Tailored solutions forum
Investors everywhere want to get a return for taking risk and to be a part of economic growth. The very function of investment in capital markets is to provide funds so that companies and governments can grow, creating jobs and improving people's lives in the process. The needs in emerging markets create opportunities for investors, and that's exciting.
Russian market is not quite fully developed but is making efforts toward developing further. This country has some infrastructure, some stable government system, strong human capital and success with economic growth.
Russia is truly emerging, because its economic growth is expanding beyond its borders. Russia produces enough goods that it exports to other countries, becoming an active participant in global trade. It has people who take the jobs that local companies are creating. And Russia is open to capital and investments from outside the country, whether by individuals, financial institutions, or multinational corporations.
There is one other catch: Russia as an emerging market has a stock market so that investors can buy and sell securities.
The Russian education system is excellent. In the Soviet era, the government pushed to train as many scientists and engineers as possible to gain an advantage over the United States, and the country still graduates world-class talent. In total, almost 43 percent of Russian adults are college graduates, one of the highest rates in the world. Russia also has one of the world's highest literacy rates, so even those who don't go to college can function in a modern economy. And almost 90 percent of high school students graduate. The depth of skills in Russia allow for extraordinary economic flexibility. The country has people who can do whatever work needs to be done.
Russia's extensive landmass is rich in natural resources. The country is one of the world's leading producers of oil and gas, and it produces iron ore, bauxite, and gold, too. Russia has ports to the northeast on the Baltic Sea, to the southeast on the Caspian Sea, and to the west along the Pacific Ocean. In between, Russia has rich agricultural soil and is a net exporter of grain and timber.
This nation has tremendous resources. It can sustain its own people, and it can provide food and materials to developed and developing nations worldwide. Russia has also been a special beneficiary of growth in India and China because those nations need Russia's resources.
After the 1998 default, the Russian economy was completely restructured. International investors were scared off, which in hindsight allowed the Russians to concentrate on making their own system stronger without regard for returns to other investors. Banks took a hard line on risk, and as a result, they made it through the 2008 global financial crisis with nary a problem.
And maybe as a legacy of the Cold War or the financial crisis, Russia doesn't have as much foreign investment as many other emerging markets. Instead, the country's impressive growth has been financed by a high savings rate and companies reinvesting their profits.
Kazakhstan has concluded bilateral treaties on the encouragement and mutual protection of investments with 42 countries. Kazakhstan is also a party to a number of multilateral treaties concerning foreign investments (for example, the Energy Charter). Investment treaties provide for a number of guarantees to nationals of member countries, including most-favored-nation treatment, protection against discrimination, requisition and nationalization and the right to resolution of investment disputes by international arbitration in the absence of an arbitration agreement. By June 1, 2011 bilateral treaties on the promotion and mutual protection of investments exist with the following countries :
Belgium and Luxembourg
Iran, Islamic Republic
Certain industries are subject to foreign ownership restrictions whereby a foreign
shareholder may not own more than a certain specified percentage in the company.
For example, foreign companies may not own more than 20% of shares in local
mass media companies and more than 49% in local telecommunication companies
which operate long distance and trunk communication lines.
It's an all too common scenario: A great company breaks from the pack; the analysts are in love, the smiling CEO appears on the cover of Business Week and Fortune, the stock explodes. Employees, stockholders, vendors, and customers are happy. Two years later, the company is in flames, the pension plan is bleeding, the CEO is under attack or even indictment - and the stock is worthless.
We're suffering an epidemic of leadership failure. How can this vicious cycle be broken? How do you know if your company is vulnerable? How can investors and managers reduce the likelihood of being disappointed by a company's performance?
One astonishing finding must be mentioned: Businesses that have nothing in common turn out to fail for exactly the same reasons. Even the excuses that failed managers offer turn out to be the same.
Most of the companies fail during four major business passages: creating new ventures, dealing with innovation and change, managing mergers and acquisitions, and addressing new competitive pressures. These are multifaceted events that involve some degree of corporate transformation, and are very complex. Instead of bringing out the hidden strengths of a business, each of these challenges tends to bring out the hidden weaknesses.
We discovered that precipitous business failures are caused by four destructive patterns of behaviour that set in, without anyone noticing them, well before a business goes under. These four syndromes involve:
- flawed executive mind-sets that throw off a company's perception of reality,
- delusional attitudes that keep this inaccurate reality in place,
- breakdowns in communications systems developed to handle potentially urgent information,
- leadership qualities that keep a company'sexecutives from correcting their course.
Long before there are obvious danger signs, several of these syndromes can take hold of executivebehaviour. While the business might appear outwardly healthy, the inner mechanisms are breaking down. Examining these interrelated behaviour patterns, one at a time, makes it chillingly clear how each one can set a business up for collapse. Together they provide a framework on how to think about business failer.
By studying the great corporate mistakes made by executives struggling with the key challenges of new venture creation, innovation and change, mergers and acquisitions, and competitive rivalry, we gain insight not just about what not to do, but about what you should do. By the destructive syndromes behind failure-executive mind-set failures,delusional attitudes, communication systems breakdowns, and unsuccessful leadership habits - you learn not just what not to do, but what you should do. And by studying early warning signs and how to diagnose and prevent business mistakes, you learn not just what not to do, but what you should do.
That is why International Business Development Alliance monitors many companies
in the Global Collection of International Business Development. By trying to solve the problem of how smart executives fail you will learn how smart executives can succeed. To get more information about the Global Collection of International Business Development email@example.com.
The Russian Federation emerged following the dissolution of the Soviet Union in 1991 and adopted a new constitution following violent confrontations in 1993. Russia’s increasingly centralized government has tightened controls on civil society. Dmitry Medvedev was elected president in March 2008, but former President Vladimir Putin remains prime minister and leader of the ruling United Russia party. Medvedev’s efforts to improve the rule of law have stalled.
Russia’s increased risk profile of Maplecroft reflects both the heightened activity of militant Islamist separatists in the Northern Caucasus and their ambition to strike targets else where in the country. Russia has suffered a number of devastating terrorist attacks during 2010, including the March 2010 Moscow Metro bombing, which killed 40 people. Such attacks have raised Russia’s risk profile in the Terrorism Risk Index and Conflict and Political Violence Index. The country’s poor performance is compounded by its ‘high risk’ ratings for its business environment, corporate governance and the endemic nature of corruption, which is prevalent throughout all tiers of government.
The state has reasserted its role in the extractive industries and depends heavily on exports of natural resources, especially hydrocarbons. The global financial crisis, over regulation, pervasive corruption, and the war with Georgia sparked capital flight in 2008, and GDP contracted in 2009. Moscow has an agreement with Ukraine to extend basing of the Black Sea Fleet in Crimea for an additional 25 years from 2017.
Russians in general appreciate having more stability and this is helping to make the population feel that they have a 181 stake in the future. It is also generating confidence among Russian entrepreneurs as they do business with western partners and start to buy up companies in the West. However, Russia is still a country in transition and its institutions are weak, so the risks need to be considered.
Living standards for many are still poor, especially in the rural and more remote regions; but a backlash is unlikely because there is no political organisation through which this dissatisfaction can be expressed. Any significant fall in the oil price puts pressure on the budget, government spending and consumption in the cities, which could pose a political threat of upheaval. More active and organised opposition may develop as some powerful economic and political interests are affected by the reorganisation that has started to take place in the energy sector, utilities and the railways. A major failing of the political system, the lack of modernisation of Russia's institutional bodies and its civil service, could give rise to problems. Nevertheless, the political risk appears to be manageable and the political outlook stable for the next few years at least.
Challenges for companies operating in Russia also stem from an ineffective legal and regulatory system, which includes a lack of judicial independence from the government. Russia is rated ‘high risk’ in Maplecroft’s Rule of Law Index, and companies should monitor the increasing risk of poor contract enforcement and expropriation. Burdensome regulations continue to hinder private-sector development. The regulatory system suffers from corruption and a lack of transparency. Bureaucratic obstacles and inconsistent enforcement of regulations inject considerable uncertainty into entrepreneurial decision-making and are a particular problem for small businesses.
Irrespective of the said risks, Russia remains an attractive investment destination – particularly for the long term where the country scores well on resource security, infrastructure readiness and education. Russia has approximately 140m consumers and an expanding economy. IMF figures reveal that Russia’s real GDP growth amounted to 4% in 2010 and expects it to expand by 4.3% in 2011. The country also enjoys political stability. Russia has relatively low taxes. The individual income tax rate is a flat 13 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT) and a regional property tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.1 percent.
So long as risks are assessed, monitored and managed in the short term, Russia remains, as do all of the BRICs, an important growth economy and contributor to global economic recovery.
The form of competition for consumer goods companies changes radically as western retailers flood into the Russian market. Western retailers also introduce and enforce their global business models, which squeeze the margins of consumer goods companies.
This trend is already apparent in central and eastern Europe. By 2011 the total supply of modern retail space had reached 3,642m sq m and the total number of shopping centres was 111.
Moscow has a population of at least 8 m with an income per head of almost $6,000 (almost five times higher than St Petersburg). Muscovites spend 45% of their income on food and alcohol, 20% on other non-food consumer products, 16% on shoes and clothing, 5% on electronics, 3% on public transport and just 4% on housing and 1% on education. The proportion of retail spending is significantly higher than in other European cities. Currently, just one-third of retail spending is in"normal" shops and supermarkets; outdoor markets and kiosks account for the remaining two-thirds.
Players such as Metro, a wholesaler, Spar and Av A, both retailers, have monitored the success of IKEA, a Swedish home furnishings chain. After just two years in business, the first IKEA store in Moscow accounts for 11% of IKEA'S global sales.
Clearly outlining risk factors, as a foot note to the budget and business plan, is a smart thing to do in emerging markets regardless of whether a company encourages and rewards truthful communication or is infested with a culture of deceit. In both cases, senior management needs to be aware of the things that can go wrong.
There is no shortage of risks in emerging markets. Many companies active in them say that the single biggest risk affecting their emerging-market plans in the last decade was the unpredictability of currency devaluations. Managers at Sony say that they fear unpredictable recessions and unpredictable consumer behaviour.
In many countries, managers worry about political risks and the way they affect sales. In years of uncertain elections, for example, consumers' appetite for spending often shrinks. Perhaps the most worrying thing for many companies is that the list of largely unpredictable market threats is long, even in reasonably well managed emerging markets. The Mexico crisis in 1994 moved the country from a star to a short-term basket case in a matter of weeks, for no good fundamental reason.
Depending on the company culture and the CEO, some managers are able truthfully to communicate this sustain ability analysis to their senior management. But in many companies it is not possible for at least two reasons. One is that pay and bonuses are linked to exceeding targets, and furthermore, missing a target can lose you your job or damage your career. As a result, many companies have developed a corporate culture of deceit and caution. If a manager thinks his business in an emerging market can grow 30% next year, he will tell his senior management that a sustainable rate of growth is 15% plus, while pointing out a whole set of things that can potentially destroy even this 15% growth rate.
More advice from International Business Development Alliance on doing business in emerging markets is available here.
Competition is not as intense as it is in some of the central and eastern European markets. It is reasonable to say that in terms of competition, Russia is 3-4 years behind Poland and 1-3 years behind Hungary and the Czech Republic. However, it is catching up quickly. The type of competitionis also different from the core central and eastern European markets, as a manager of a consumer goods company noted:
We bump into each other in the market but we are not yet at the stage of savaging each other for 1% of market share, not even in Moscow. The market is big enough and the regions will give a lot of scope for geographical growth. But the cake will stop expanding in size and then market share will become the driver.
How long will the window of opportunity for other competitors to enter the market stay open? For those not in the market, this comment from the managing director of a major western company will be food for thought: "We think anyone who wants to be a player must be in right now." A Danish executive noted the change in the competitive environment:
In the mid-1990s we were making a lot of money in Russia for not doing very much. Now we're making a lot of money in Russia, but we are working damned hard for it.
Business in emerging markets rarely succeeds if it is subjected to the short-term criteria that companies in the less volatile developed world are often judged by. But many chief executives of listed companies are unwilling to adopt longer-term targets. Managing the expectations of senior management is one of the top three critical issues for developing a healthy business in emerging markets. We will try to explore strategies to overcome in-built short-term perspectives and to manage the expectations of not only board members but also investment analysts and the media, whose perceptions of a company are crucial in determining its reputation and share price.
If you look at how companies have gone about building and sustaining their business in emerging markets, two facts invariably emerge. A short-termist approach succeeds only in the short term. Private companies, or those not dependent on equity markets, almost always build stronger and more sustainable businesses than listed companies.
A short-term approach to building business in emerging markets is the most frequent cause of longer-term failure. When companies fall behind their more systematic competition, regional and country managers often criticise their CEOs for not releasing enough resources to build the business properly. Many privately accuse their CEOs of caring only about the next set of quarterly results.
That CEOs take a short-term approach is not surprising for two reasons. First, reward systems have increasingly favoured those who maximise short-term profits. Second, the complexity and pressure of running large corporations have steadily decreased the shelf-life of the average CEO.
To the detriment of the long-term well-being of their corporations, a number of CEOs have come to see their job as maximising short-term profits while in charge. This growing short-termism in the past two decades is one of the reasons that only 40% of Fortune 500 companies in 1980 are still on the list today. The stockmarket madness of the late1990s, where many tried to inflate profits via creative accounting practices, is just an extreme symptom of the same disease.
In the past two decades compensation systems for CEOs have largely been based on stock options and bonuses based on short-term profit maximisation. Rewards go to those who move the stock price up in the short term. Many CEOs choose not to miss a large annual bonus or a mega stock-option deal by investing in something that will bring returns 3-5 years later. In such companies, emerging-market business suffers the most. Success in emerging markets requires a passion for systematically building business and investments that will not bring in profits next quarter or even in the next three years. Unfortunately, investing for the medium to longer term has increasingly been viewed as a cost that squeezes the all-important short-term profits.
Short-termism reached its peak during the stockmarket bubble of the late 1990s. Many CEOs of listed companies, particularly in the United States and the UK, were under pressure to provide high short-term returns to their increasingly impatient shareholders. Managers operating in emerging markets found themselves (and many still do) impossibly pressured by the contradictions in overall policy. On the one hand they were being told to increase growth (and short-term returns); on the other hand they were being refused the resources to systematically build up business.
Many well-run companies' stock prices were (and continue to be) severely punished for missing expected quarterly earnings by an unforgiving Wall Street, as if such results really mattered for the overall soundness and future prospects of the business. Good decisions aimed at building a sustainable business are rarely rewarded by the herd-like behaviour of large institutional investors. Although this attitude has started to change following the bursting of the stockmarket bubble, short-termism among investors, and subsequently CEOs, remains alive and kicking. Fund managers and analysts are frequently rewarded on how well they do in one quarter and how well they predict quarterly earnings. This contributes to the steadily growing and damaging phenomenon of herd behaviour. "I buy because others do. I sell when I see that others sell," is how one youngish fund manager described how he worked.
Read the transcripts of CEOs' conference calls with stock analysts and it is clear that business decisions relating to the future development of publicly listed companies are largely irrelevant. A study reported in the Harvard Business Review, done by doctoral candidates at New York University's Stern School of Business, found that more than 90% of analysts' questions to CEOs during conference calls were about expectations for the next quarter's earnings. Investments were treated as factors that might jeopardise this "holy" quarterly number. Analysts' behaviour is unlikely to change. They cover many companies, and according to one analyst: "There is really no time to properly research, analyse and think.
"No wonder the managers who are in charge of real business decisions are immensely irritated by analysts. A senior executive from one of the 100 largest corporations in the world (and a rare highly successful company in emerging markets) said in a private conversation:
These 26-year-olds, who have never run any business, come to us and interrogate us like the Gestapo. They are not interested in how we build business or what we are trying to do. And the day after they reveal our plans on CNBC, another damaging influence by the way. Because we told them about our investments our share price went down 15 % in a few hours. We should do what XYZ does - give them a vague idea what the plans are and tell them to go to hell.
The impact of all this on business is clear. Many companies have postponed relevant or even crucial investments for their future, and some will have trouble surviving as years go by. One regional executive says:
We make an enormous number of business decisions thatIwould never do if I were a sale owner of this business. But our top management is more obsessed with the steady growth of quarterly earnings than investing for the future. We will soon run into severe problems.
Short-termism is problematic for sound business decision-making in general. But for decision-making in emerging markets it is disastrous. Many companies invest too little in preparing for market entry (relative to the best competition) or have inadequate resources to execute sound market entry and market expansionplans.
So how do emerging-market managers go about managing the expectations of senior management? First they shouldgo through the checklist and fight to get the resources to prepare each aspect of market entry properly. Without thorough preparation, any manager will have a hard time growing an emerging-market business, and the task of managing the CEO’s expectations will become monumental.
Emerging markets are often more volatile than developed markets. There are years that are spectacularly good but they usually do not last. How can emerging-market managers predict the sustainable annual growth of business over, say, the next five years? How do they explain the inevitable ups and downs, and how do they get senior management to accept that next year may not be as good as the previous one?
There is a tendency for CEOs to say: “Your business jumped 55% last year. You can do better than that or at least as well.” Emerging-market managers need to communicate constantly what is shaping their business, taking care to point out why a certain level of performance may not be sustainable and the factors and risks which might set things back. Equally, senior management needs to be made aware that there are years when sales fall to unexpectedly low levels, usually because of some kind of emerging-market crisis. As with good years, the circumstances that made a year a bad one usually do not last. Markets bounce back sooner or later. Many short-termist companies react to such crises by radically downsizing operations. Although this provides short-term protection, it may have negative implications in the longer term.
Many CEOs push regional managers to work to stretched budgets, which simply increases the stress of working in a volatile and difficult to predict market. Or it is counterproductive because managers simply ignore the budget as it does not take into account the realities of the market. The message from the top is often: “You claim there is a lot of potential in emerging markets, let’s see it.” And that is regardless of the fact that the risk and uncertainty as well as the potential have been pointed out.
One problem is that many companies push managers to deliver big returns before enough has been invested in establishing local market presence and securing brand recognition. But even in companies that do invest in what they need to, budget games are rampant. Those who meet and beat budgetary targets (regardless of how low they were set) are usually regarded as better managers than those who grow a business faster year on year but keep missing their unrealistic budgetary targets.
Many potentially productive hours of work are wasted on tactics for meeting budgetary expectations. As the regional manager of a large American company says: “I spend too much time managing the bottom line instead of managing the business.” Studies by Wharton Business School show that setting what managers perceive as overly ambitious goals distorts their behaviour and ultimately damages their companies. Managers start playing games. If they see they can exceed the stretch budget, for example, they try and delay end-of-year sales so they are booked in the next year. They fear that fantastic growth will earn them an even worse budgetary target next year, and they also want to have a good start to the year. Some managers even give up hard work “to prove that the target was crazy” and to play down expectations for the next year. As one manager who lost his job after proving that the target was crazy said: “I lost my job but at least I’ll stay sane.” The volatility of emerging markets makes the requirement to meet demanding budgets particularly stressful for local and regional managers, with the result that they are even more likely to behave in ways that are not in the best long-term interests of their firms.
Budget games are a fact of corporate life, but for emerging markets the following approach is a good one to adopt.
Assess and address the internal constraints
It is essential to work out what resources the company does not have but will need to carry out its emerging-market strategy. These may be financial, product-related or human.
Set high standards and benchmark against the best
Successful companies frequently ask themselves what ideal they are aiming at in emerging markets. They set criteria and then see what they can learn from the companies that are best for each criterion.
Understand that business in emerging markets is more time consuming
Everything takes longer than in the developed world. Dealing with local authorities, customs clearing or getting a simple licence can take days or weeks. Since time is money, companies should understand the pace at which it is possible to run the business and budget money and time accordingly.
Don't ignore emerging markets because you think they are too small
With low economic growth and increasing pressure (for most businesses) on profit margins in the developed world, emerging markets can offer higher margins and higher growth.
Never take your eye off the ball
It is really all about being thorough, and these guidelines are a goodstart. Companies that are not constantly alert risk failure and damage to their brands. If Mercedes had waited for its distributor to build a service facility in Moscow instead of taking control and building a facility itself, it might have taken years to recover from the brand damage the company would have suffered.
Additional advice from International Business Development Alliance on doing business in emerging markets is available here.
The Russian regions can be good ammunition for country and regional managers in corporate debates because they can be used as a positive factor in the drive for organic geographical growth as well as a stabilising factor in managing corporate expectations.
The Russian Federation is broken down into 89 administrative unitsor regions. In 2005-09 most western consumer goods and food and beverage companies were doing business in 5-10 such regions. The main ones for business are Moscow city, Moscow region, St Petersburg and the Leningrad region (curiously, when the city changed its name, the surrounding region did not). Only a handful of western companies do businessin more than 20-30 regions, including Dandy Stimorol, Coca- Cola and Pepsico.
As competition tightens in Moscow and St Petersburg and theirsurrounding regions, more western companies are looking at the relatively untouched markets of the outer regions. There are a number of"usual suspects" of second-rank regions, including Yekaterinburg, Nizhnii Novgorod, Samara, Rostov, Novisibirsk and Novgorod. They offer good scope for organic business growth, but they are no panacea for business development as a large number (as many as 40-50) are not really interesting for western companies because their populations are too small and/or too poor or the regions are geographically too remote. However, overall, the regions offer business opportunities that do not exist to the same extent in central Europe. A good comparison is China,where western companies are expanding out of Beijing and the coastal zones into the interior regions.
Managers can use the regions like a concertina in their budgeting process, expanding or contracting at their own discretion the number of regions into which they plan to expand business in order to meet budget targets set by headquarters. A manager in Moscow may consider expanding into five new regions in the next budget year, but if a tough budget is set, the expansion can be ratcheted up to seven or eight new regions. However, if by good fortune a growth target is set which can be met with some ease, the manager may choose to go for only two or three new regions instead of five.
To find out more about business opportunities in Russia, plese, go here.
When companies prioritise the markets they are considering entering, they often do so on the basis of a few key economic indicators. This produces hotspots, with many players pouring into some markets and few into others. For example, as a regional star, Hungary attracted all the major players in the mid-1990s, creating one of the tightest, most competitive markets in Europe where many firms struggled to make any money. However, companies which anticipated how crowded the Hungarian market was going to become and opted to invest more in Russia found themselves in a market that offered less competition, higher margins,quicker profits and more scope to build market share and brand loyalties.
To find out more about why companies fail in emerging markets, plese, go here .
When Apple introduced the iPod, it did something far smarter than wrap a good technology in a snazzy design. It wrapped a good technology in a great business model. Combining hardware, software, and service, the model provided game changing convenience for consumers and record-breaking profits for Apple. Great business models can reshape industries and drive spectacular growth.Yet many companies find business-model innovation difficult. Managers don’t understand their existing model well enough to know when it needs changing—or how.
To determine whether your firm should alter its business model you can take these steps:
1. Articulate what makes your existing model successful. For example, what customer problem does it solve? How does it make money for your firm?
2. Watch for signals that your model needs changing, such as tough new competitors on the horizon.
3. Decide whether reinventing your model is worth the effort. The answer’s yes only if the new model changes the industry or market.
To find answers to these questions and other fascinating info on business models, the International Business Development Alliance recommends you to attend webinars given by our partner the Innovation Intelligence Group. For schedule and further info please see: http://www.iigglobal.com/training.html
Few companies have the resources to develop all markets at the same time. So a company needs up-to-date knowledge of external conditions to decide and plan the geographical order in which it should expand its operations. Such knowledge takes time and money to acquire, but in emerging markets there is also the difficulty that reliable data are often hard to find. As a result, instinct or gut feeling plays an important part in decisions to expand into developing countries. Companies can become more comfortable with such decision-making by, for example, building relationships and networks with people already operating in the markets in question. This is a great help in testing assumptions and in discoveringthe realities of a market.
What is your challenge of doing business in emerging markets?
To find out more about why companies fail in emerging markets, plese, go here.
Investment Bodies in Kazakhstan
The principal state body overseeing investments in the Republic of Kazakhstan is the Committee on Investments within the Ministry of Industry and Trade. Among other things, the Committee on Investments is charged with negotiating and concluding investment contracts with investors pursuant to the Law on Investments.The conclusion of subsoil use contracts, however, is the responsibility of the Ministry of Oil and Gas (and, in certain cases, the local executive authorities). An entity known as Kazinvest is responsible for promoting investment in Kazakhstan. Formerly known as the State Enterprise Kazakhstan Investment Promotion Center, Kazinvest is now a joint stock company 100% owned by the state.
In 2003 Kazakhstan adopted the Law on Investments which replaced the Law on Foreign Investments and the Law on State Support for Direct Investments.This law equalized the rights of foreign and domestic investors, while reducing or eliminating a number of the guarantees previously available to foreign investors. In particular, the Law on Investments eliminated guarantees against adverse changes in legislation (the so-called “grandfather” clause) and guarantees of international arbitration in the absence ofan arbitration agreement.The Law on Investments retains the following investment guarantees: stability of contracts (with certain exceptions), free use of income, transparency of state investment policy, reimbursement of damages in the event of nationalization and requisition, and certain others.
State Support for Direct Investment
The Law on Investments creates a system of benefits and preferences supporting direct investments in priority types of activity, the full list of which is approvedby the Government(examples include certain types of production of equipment, agriculture and construction). Local companies engaged in a designated priority activity may be eligible for benefits and preferential treatment and may receive, depending on the circumstances:
• an exemption from customs duties on imported equipment required forinvestment projects (the exemption can be granted for up to 5 years);and/or
• state grants in-kind (land plots, buildings, equipment, machinery, etc.)
To receive the investment benefits, a local company must sign an investment contract with the Committee on Investments. The investment contract should be registered by the Committee.The investments preferences are not available to subsoil users. Prior to 2010, the investment benefits also included a number of tax concessions, such as a corporate income tax exemption for up to 10 years (or, if certain tests were not met, accelerated straight-line tax depreciation for up to 10 years), as well as property tax and land tax exemptions for up to 5 years.With the adoption of the new Tax Code of Kazakhstan, these tax concessions were eliminated. Earlier contracts, however, will remain in effect through the end of their terms. The new Tax Code replaces the above tax preferences with an automatic right for local companies to accelerated straight-line tax depreciation of fixed assets which meet certain criteria.The tax payer is not required to make any specific new investments in order to obtain this right, other than to acquire the assets.