2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report

Overview of Foreign Investment Climate

The Kyrgyz Republic has a liberal investment regime on paper with a broad base of commercial laws in place. These laws, however, are not always implemented consistently and the legal concept of contract sanctity is not consistently observed.

Kyrgyz law on foreign investment guarantees protection for foreign investors from expropriation and nationalization. Individual investors have become involved in disputes over licensing, registration, and enforcement of contracts, and, in one case, the government has repeatedly entertained the issue of nationalization. Corruption remains a serious problem despite the Government of the Kyrgyz Republic’s efforts to combat it. The Commercial Arbitration Court of Kyrgyzstan was established in April 2004.

Foreign investors must register their firms with the Ministry of Justice. In addition to company registration, expatriate employees must obtain a work permit from the Ministry of Labor, Employment and Migration. Visa requirements and fees may change on short notice. Foreign investors usually form joint ventures with local partners.

With U.S. government assistance, Kyrgyz authorities have taken steps to cut regulatory measures in order to benefit the business sector. As a result, Kyrgyzstan was recognized by the World Bank Doing Business Report as one of the top reformers in the world in 2009 and 2010. However, effective implementation of business regulations remains a challenge.

Banking laws do not discriminate against foreign banks. In the past, foreign institutions seeking new banking licenses from the National Bank of the Kyrgyz Republic (NBKR) have sometimes encountered difficulties in trying to establish operations in the country. There are 10 foreign banks operating in the Kyrgyz Republic, although no U.S. banks operate in the country.

It is official government policy that there is no discrimination against foreign investors. However, procedures for licensing and approvals are not always transparent, which can make the process seem discriminatory. Tax authorities may apply greater scrutiny to foreign entities than domestic entities operating in the Kyrgyz Republic. However, Kyrgyz officials are also working to streamline customs procedures to spur foreign trade and investment.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2010

2.0

Heritage Economic Freedom

2011

61.1

World Bank Doing Business

2011

44th

MCC Gov’t Effectiveness

2011

-0.07

MCC Rule of Law

2011

-0.36

MCC Control of Corruption

2011

-0.45

MCC Fiscal Policy

2011

-0.3

MCC Trade Policy

2011

63.2

MCC Regulatory Quality

2011

0.33

MCC Business Start Up

2011

0.991

MCC Land Rights Access

2011

0.719

MCC Natural Resource Mgmt

2011

77.83

Conversion and Transfer Policies

Foreign exchange is widely available, and the local currency, the som, is freely convertible. As of January 11, 2010, the exchange rate was 47.17 soms 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. Payment disputes adjudicated through the court system can be extremely lengthy.

Expropriation and Compensation

Prior to April 2010, the Kyrgyz government led by President Bakiyev had never expropriated any foreign owned properties. Following the collapse of the Bakiyev government in April, the Provisional Government nationalized a number of enterprises, companies, and properties that allegedly had ties to the son of former president. Some of the nationalized entities involved foreign capital. The process of nationalization did not follow due process, and in some cases did not include compensation schemes to the former owners.

In recent years some Kyrgyz parliamentarians and government officials have advocated the nationalization of certain resource extraction firms, in particular a foreign-run gold mine. 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

The Law on Commercial Arbitration 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. There has been little recourse to arbitration in Kyrgyzstan, as yet, so it is uncertain how such cases might result and how the results of arbitration might be respected or enforced in practice.

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.

Performance Requirements/Incentives

A World Trade Organization (WTO) member, the Kyrgyz Republic is compliant with WTO Trade Related Investment Measures obligations. The Kyrgyz government has also reduced the tax burden on repatriation of profits by foreign investors to conform to the tax rate for domestic investors.

The Kyrgyz government adopted a new tax code, which took force in January 2009, aims to be more business and investment friendly. Under the new tax code, a number of taxes were abolished and some new taxes were introduced. For example, the VAT rate was decreased from 20% to 12%. Hotel, advertising and resort taxes were abolished. A unified sales tax replaced several previous taxes, and property taxes were also introduced.

The new tax code also establishes a presumption of innocence of the taxpayer, improves collection provisions, and supports automation and e-filing.

Payroll taxes such as social fund payments, used for the National Pension System, are complex. Many recent tax inspections of companies, including foreign companies, have focused on social fund payments. Potential foreign investors are encouraged to hire a local tax adviser before they start their operations in Kyrgyzstan.

Right to Private Ownership and Establishment

Foreign and domestic private entities may own business enterprises and engage in a broad range of commercial activities. Foreign entities are expressly forbidden from owning land, including farmland, although regulations allow for up to 99-year leases of property.

Foreign investors are theoretically given equal treatment under Kyrgyz law. In reality, the business operating environment is complex in the Kyrgyz Republic and many foreign investors are disadvantaged less by outright discrimination than by a simple lack of knowledge of how to "work the system."

There is no prohibition on foreign rental of land for residences or factory sites. A central land registry has helped potential lenders and others deal with the financing of real property (e.g., land, buildings, and other improvements) in a relatively sophisticated manner. The recent introduction of property taxes may make land ownership more transparent.

Protection of Property Rights

Property right protections are slowly emerging. The judicial system, however, remains under-developed and lacks independence. Court actions can force the sale of property to enforce payments and other contractual obligations.

The Kyrgyz Republic is obligated to protect intellectual property rights as a member of the WTO. The Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. Counterfeit goods, however, are widely available in certain stores and markets.

Transparency of the Regulatory System

The legal and regulatory system of the Kyrgyz Republic continues to develop. 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.

There is an investment department at the Ministry of Economic Regulation, which assists investors with bureaucratic procedures. This department also consolidates information about potential investment projects in the Kyrgyz Republic. However, the ability of this office to steer firms through the system has not been fully demonstrated. An investment council, under the auspices of the president, exists to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for undocumented incentives

Efficient Capital Markets and Portfolio Investment

The National Bank of the Kyrgyz Republic is a nominally independent body which, in 2010, intervened repeatedly in the market to stabilize the Kyrgyz som, against the U.S. dollar. The currency is freely convertible, Kyrgyz bonds are available for foreign ownership, and the stock market is developing. According to the Kyrgyz National Statistical Committee, the Kyrgyz Republic's Consumer Price Index was up by at least 15.4% in 2010, while it was down by 0.5% in 2009. The economy of the Kyrgyz Republic is primarily cash-based.

There are two stock exchanges in the Kyrgyz Republic – Kyrgyz Stock Exchange (KSE) and Stock Exchange Kyrgyzstan (SEK). The Central Asia Stock Exchange (CASE) stopped operation in mid-2010. In 2010, the total value of transactions of all three exchanges combined amounted to only 1.4 billion soms ($31 million), while in 2009 it was 5.2 billion soms ($121 million), which was 3.7 times higher than in 2010. There were 1,585 transactions in 2010 against 5,396 transactions in 2009. The political instability in 2010 contributed to the significant drop-off of stock exchange activities.

Total capitalization of the banking sector as of October 2010 was around $198 million and has increased slightly compared with 2009 in local currency terms, but decreased by $10 million in US dollar terms due to US dollar appreciation. There are currently 22 commercial banks in the Kyrgyz Republic, with a total of 245 branches throughout the country.

There are 10 foreign banks operating in the Kyrgyz Republic. Demir Bank, Bank of Asia, National Bank of Pakistan, Halyk Bank, Kazcommerce Bank - Kyrgyzstan, FinanceCredit Bank and UniCredit Bank are entirely foreign held. Other banks are partially foreign held, including the Asia Universal Bank, Manas Bank and Kyrgyz Investment and Credit Bank, which has multinational organizations as shareholders including EBRD, IFC, AKFED and others. The National Bank of Kyrgyzstan took control of Asia Universal Bank following the violence of April 2010. Although no U.S. bank has set up operations 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 have rarely sought financing from domestic banks. Bank lending is heavily biased towards short-term loans.

Since March 2008, new banks must have a minimum charter capital requirement of 600 million soms ($14.8 million). Banking laws also require that banks maintain a 10% reserve with the National Bank. A deposit insurance system exists for the benefit of individual investors.

Accounting systems in banks and enterprises are being converted to international standards. The Kyrgyz government has supported this exercise. International assistance programs have contributed to rapid progress in reaching these standards via accounting training and certification.

Competition from State-Owned Enterprises (SOEs)

There are no nationally owned companies in the Kyrgyz Republic that compete unfairly with private companies.

Political Violence

Political and ethnic violence escalated in Kyrgyzstan during 2010. In April 2010, political violence led to the overthrow of President Kurmanbek Bakiyev. For two days after President Bakiyev fled Bishkek, some looting of businesses occurred in Bishkek. . In mid-June, inter-ethnic violence erupted in the southern cities of Osh and Jalalabad resulting in the deaths of more than 400 people, injuries to thousands and the destruction or damage of many residences and businesses. The ethnic situation in the country has stabilized, though further unrest could reoccur suddenly.

In late 2010, Kyrgyz security forces carried out a series of operations against groups the government claimed were Islamic extremists seeking to destabilize the country. These security operations have resulted in the death or arrest of several suspects, and several members of the Kyrgyz security forces. These militants are blamed for carrying out a home invasion, planting a car bomb near a Bishkek police station, and detonating an improvised explosive device outside the venue of a large trial in downtown Bishkek resulting in some property damage and minor injuries.

Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement remain active in Central Asia. These groups have expressed anti-U.S. sentiments and may attempt to target U.S.-affiliated interests in the region, including in the Kyrgyz Republic.

The Department of State urges U.S. citizens to consider carefully travel to Batken, Osh, and Jalalabad Oblasts where violence has broken out several times in recent years, and along the Kyrgyz-Tajik border. 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.

Corruption

Corruption remains a serious problem at all levels of society. According to the Transparency International Corruption Perception Index, in 2010 the Kyrgyz Republic ranked 164 out of 178 countries surveyed.

The Kyrgyz Government recognizes the damage corruption can cause. In 2003, the law on combating corruption was adopted. In 2005, the Kyrgyz Government adopted the National Anti-Corruption Strategy, founded the National Anti-Corruption Agency and the National Anti-Corruption Council, and the Parliament ratified the UN Convention Against Corruption.

The law provides criminal penalties for official corruption; however, the government has not consistently implemented the law. The Ministry of Internal Affairs investigates corruption, together with the Prosecutor General and subordinate prosecutors. The government has also created special investigative units to address corruption issues with law enforcement agencies.

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

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign 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 foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U.S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies.

Bilateral Investment Agreements

The Kyrgyz Republic currently enjoys 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.

OPIC and Other Investment Insurance Programs

OPIC has provided insurance in the Kyrgyz Republic in the past and currently welcomes applications for financing or insurance in the country.

Labor

There is significant competition for skilled individuals in the Kyrgyz labor market as many qualified Kyrgyz citizens have found lucrative job opportunities abroad. 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. According to Kyrgyz Government officials, the unemployment rate was around 20 percent in mid-2010.

Foreign Trade Zones/Free Ports

There are five Free Economic Zones (FEZs) in the Kyrgyz Republic: Bishkek (2), 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.

Foreign Direct Investment Statistics

According to the Kyrgyz National Statistical Committee, Foreign Direct Investment (FDI) totaled $660.9 million in 2009, $866.2 million in 2008, $436.8 million in 2007, $335.6 million in 2006, and $210.3 million in 2005. For the first nine months of 2010, FDI totaled $249 million, only about half of the total for the previous year. Government statistics on employment, the tax-base and national economic performance are questionable and the shadow economy may account for up to one-half of overall economic activity.

Foreign direct investment is chiefly oriented towards manufacturing, food processing, banking and mining. Many foreign firms are the contractors of foreign assistance organizations. U.S. direct investment is concentrated in the hotel and telecommunications sectors, with increasing interest in construction and mining.

Joint ventures and foreign companies in the Kyrgyz Republic include the Reetsma Kyrgyzstan Company (cigarettes), the Plaskap Bishkek Company (packaging/bottling), the Central Asian Group (entertainment/garments), the Hyatt Regency Bishkek, Coca-Cola Icecek, and the Kyrgyz Petroleum Company. Coca-Cola and The Canadian gold-mining firm Centerra Gold has the largest foreign investment in the Kyrgyz Republic - the Kumtor Operating Company. Joint ventures play a leading role in the mining, petrochemical, hotel, and food processing sectors.

According to the National Statistical Committee, the following countries were the largest sources of FDI in first nine months of 2010: Canada (37%), United Kingdom (16%), China (12%), Russia (10%). In 2009 largest sources of FDI were Kazakhstan (32%), Great Britain (17%), Canada (12%), China (8%) and Russia (7%).

Issyk-kul region, Bishkek and Jalalabad region were the top recipients of FDI for the first 9 months in 2010 and accounted for 89% of FDI. Issyk-kul region accounted for 37%, Bishkek – for 33%, and Jalalabad – for 19%.

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