Mansur Kainarbekov | 15.11.2024
Foreign Direct Investments in Kazakhstan: Opportunities and Challenges
Kazakhstan, being strategically located at the crossroads between Europe and Asia, has emerged as one of the main destinations for foreign direct investment since its independence in 1991. It is indeed highly endowed with vast natural resources, especially in oil and gas, which has been the main factor in attracting investors. With the diversification of the economy and decreasing dependency on hydrocarbon products a priority agenda for Kazakhstan, there is a dire need to understand the evolving landscape of FDI. The following paper discusses various opportunities and challenges related to foreign investments in Kazakhstan.
Opportunities of Foreign Direct InvestmentAmple Natural Resources
Kazakhstan is endowed with oil, natural gas, uranium, and other mineral resources in abundance. Traditionally, the biggest share of foreign direct investments has been received by its oil and gas industry, in which large international companies have invested billions of dollars in exploration and production. For example, one of the largest oil fields discovered in recent decades, Kashagan, has received billions of dollars in foreign investments.
Location and Development of Infrastructural Facilities
Kazakhstan is located at the Silk Road of old, serving as a significant transportation link between Europe and Asia. The governmental infrastructure development program "Nurly Zhol" serves to enhance the transport and logistical potential of the country, opening avenues for investors in infrastructure-related sectors.
Initiatives for Economic Diversification
Fully realizing the dangers of dependence on oil and gas resources, Kazakhstan has taken a raft of initiatives to transform its economy towards diversification. Agriculture, renewable energy, information technologies, and manufacturing are some of the fields that are being opened for foreign investment. As a commitment by the government to green energy, there is ongoing effort to increase the renewables in energy mix.
Investment Incentives and Reforms
Kazakhstan has pursued various reforms with a view to becoming an increasingly investment-friendly environment. These include tax incentives, the simplification of procedures for business registration, and special economic zones. The Astana International Financial Centre gives a legal platform based on common English law, which is secure for investors.
Challenges Facing Foreign Investors: Legal and Regulatory Environment
Despite reforms, there are challenges that foreign investors have to confront in terms of regulatory transparency and predictability. Bureaucratically complex procedures and incomplete legal reforms can create uncertainties. For example, disputes over oil project cost recovery and profit sharing have led to several arbitration cases between the government and foreign companies.
Corruption and Governance Issues
Corruption has traditionally been one of the chief issues investors have faced. Although Kazakhstan had made some efforts in fighting corruption—for example, elaborating on a new anti-corruption strategy—the position of the country regarding global corruption perception indices still stands pretty low. In the Corruption Perceptions Index 2023 presented by Transparency International, Kazakhstan scored 39 points out of 100, hence leaving considerable room for further improvements.
Oil and Gas: Whims of Economy
Dependence of the economy on hydrocarbon is by far the largest single factor that renders it vulnerable to fluctuations in global oil price. Such volatility may also hit returns on investment in related sectors to kill any semblance of stability. Efforts at diversification are on, but it would take a while before they materialize fully.
Geopolitical Risks
The geopolitical risks are that, since Kazakhstan has been surrounded by the major powers and has been taking part in regional alliances, it may come under geopolitical tension. While Kazakhstan professes a multi-vector foreign policy, regional instability is a potential risk to foreign investments.
Recent Developments and Future Outlook
During the last couple of years, Kazakhstan has continued to be attractive for substantial FDI inflow. Gross foreign direct investment inflow to Kazakhstan reached $28 billion by the end of 2022, which means a 17.7% increase compared to 2021. This growth demonstrates restored investors' confidence and a really effective government policy for investment climate improvement.
However, not all problems have been yet eliminated. In 2024, Kazakhstan filed arbitration against major foreign oil companies in connection with disputed costs of the Kashagan and Karachaganak oil fields, claiming more than $150 billion. A dispute of this type may reveal those difficult conditions that can emerge for foreign investors in the extractive industries of the country.
In this sense, the process of diversification of Kazakhstan opens new prospects for foreign investors due to the fact that the head of the government strongly underlines renewable energy, technology, and agriculture—all fields very much in tune with global trends of sustainability and innovation. For example, it is expanding its production of metals needed for electric vehicle batteries as a way of turning itself into a crucial link in the supply chain of battery materials such as lithium, cobalt, and nickel.
Conclusion
With rich natural resources, a strategic location, and proactive economic policy, Kazakhstan offers dynamic ground for foreign direct investment. While there are still regulatory frameworks, issues of governance, and economic dependence on oil, the government proceeds with the process of reform and diversification of its economy. In this changing economic context, foreign investors who adopt a long-term perspective and show adaptability to the local context can find a wide scope of lucrative opportunities in Kazakhstan.
Opportunities of Foreign Direct InvestmentAmple Natural Resources
Kazakhstan is endowed with oil, natural gas, uranium, and other mineral resources in abundance. Traditionally, the biggest share of foreign direct investments has been received by its oil and gas industry, in which large international companies have invested billions of dollars in exploration and production. For example, one of the largest oil fields discovered in recent decades, Kashagan, has received billions of dollars in foreign investments.
Location and Development of Infrastructural Facilities
Kazakhstan is located at the Silk Road of old, serving as a significant transportation link between Europe and Asia. The governmental infrastructure development program "Nurly Zhol" serves to enhance the transport and logistical potential of the country, opening avenues for investors in infrastructure-related sectors.
Initiatives for Economic Diversification
Fully realizing the dangers of dependence on oil and gas resources, Kazakhstan has taken a raft of initiatives to transform its economy towards diversification. Agriculture, renewable energy, information technologies, and manufacturing are some of the fields that are being opened for foreign investment. As a commitment by the government to green energy, there is ongoing effort to increase the renewables in energy mix.
Investment Incentives and Reforms
Kazakhstan has pursued various reforms with a view to becoming an increasingly investment-friendly environment. These include tax incentives, the simplification of procedures for business registration, and special economic zones. The Astana International Financial Centre gives a legal platform based on common English law, which is secure for investors.
Challenges Facing Foreign Investors: Legal and Regulatory Environment
Despite reforms, there are challenges that foreign investors have to confront in terms of regulatory transparency and predictability. Bureaucratically complex procedures and incomplete legal reforms can create uncertainties. For example, disputes over oil project cost recovery and profit sharing have led to several arbitration cases between the government and foreign companies.
Corruption and Governance Issues
Corruption has traditionally been one of the chief issues investors have faced. Although Kazakhstan had made some efforts in fighting corruption—for example, elaborating on a new anti-corruption strategy—the position of the country regarding global corruption perception indices still stands pretty low. In the Corruption Perceptions Index 2023 presented by Transparency International, Kazakhstan scored 39 points out of 100, hence leaving considerable room for further improvements.
Oil and Gas: Whims of Economy
Dependence of the economy on hydrocarbon is by far the largest single factor that renders it vulnerable to fluctuations in global oil price. Such volatility may also hit returns on investment in related sectors to kill any semblance of stability. Efforts at diversification are on, but it would take a while before they materialize fully.
Geopolitical Risks
The geopolitical risks are that, since Kazakhstan has been surrounded by the major powers and has been taking part in regional alliances, it may come under geopolitical tension. While Kazakhstan professes a multi-vector foreign policy, regional instability is a potential risk to foreign investments.
Recent Developments and Future Outlook
During the last couple of years, Kazakhstan has continued to be attractive for substantial FDI inflow. Gross foreign direct investment inflow to Kazakhstan reached $28 billion by the end of 2022, which means a 17.7% increase compared to 2021. This growth demonstrates restored investors' confidence and a really effective government policy for investment climate improvement.
However, not all problems have been yet eliminated. In 2024, Kazakhstan filed arbitration against major foreign oil companies in connection with disputed costs of the Kashagan and Karachaganak oil fields, claiming more than $150 billion. A dispute of this type may reveal those difficult conditions that can emerge for foreign investors in the extractive industries of the country.
In this sense, the process of diversification of Kazakhstan opens new prospects for foreign investors due to the fact that the head of the government strongly underlines renewable energy, technology, and agriculture—all fields very much in tune with global trends of sustainability and innovation. For example, it is expanding its production of metals needed for electric vehicle batteries as a way of turning itself into a crucial link in the supply chain of battery materials such as lithium, cobalt, and nickel.
Conclusion
With rich natural resources, a strategic location, and proactive economic policy, Kazakhstan offers dynamic ground for foreign direct investment. While there are still regulatory frameworks, issues of governance, and economic dependence on oil, the government proceeds with the process of reform and diversification of its economy. In this changing economic context, foreign investors who adopt a long-term perspective and show adaptability to the local context can find a wide scope of lucrative opportunities in Kazakhstan.
