TRICKS OF THE TRADE: Kazakhstan Provides NIS Lessons
BISNIS Bulletin, March 2002
by Andrey Chursov
The following are some do's and don'ts of working in the Kazakhstani market, but most are relevant to all NIS markets.
1. Take medium to long-term approach to the market - The Kazakhstani market operates with 20-200 percent profit margins (depending on the types of ventures), paying solid risk premiums. However, typically an SME company/joint venture can count on earning its first profit after 2-3 years of doing business in Kazakhstan.
2. Carefully study the market before making any commitments - In terms of goods and services markets, Kazakhstan is relatively well integrated into the world economy. The country's companies trade with 135 nations having alternative sources of supply and working on different terms at various price ranges. South Asian, Russian, and Eastern European companies carry out aggressive marketing strategies in Kazakhstan. Consequently, a U.S. company can enter the market more effectively after studying generally accepted price levels, terms of payment and delivery, etc. Obtaining a comprehensive understanding of the market may require one or several preliminary on-site visits and some investment into market analysis. These initial investments, however, will save a company from wasting resources as a result of a poorly chosen market entry strategy.
3. Ensure a constant market presence - The first sales usually do not happen immediately since potential local partners, clients, and government officials prefer to get acquainted with the U.S. firm at a more informal level before buying. Specifically, establishing a representative office or hiring an individual representative (avoiding establishment of a legal entity) can ensure effective market presence. This option is favorable from the taxation standpoint since Kazakhstani legislation provides for zero rate income tax on representative offices and a number of other tax breaks. Salary levels are relatively low even for skilled professionals, making a representative office an inexpensive but efficient operation.
4. Find yourself a tax and legal advisor before forming a partnership or setting up a legal entity - The Kazakhstani legal system imposes serious penalties even for minor tax and administrative violations, even if they are discovered several years after establishment of the legal entity. That is why having competent tax and legal advisor from the outset can be crucial for ensuring effective development of the company.
5. Maintain positive working relations with government officials whenever possible and participate in government tenders - In Kazakhstan, government procurement serves as one of the key types of guaranteed demand. Additionally, fulfillment of government orders and participation in tenders can create a positive company image, providing valuable connections and saving time when dealing with the wide range of inspectors.
6. Ensure your partner's reliability and try to know intentions - In a number of cases, local partners tried to push their foreign counterparts out of joint ventures as soon as the business started to gain some recognition and profitability. Potential wrongdoings on the part of the partner always remain a possibility in Kazakhstan. Consequently, it is advisable to carry out thorough due diligence before the project is launched and occasionally in the course of project implementation
7. Diversify activities whenever possible - Kazakhstan's legal system is known for its instability with customs duties, export and import preferences, and local taxes fluctuating on a regular basis. The experience of the country's leading enterprises vividly supports the need for diversification as a key to successful long-term company development.
1. Do not consider Kazakhstan "a far away stan" with distances preventing effective business relations - Research indicates that it costs $3 to bring one kilogram of air cargo from New York to Almaty, while it costs $5 to bring one kilogram of air cargo from continental Europe to Almaty. Transportation costs for a 20-foot container are around $4,500 on New YorkAlmaty route and $3,800-3,900 on Amsterdam-Almaty route, which constitutes an insignificant difference when shipping the vast majority of goods.
2. Do not rely on printed matter and promotional materials - Kazakhstani customers tend to judge goods (industrial as well as household) by their physical appearance. Consequently, it is much more effective to attend fairs, exhibitions, and other events, bringing samples of goods or equipment rather than just sending promotional materials and publications. Logistical difficulties and costs associated with bringing in the samples usually pay back multifold.
3. Do not judge partners by their appearance - Because of the influence of local traditions, some Kazakhstani companies tend to present themselves very well, while having no substantial activities to support the appearance. On the other hand, other companies might appear to not be as savvy, but nonetheless have a more solid financial standing. It can be best to make preliminary judgments only after getting to know the company's current business activities, history, managers, etc.
Andrey Chursov is a former BISNIS representative in Kazakhstan.
This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)