2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
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 often is not 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 threatened to nationalize a telecommunications company. Corruption remains a serious problem despite the government’s efforts to combat it. The Commercial Arbitration Court of Kyrgyzstan was established in April 2004 but remains underutilized.

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 often 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.

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 Youth, Labor and Employment. The work permit process may involve lengthy delays and is not synchronized with an employee’s visa. Visa requirements and fees may change on short notice. In order to navigate the business envinronment, many foreign investors form joint ventures with local partners.

With U.S. Government advice, 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 these new 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 nine foreign banks operating in the Kyrgyz Republic. No U.S. banks operate in the country.

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

2011

2.1

Heritage Economic Freedom

2011

61.1

World Bank Doing Business

2012

70

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 competitive. The local currency, the som, is freely convertible. As of December 27, 2011, the exchange rate was 46.45 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 and inconsistent.

Expropriation and Compensation

Prior to April 2010, the Kyrgyz government had never expropriated any foreign owned properties. Following the collapse of the former Bakiyev government in 2010, the Provisional Government nationalized a number of enterprises, companies and properties which allegedly had ties to the 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 plans to the former owners. Since the revolution, some public and private agreements made by previous administrations have been subject to review and debate by the current administration and parliament. This includes agreements relating to business ventures, particularly in extractive industries.

For example, some Kyrgyz parliamentarians and government officials have advocated the nationalization or renegotiation of the agreement underpinning the Kumtor gold mine and have also discussed reallocation of mining and radio spectrum licenses. 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. As a remote country, that is loosely integrated with the world economy, Kyrgyzstan has little practical experience working under the guidelines of WTO and the country’s treaty obligations remain poorly understood by many within the government.

The Kyrgyz government adopted a new tax code, which took force in January 2009, that 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, at least on paper, 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. Due to the newness of these tax code reforms, many tax inspection and collection employees are ignorant of the subtleties and have been accused of using their positions for personal enrichment.

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). Yet, the banking system of the Kyrgyz Republic remains relatively undeveloped and uncompetitive by international norms. 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. Due to the structure of the system, the appeals process can be lengthy and subject to prolonged appeals. 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 Kyrgyz Republic acceded to both the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty in 2002. Counterfeit goods made primarily in China, however, are widely available.

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 Economy
and Antimonopoly Policy, 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 is still unknown. 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 and regularly intervenes in the market to stabilize the Kyrgyz som, against the U.S. dollar. The currency is freely convertible and Kyrgyz bonds are available for foreign ownership. According to the Kyrgyz National Statistical Committee, the Kyrgyz Republic's Consumer Price Index increased by 4.6% in 2011, and 15.4% in 2010 . The economy of the Kyrgyz Republic is primarily cash-based, although non-cash consumer transactions, such as debit cards, have been growing for the past few years.

There are two stock exchanges in the Kyrgyz Republic (Kyrgyz Stock Exchange and Stock Exchange Kyrgyzstan), but all transactions are conducted through Kyrgyz Stock Exchange. In 2011 the total value of transactions amounted to 1.5 billion soms ($32.7 million) compared to 1.4 billion soms ($31 million) in 2010.

Total capitalization of the banking sector as of October 2011 was around 8.69 billion soms or roughly $188 million and has increased slightly compared with 2010 in local currency terms, but decreased by almost $10 million in U.S. dollar terms due to U.S. dollar appreciation. There are currently 22 functioning commercial banks in the Kyrgyz Republic, with a total of 250 branches throughout the country.

There are nine 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 Manas Bank and Kyrgyz Investment and Credit Bank, which has multinational organizations as shareholders including the European Bank for Reconstruction and Development, Economic Finance Corporation, the Aga Khan Fund for Economic Development and others. The National Bank of Kyrgyzstan took control of Asia Universal Bank following the revolution of April 2010 and reorganized it under the new name of Zalkar Bank which it plans to privatize. 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, although mid-term loans are being offered as well.

Since March 2008, new banks must have a minimum charter capital requirement of 600 million soms ($13 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.

With support of the government, accounting systems in banks and enterprises are being converted to international standards. In addition, 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. Most state owned enterprises are uncompetitive Soviet-legacy organizations.

Political Violence

The political situation in 2011 was relatively calm compared to the previous year. Concerns about law enforcement abuses and human rights violations in the country remain. In October, the Kyrgyz Republic held successful presidential elections and on December 1 President Almazbek Atambayev was inaugurated as president. In December, a new governing coalition was announced. During the year, inter-ethnic tensions remained in the southern region of the country but did not have a destabilizing effect on the government.

Supporters of extremist groups such as the Islamic Movement of Uzbekistan (IMU), Al-Qaeda, and the Eastern Turkistan Islamic Movement remain active in the Central Asia region. These groups have expressed anti-U.S. sentiments and could potentially target U.S.-affiliated concerns. With U.S. assistance, the Kyrgyz Government has improved border and public security and Kyrgyzstan has, thus far, remained a peaceful country

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, 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.

Corruption remains a serious problem at all levels of Kyrgyz society. According to the Transparency International Corruption Perception Index, in 2011 the Kyrgyz Republic ranked 164 out of 182 countries surveyed. Kyrgyz politicians and citizens alike are aware of the systemic corruption but the problem is so entrenched that it is difficult to fight. Moreover, many in Kyrgyzstan view paying of bribes as the most efficient way to receive government assistance and many, albeit indirectly, gain benefits from corrupt practices.

The Kyrgyz Government has announced a number of initiatives to fight corruption and current President Almazbek Atambayev has established a new anticorruption service within the State Committee on National Security.

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 and the nation’s education system has failed to keep pace with advancing educational needs within many sectors. 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 12 percent in mid-2011.

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 for the first nine months of 2011 totaled $459 million, almost twice the reported size of the equivalent period of 2010. According to official statistics, FDI was $446 million in 2010, $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. 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, if not more.

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. The Canadian gold-mining firm Centerra Gold, through its local subsidiary Kumtor Operating Company, has the largest foreign investment in the Kyrgyz Republic. Joint ventures play a leading role in the mining, petrochemical, hotel, and food processing sectors. The following countries are listed as the largest sources of FDI in first nine months of 2011: Canada (48%), China (14%), United Kingdom (7%), Germany (6%). In 2010 largest sources of FDI were Canada (37%), United Kingdom (16%), China (12%) and Russia (10%).

The Issyk-kul region, was the top recipient of FDI for the first 9 months in 2011 and accounted for 46% of FDI. The investment in Issyk-kul region is related primarily to the activities of Kumtor but also reflects foreign investment, primarily Kazakh and Russian, in the area’s resort sector.

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