Central Asia.


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Disclaimer

This research report was prepared by CJSC MGN Capital (MGNCapital) and/or one or more of its affiliates (collecvely, MGN),as further detailed in the report, and is provided for informaonand discussion purposes only. It does not constute an offer or so-licitaon to purchase or sell any securies or other financial prod-ucts.

The informaon contained in this report is based on generally avail-able informaon and, although obtained from sources believed tobe reliable, its accuracy and completeness is not guaranteed. Theanalysis contained in this report is based on a number of assump-ons. Changes in such assumpons could produce materially dif-ferent results. This communicaon is not intended to forecast orpredict future events. Past performance is not a guarantee or in-

dicaon of future results.

This report does not take into account the investment objecves,financial situaon or parcular needs of any parcular person. In-vesng in securies and other financial products entails certainrisks, including the possible loss of the enre principal amount in-vested. Certain investments in parcular, including those involvingstructured products, futures, opons and other derivaves, arecomplex, may entail substanal risk and are not suitable for all in-vestors. The price and value of, and income produced by, securiesand other financial products may fluctuate and may be adverselyimpacted by exchange rates, interest rates or other factors. In-vestors should obtain advice from their own tax, financial, legal

and other advisors and only make investment decisions on thebasis of the investors own objecves, experience and resources.

MGN has no duty to update this report and the opinions, esmatesand other views expressed in this report may change without no-ce. No liability whatsoever is accepted for any loss (whether di-rect, indirect or consequenal) that may arise from any use of theinformaon contained in or derived from this report.This report is intended for distribuon solely in those jurisdiconswhere such distribuon is permied. No part of this report may becopied or redistributed by any recipient for any purpose withoutMGNs prior wrien consent.


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