“Strategy of Industrial and Innovation Development of Kazakhstan: New Investment Opportunities for Canadian Business”

Address by H.E. Mr. Kanat B. Saudabayev, Ambassador Extraordinary and Plenipotentiary of Kazakhstan to Canada, at a conference, organized by Canada-Russia-Eurasia Business Association, Export Development Canada and the Embassy of Kazakhstan

Montreal, Canada, October 21, 2004

(prepared remarks)

Dear Ladies and Gentlemen,

I am pleased to speak to you today. I thank you for your interest to Kazakhstan and to business cooperation with us.

First, let me say a few words about my country. You would be interested to know that Kazakhstan and Canada are close neighbors since there is only Russia between us.
In many respects our two countries are similar. Kazakhstan, like Canada, has a huge territory and is the 9th largest country in the world. Like Canada, Kazakhstan has a small population of only 15 million, which is very multiethnic and consists of clever and industrious people. Like Canada, Kazakhstan is a bilingual country: while English and French are official languages in Canada, Kazakh and Russian are official languages in Kazakhstan.

Like Canada, Kazakhstan was blessed by God with rich natural resources, such as oil, gas, and large agricultural pastures. Even our climatic and natural conditions are very similar – our new capital Astana “stole” the first place from Ottawa as the world’s coldest capital.

There are similarities in our histories and modern political geography. Canada was part of the British Empire; Kazakhstan was part of the Russian, and then the Soviet Empires, which left its mark on our history and the modern day. Canada has one “big brother”. We have two, Russia and China.

Since gaining its independence in 1991, Kazakhstan has covered a difficult but successful path of political and economic reforms. Despite the fact that we continue to face major challenges which inevitably accompany transitions, we are building a solid foundation of a democratic society and the market economy.

Today Kazakhstan has found its worthy place in the international community. The country has a stably developing democratic system which includes a publicly elected President and a two-chamber Parliament. There are 12 political parties in Kazakhstan, of which five could bring their representatives to the Parliament during the recent election in September. More than 4,500 nongovernmental organizations are active in Kazakhstan, as well as more than 2,000 private news media outlets. An important characteristic of our society is its unique ethnic and religious diversity, and the preservation of peace and harmony in a house of 130 ethnic groups and more than 40 religions.

Our relations with Canada are strong and are characterized by a high level of interaction and mutual visits. In 2003, President Nursultan Nazarbayev of Kazakhstan visited Canada with the first ever visit of a Kazakhstan head of state. During that visit he met with Prime Minister Jean Chrétien, and a number of agreements were signed, including the Kazakhstan-Canada Plan of Joint Actions on strengthening the bilateral economic partnership. This document provides for the establishment of cooperation frameworks such as regular consultations, trade missions, roundtables, seminars with clear accent on such sectors as energy, agriculture, mining, construction, communications, transportation and other potentially attractive areas of economy. We view today’s conference as a concrete substance of this plan.

Overall volume of Canadian investment in Kazakhstan by 2002 reached 590 million US dollars. Around 130 companies in Kazakhstan have Canadian participation. The volumes of Kazakhstan-Canada trade during the past five years show a dynamics of growth, although still remain at a low level of 40-50 million US dollars. The main staples of Kazakhstan exports were iron and steel. Kazakhstan mostly imported industrial equipment.

I believe these numbers do not correspond to the real potential of our two countries. I will explain why and I will explain what you and your company can participate in business cooperation with our country.

What are Kazakhstan’s economic conditions today?

More than 80 percent of Kazakhstan’s economy are in private hands. Major reforms of the banking sector, the taxation system, the pension system were carried out. The stock market is developing.

Reforms of the 1990s began to bear long awaited fruit in 2000. Since that year high level of economic growth is achieved, averaging 10 percent annually. Today these are the highest indicators of economic growth among countries of the CIS and Eastern Europe. According to studies by Oxford Analytica, a British research center, Kazakhstan today is the fastest growing transition economy.

Foreign investment since the year of independence amount to more than 26 billion US dollars and continue to grow annually which speaks to the attractiveness of business climate in Kazakhstan.

Kazakhstan’s foreign trade also grows rather quickly. In the last 4 years its volume doubled. The positive trade balance exceeded 4 billion US dollars.

The GDP grew 9.4 percent during the nine months of this years compared to the same period of last year. Production of goods accounts for 41 percent of the GDP, while services account for 53.5 percent of the GDP. Industrial production grew 9.5 percent., inflation stood at 6.7 percent, and unemployment at 7.9 percent.

Therefore, in Kazakhstan we see a high level of GDP growth and rather low inflation. Kazakhstan’s banking sector is among the most developed in the CIS countries, and the country’s credit rating reached the investment grade. This progress is confirmed by concrete results. For example, Kazakhstan’s Kazkommertzbank recently became the first private financial institution in Central Asia to receive a loan under the guarantee of U.S. Overseas Private Investment Corporation.

Current economic situation in Kazakhstan

Kazakhstan is among the top ten countries in the world in terms of mineral wealth.
Coal industry is the basic industry which provides for 80 percent of electricity and heat, as well we 100 percent of needs of ferrous metallurgy. Atomic industry is developing. Around 21 percent of the world’s uranium reserves are in Kazakhstan.

But our country is not only about rich underground resources. Agriculture has developed traditionally, and we annually export from 3 to 5 million tons of grain. According to the World Grain Council, after the harvest of 2003 and 2004 Kazakhstan will join the top five exporters, moving up one notch from its current sixth position.

Kazakhstan has a developed production in energy, oil and gas production and oil chemistry, ferrous and non-ferrous metallurgy and machinery building.

Kazakhstan has proven oil reserves exceeding 20 billion barrels, however, these reserves can potentially grow to more than 100 billion barrels. In 2000 the largest oil find in the past thirty years was discovered in Kazakhstan, called Kashagan, with geological reserves exceeding 38 billion barrels of oil (4.8 billion tons). Besides oil, Kazakhstan also has huge reserves of natural gas and is 15th in the world in terms of reserves.
Oil production in 2003 grew to 52 million tons, which is equivalent to production of more than 1 million barrels a day. Since the beginning of 2004, oil production grew 15 percent compared to 2003 levels. By 2005, oil production is due to grow to 1.3 million barrels a day.

All major oil fields, Tengiz, Karachaganak and Kashagan, are developed by international consortia. Tengizchevroil joint venture works at Tengiz. ChevronTexaco has a 50% stake in it, ExxonMobil has 25%, KazMunaiGaz has 20 perccent and LUKArco has 5 percent. At Karachaganak, such companies as British Gas, Agip, ChevronTexaco and LUKOil work. At Kashagan, there is an international consortium, Agip KCO, consisting of BG Group, ExxonMobil, Inpex, Phillips, Shell and TotalFinaElf. On February 25, 2004, the government of Kazakhstan and Agip KCO signed an agreement on the beginning of commercial oil production at Kashagan in 2007-2008.

You would be interested to learn that the second largest private oil producer in Kazakhstan currently is a Canadian company, PetroKazakhstan, earlier known as Hurricane Hydrocarbons, which is working there since 1996.

In 2003, during his visit to Canada, President Nazarbayev announced a program of the development of Kazakhstan’s sector of the Caspian Sea. Our sector, with 75 percent of all the hydrocarbon reserves of the sea, provides new opportunities for Canadian businesses which already know Kazakhstan well. It is expected that through the realization of this program more than 3 million barrels a day will be produced in Kazakhstan by 2015. By that time Kazakhstan will be producing 5 percent of the world production. I believe the potential of cooperation with Canadian companies in this sphere is evident.

Industrial and innovation policy of Kazakhstan

Yet we understand well that oil is not eternal. This is why, in order to move toward a dynamically developing and sustainable industrial economy, the government of Kazakhstan developed the Strategy of Industrial and Innovation Development for the years of 2003 through 2015. This program, adopted in 2003, is very ambitious but at the same time is based on real potential and possibilities of Kazakhstan.

It defines ways for the diversification of economy from a raw-material based to a processing one, as well as a complex of measures with which the government intends to stimulate the use of scientific achievements, create and develop science-related and high-tech industries. To carry out the industrial policy, we defined basic industries such as oil and gas sector, mining complex, agricultural and construction industries around which new high-tech industries will be accumulated and created. We intend to ensure the development of new high technology areas, such as information technologies, biotechnologies, nuclear technologies, aerospace industry and the creation of new materials.

The strategy’s main goal is to ensure the tripling of Kazakhstan’s economy by 2015 through the development of the said high-tech industries. In order to do this, the strategy provides for the establishment of an investment climate, competitive environment and the system of government institutions which will stimulate the private sector to create high value-added industries. There is a considerable potential for the creation of such industries in areas such as ferrous and non-ferrous metallurgy, fuel and energy complex, raw materials processing, including processing of agricultural produce.

For example, the implementation of the strategy must lead to the development of an oil and gas industry that will include deeper stages of processing. Through this the industry will be diversified and high added value will be produced, providing a stable income.
The strategy’s main landmarks are ensuring annual average growth levels of processing industries in the range of 7.5 percent. Productivity must grow three times by 2015 compared to 2000, while energy consumption versus GDP must be halved.
In order to achieve these goals, a number of special institutions were established such as the Investment Fund (with charter capital of 150 million dollars), Innovation Fund (US$20 million), Export and Investment Insurance Corporation (US$50 million). These institutions are there to invest in high value-added productions and support scientific research and development.

The potential for investment from the government is even higher. Three years ago a transparent National Fund accountable to the Parliament was set up. Today, through accumulation of excess tax revenues from raw materials sector, it accumulated more than 4 billion US dollars. This Fund, based on a Norwegian model and in some respect similar to Alberta’s Heritage Savings Trust Fund, is Kazakhstan’s heritage which will be used for the diversification of our economy.

We have already begun creating innovation and industrial infrastructure, such as technoparks and joint enterprises. Foreign companies, which create joint enterprises and transfer science-related technologies in Kazakhstan, will receive support and preferential treatment from the government under the strategy. Among measures envisioned are tax breaks on corporate profits, land tax, as well as other preferences. Currently, three technological parks are being set up, including a park of information technologies in Alatau village next to Almaty, a biotechnology park in Stepnogorsk and a park of nuclear technologies in Kurchatov.

Moreover, there are three special economic zones in Kazakhstan where business activity is treated under a preferential taxation and customs regime. I am talking about the Aktau Seaport Special Economic Zone on the Caspian seashore, the New City of Astana Special Economic Zone and the Information Technologies Park Special Economic Zone. Besides streamlined depreciation of main assets within the special economic zones, and the freedom from land, property and value-added taxes, also free from taxes are the imported equipment and spare parts for the purposes of the Park. There is also 50 percent reduction in the corporate income tax on the Park’s activity.

We are confident in the success of this strategy for, as I said before, it is based on real assessment of our current conditions. Indeed global economy is highly competitive, and we clearly understand that. But there are several factors which give us advantages:
Macroeconomic stability and leadership on economic reforms among the countries of CIS;
Financial and institutional backing for the strategy through the creation of development institutions, techno parks, projects of scientific research;
High level of literacy of the population, reforms in education aimed at best international standards;
Availability of experts in biotechnologies and nuclear technologies, formerly employed in weapons-related programs;
Favorable investment climate, a developed banking system and modern taxation system;
High transit potential, the possibility for large infrastructure projects 
Availability of large commodity markets in neighboring countries, up to 800 million people, including Western China

The industries I specified will surely be familiar to you and there are objective reasons for that – Canada and Canadian businesses have impressive reputation in all of these industries and are among leaders in the areas of developing and introducing innovative technologies. This is why we are strongly interested in your participation in projects in Kazakhstan.

Among prospective new dimensions for cooperation between Kazakhstan’s and Canadian companies are following:
Developing transportation infrastructure, transportation and logistical services, particularly international shipping;
Developing information services, in particular, the production of software as a sector of high added value and low materials expenditures;
Developing communications and Internet services to strengthen the role of Kazakhstan in global information community;
Improving the market of educational services, including distance learning to ensure equal access to national educational resources of all regions;
Developing a financial services market for effective redistribution of resources in the real sector of economy primarily through the development of leasing, insurance, and stock markets as well as through the instruments of collective investment.

I would like to say a few words about agriculture. In recent years, Kazakhstan has developed into one of the world’s largest exporters of high quality grain. Potential export volumes amount to 5 to 6 million tons (with existing supplies of 17.5 million tons) annually. Last year, we exported 5.7 million tons of grain to 40 countries. Given their experience and given the fact that Canada is a global leader in terms of agricultural production, we are interested to see Canadian businesses participate in the creation of new production of processing grain and other agricultural products, as well as food industry in Kazakhstan. The Biotechnology Park can become a potential partner in creating new high quality mineral fertilizers.

Such potential means new opportunities for both countries. The cooperation in energy, high technologies will allow the significant expansion of our trade and economic cooperation.

Those willing to get detailed information can get it at the Embassy’s web site at www.kazakhembus.com.

Investment climate

I would like to say a few more words about the investment climate in Kazakhstan.
We have established a rather favorable investment climate: we have political stability, clear legislation, favorable ratings from the rating agencies. Today the government does not just provide benefits and preferences to investors, but itself participates in business through the development institutions.

Kazakhstan does everything possible to ensure guarantees for foreign capital. Kazakhstan actively introduces international banking system standards. The customs system is being reformed to create favorable conditions for the participants of foreign economic activity. Measures are taken to streamline customs procedures and bring customs legislation into compliance with the Kyoto Convention on Simplification and Harmonization of Customs Procedures. In January 2003, a new law “On Investment” was adopted which kept all positive provisions of the previous law on investment and incorporated international experience. You can read texts of these laws at the website of the Foreign Investment Council under the President of Kazakhstan at www.fic.kz.

As I already noted, during the independence years Kazakhstan attracted more than 26 billion U.S. dollars in foreign direct investment. The United States is the leading investor with more than a third of overall volume. Canada has around 5 percent. In terms of new influx of foreign direct investment from 1993 to 2003, Kazakhstan leads many countries of Eastern Europe and the Baltics, such as Bulgaria, Croatia, Estonia, Latvia and Romania.

As of the end of 2003, 3,800 joint ventures and 5,900 foreign companies were operating in Kazakhstan. The number of foreign companies grew almost three times, which also speaks about the investment and economic attractiveness of Kazakhstan.

The IMF and the IBRR view Kazakhstan as a leader of market reforms not just in the CIS, but among the countries of Central and Eastern Europe. Currently, Kazakhstan fully complies with criteria of a market economy. The EU and the United States recognized Kazakhstan as a first market economy in the CIS countries. In the fall of 2003, representatives of export import agencies of the Organization for Economic Cooperation and Development decided to raise Kazakhstan’s credit rating from the 6th to the 5th grade according to its own classification.

These facts allow calling Kazakhstan’s investment climate as a liberal one providing access for foreign investors in practically all areas of economy.

Kazakhstan has a reputation of a safe and respected country, an initiator of peace, good neighborly relations and reliable partner in the international trade. We are ready to expand horizons of our cooperation and work with you in new spheres.

I am sure new and profitable business opportunities can be opened up for you in Kazakhstan. I am also sure that will be challenges for you, but the success of Canadian and other foreign companies in Kazakhstan speaks to the fact that these challenges can be overcome and those who truly want to do business with us can do it and do it with a considerable profit. Knowing Canadians as people who are not afraid of difficulties, I am sure that together we will be able to realize a lot of interesting projects.

Thank you for your attention and welcome to Kazakhstan.