After nearly 20 years of discussions, Kazakhstan finally completed negotiations on accession to the World Trade Organization (WTO) in June and will join the organization by the end of 2015. Though a noteworthy achievement and step in the right direction, firms should not overestimate the impact of Kazakhstan’s WTO accession on the investment climate or on the economy.
The main gains will be a mild rise in imports in the coming years, while considerable economic benefits will remain elusive until Kazakhstan implements substantive reforms towards diversification.
The final obstacles delaying Kazakhstan’s accession the last several years were related to further liberalizing the trade regime by lowering/aligning tariffs and tariff quotas within the structure of the Eurasian Economic Union (EEU). Belarus, Russia and Kazakhstan officially established a customs union in July 2010 which required Kazakhstan to implement a common external tariff (CET) with the other customs union members, thereby increasing its tariffs on thousands of goods up to an average of 11.1 percent from an average of 6.7 percent.
In joining the WTO, Kazakhstan agreed to bind tariff rates for all products to an average rate of 6.1 percent; for agricultural products the average is 7.6 percent, while for non-agricultural products the average is 5.9 percent. Various other improvements will be implemented in the services sector, which could help strengthen the investment environment over the next several years. Foreign firms will be able to distribute pharma and medical products via wholesale starting five years from now and foreign equity limitations (currently of 49 percent) in the telecom sector will be eliminated in 2.5 years. Other commitments related to international trade (restrictions on forex, price controls, regulations, taxes, etc.) will be now applied only in concert with WTO provisions.
For multinationals, the primary and most immediate impact on businesses will be a minimal rise in imports starting in 2016 as lower tariffs make imported products more competitive. However, companies should not assume a significant change to the country’s overall operating environment or growth outlook. Structural weaknesses of the undiversified Kazakh economy will continue to present the main challenge to trade and investment in the country. Kazakhstan has considerable room for progress; according to international standards, the country ranks 129th out of 175 countries in Transparency International’s Corruption Perception Index and 77th out of 189 in the World Bank’s Doing Business Report, both marking a decline over the past few years. Thus, over the longer-term, WTO accession could have a positive impact on the operating environment but only insofar as the government takes deliberate steps to diversify and liberalize the economy.
For those clients with a strategic interest in Kazakhstan, WTO accession should be welcomed as a concerted move by the government to improve the operating environment, in line with the heightened rhetoric of economic liberalization by President Nazarbayev and the top leadership of the country. These firms should lobby the government to encourage further progress towards these long-term goals and watch for signs of change on the ground in the coming years. Ultimately, multinationals should bear in mind the attractiveness of the market; Kazakhstan retains much appeal within the CIS portfolio as a stable country open to Western goods and foreign investors, with a comparatively high per capita income.
Nonetheless, multinational executives should recognize the positive but limited impact emanating from the WTO accession. It should be understood that Kazakhstan had generally liberalized its trade policy well before its accession to the WTO, with minor tariff reductions and alignment within the EEU only in the final adjustments. As the main impediment for the economy has not been the lack of participation in the WTO, clients should not decidedly alter their future targets for the country just on the basis of WTO accession.
For a full, more comprehensive update on the Kazakh economy, FSG clients can access our latest Kazakhstan Market Spotlight and listen to our podcast. Not a client? Contact us at email@example.com.