Foreign Direct Investment in Kyrgyzstan

The economic benefits to the recipient countries by providing capital, foreign exchange. The question of potential causality between foreign debt and domestic savings in the context of the Kyrgyz Republic. The problem of tracking new private businesses.

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28.01.2014

Foreign Direct Investment in Kyrgyzstan

Introduction

Kyrgyzstan was the first Central Asian Republic to declare independence in 1991. It is a small country, but has a strategic location bordering Kazakhstan, Uzbekistan and China, and is not far from the huge market of India. It has a predominantly agricultural economy, but has been one of the most progressive in the CIS. Kyrgyzstan has abundant energy resources, an inexpensive and well-educated labour force, and good potential for agriculture, food processing, consumer industries and tourism. (Investment Profile, Business Forum, London, 2001)

Kyrgyzstan has implemented the most liberal and democratic transition path in Central Asia in terms of macroeconomic stabilization and restructuring. It has a very liberal trade regime, no foreign exchange controls, and has been accepted into the WTO. As its WTO membership requires that domestic policies be consistent with international practice, legislation of the country has been substantially improved to introduce better legal standards, and an impetus has been given to the transition process towards a market-based economy. (Investment Climate in Kyrgyzstan, Country report, 2003). As a WTO member, Kyrgyzstan is also under obligation to develop domestic institutions and reduce the role of the Government in the economy. In the process of macroeconomic stabilization, a unified exchange rate system has been achieved and inflation has been reduced. Small-scale privatization has been completed, and reforms in the telecommunications and energy sectors are under way. Substantial progress in tightening fiscal policies has been achieved, including initial modernization of the tax system and a comprehensive reform of the budgetary procedures and intergovernmental relations. The monetary policy framework and instruments have been overhauled, in parallel with successful reform of the financial sector. Non-tariff barriers have been removed and export taxes have been eliminated on all goods.

The number of trade relations of the Kyrgyz Republic with other countries has increased in recent years. So, today Kyrgyzstan has trade relations with 109 countries of world trade community. There is the progress in cooperation with these countries in many areas particularly, in export-import operations. Trade relationships with most of these countries were created within the framework of WTO, full member of which Kyrgyz Republic became on December 20, 1998.

External trade regime of the Kyrgyz Republic is one of the most liberal among CIS countries. There are no private or state enterprises with exclusive rights or powers to influence the level or direction of imports and exports. Export and import licensing applies to only eight articles adopted in worldwide practice, including weaponry, explosives, drugs and virulent poisons, precious metals and works of art, etc. The volume of commodity circulation in the Republic keeps its level on about 1,6 billion US$.

The Kyrgyz Republic along with Kazakhstan, Tajikistan, Belarus and Russia, has a common system of payments, equal access to international economic organizations within the framework of the Eurasian Economic Union. Common borders and good trade relations with China have formed a huge potential for export.

On the world market, the Kyrgyz Republic acts as a supplier of electric power, gold, cotton fiber, articles made of wool and cotton, wood, leather materials, tobacco, antimony and mercury. It is a net importer of energy resources, oil products, natural gas, coal, fertilizers and other chemical products, machinery, vehicles and spare parts, and household appliances. Bowels of the Republic are consisted of large stocks of gold, tungsten, tin, antimony, mercury and others metals. Kyrgyzstan takes the third place in the world on manufacture of mercury and the tenth on sale of gold. Foreign business can invest the capital in development of a tourist infrastructure on unique lake Issyk Kul, and also in creation of joint venture in agricultural sphere and techno parks.

After known March events of 2005, Kyrgyzstan has opened a new page in the contemporary history. New leaders of country have accepted a number of operative measures to achieve recovery of economy, emphasizing on growth of a private sector. The Government purposefully works above liquidation of any barrier interfering successful development of private business and creation of a favorable investment climate. In addition, fight against corruption and recovery of economy's industrial sector are defined as two principle national priorities. Given Kyrgyzstan's geographical location with access to vast market of 2,5 billion consumers in Russia, China and India, it makes Kyrgyzstan a favorable and profitable destination for investment.

Kyrgyzstan has also made progress in attracting foreign investment. The government has adopted a new law on foreign investments in the Kyrgyz Republic, introduced special incentives for investors, established a liberal exchange rate regime, and supported all initiatives to attract foreign investment. The guarantees that are provided to foreign investors such as national treatment, freedom of transfers and protection against nationalization meet western and international standards, although implementation could be further improved. The establishment of the Advisory Council on Investment Policy (ACIP) in 1999 has been a positive move to ensure dialogue between investors and government, and to address issues relevant to the investment climate.

1. Foreign Direct Investment

A vital prerequisite of economic development is attracting direct investments. At present, neither the Kyrgyzstan government, nor domestic investors are in a position to provide the investments needed to stimulate various branches of the Kyrgyz national economy. Moreover, as the classical development of most of the world's nations shows, relying on domestic investments alone to boost the economy is a long and laborious process.

Liberalization of the economy, privatization of state property, deregulation of prices, openness of trade, and reduction of state intervention (in favor of a free market) - all these features became the principal manifestations of economic reforms during the transition period. In the opinion of the International Monetary Fund (IMF), Kyrgyzstan's policy in the sphere of structural transformation of its economy was the most progressive among all the countries of the region, particularly with respect to the liberalization of prices and privatization. (International Monetary Fund, Economic Review: Kyrgyzstan (1992), pp. 8, 13.) Despite the difficult position that confronted Kyrgyzstan because of the high degree of its dependence on the Soviet economy, its reforms followed the path of shock therapy. Simultaneously, the government of Kyrgyzstan encountered problems that were associated with the assertion of sovereignty, the need to pursue a policy aimed at macroeconomic stabilization and economic reform, and the establishment of a new posture with respect to foreign policy and foreign trade.

Data on foreign direct investment (FDI) in Kyrgyzstan are reported by the National Bank of the Kyrgyz Republic (NBKR), based on data collected by the National Statistics Committee (NSC). FDI data are collected from enterprise surveys on joint-ventures and foreign-owned non-financial enterprises conducted by NSC. However, FDI data on the banking sector are collected by NBKR through the international transactions reporting system, which was introduced in 1997.

A new Law on Investments, enacted in 2003, provides the legal framework applicable to activities of investors within the country. It provides fair and equal treatment for investors and the protection of their investments in Kyrgyzstan. The law also regulates legal relationships between investors and governmental bodies of Kyrgyzstan, allowing investors to resolve any disputes that may arise through international arbitration proceedings. Ownership of land by foreign investors is restricted. However, land can be leased. Kyrgyzstan has established four free economic zones under the 1992 Law On Free Economic Zones in the Kyrgyz Republic, which was amended in 2002. Foreign investors may establish wholly foreign-owned enterprises or joint-ventures, acquire shares in existing entities and participate in privatization programmes.

In 2001, the Government established the Investment Promotion Centre (IPC) under the State Committee of the Kyrgyz Republic on State Property and Direct Investments. IPC acts as a one-stop shop to assist foreign investors in investing in the country. It provides information on investment opportunities, assists foreign investors to contact interested partners for project implementation, and provides administrative facilities in obtaining permits, licenses and registration certificates. The Consultative Council on Foreign Investment was established in 2001 by the Decree of the President. The Council, chaired by the President, provides a platform for investors and the Government to exchange views and discuss policy implementation and related measures in improving the investment climate of the country.

Foreign Direct Investment (FDI) (millions of US$)

FDI

2000

2001

2002

Inflows

-2

5

-12a

Outflows

5

6

6a

FDI stock. Stock data after 2001 are estimated by adding flows

Inward

439

427

415a

Outward

33

39

45b

FDI flows to Kyrgyzstan were stagnant at US$ 5 million during 2000-2002 after they peaked in 1998. Outward FDI flows during 1999-2001 were at the similar level of US$ 5.6 million. Inward FDI stock tripled from US$ 144 million to $415 million between 1995 and 2002, while outward FDI stock grew marginally during 1998-2002.

Summary of FDI

Variable

Inward

Outward

1. FDI flows, 1998-2002 (annual average)

13.0

14.2

2. FDI flows as a percentage of GFCF, 1998-2001 (annual average)

18.9

4.6

3. FDI stock, 2002

435.1

39.3

4. FDI stock as a percentage of GDP, 2002

27.1

2.5

FDI flows were dominated by investment from developed countries before 2000. Since 2000, developed countries as a group have been disinvesting in Kyrgyzstan, while Central and Eastern European countries emerged as the largest investor. FDI flows to the tertiary sector have been declining noticeably since 1998. During the period 1995-2002, the number of employees employed by TNCs increased steadily because of the increase in the number of foreign enterprises in the country.

FDI flows, by type of investment, 1995-2002

Year

Inward investment

Outward investment

Equity

Reinvested earnings

Intra company loans

Total

Equity

Reinvested earnings

Intra company loans

Total

1995

16.4

79.7

96.1

1996

49.0

0.5

-2.3

47.2

1997

53.1

0.8

30.0

83.8

1998

86.9

7.6

14.7

109.2

22.6

22.6

1999

11.2

3.9

29.4

44.4

6.1

6.1

2000

17.6

8.0

-28.0

-2.4

4.5

4.5

2001

12.3

13.5

-20.8

5.0

6.1

6.1

2002

5.0

9.0

-9.2

4.8

5.6

Foreign TNCs in Kyrgyzstan import considerably more than their exports from the country. The largest industrial investors in Kyrgyzstan in 2003 were Kumtor Operating Company (Canada), Reemstsma Kyrgyzstan (Germany) and Kyrgyzpetroleum Compnay (Canada). The largest investors in finance activity were the Demir Kyrgyz International Bank from Turkey, Amanbank from the Russian Federation and the Kyrgyz Investment and Credit Bank from the European Union. FDI inflows as a percentage of gross fixed capital formation remained low (2.3 percent) in 2001 as compared to the peak of 52 percent in 1998. FDI stock as a percentage of gross domestic product declined marginally in 2002, down from 28 percent in 2001 to 27 percent in 2002.

One of the sources of domestic investments in Kyrgyzstan is business. But the business sector has not matured enough to meet the needs of a market economy. Big business is still at the embryonic stage, and small and medium businesses are only just beginning to stand on their own feet. Thus, it is premature to expect large-scale investments in industrial development and modernization at present. This situation can only be rectified if foreign investments are found to supplement domestic capital.

The republic is in even greater need of direct foreign investments due to the indebtedness of most of its enterprises. Overdue debts are growing and state investments in industry are dwindling. The deterioration of basic industrial stock is also becoming increasingly apparent. Kyrgyzstan's industry needs a new lease of life in terms of updated technology and know-how. Most enterprises should be closed down and new state-of-the-art plants organized in their place, which will also require significant investments. Thus, the import of foreign capital into Kyrgyzstan is one of the most lucrative and fastest ways to revive the Kyrgyz economy.

Direct foreign investments will make it possible to create new, high-tech industries, modernize basic stock, create additional jobs, make active use of highly-qualified personnel, introduce the latest management, marketing and know-how achievements, saturate the domestic market with high-quality goods, and increase export. In contrast to foreign credits, direct foreign investments do not increase the republic's indebtedness, and thus decrease the drain of hard currency out of the country. If used efficiently, direct foreign investments, which do not place a long-term burden on the republic's budget, will make it possible to procure significant financial resources for investment in the key branches of the Kyrgyz economy.

In order to achieve the best results, a favorable investment climate must be created for foreign investors. In his message A Solid Economic Foundation for Social Development of the Kyrgyz Nation of 30 September, 1998, the President of Kyrgyzstan set the task of raising the annual growth rate in direct foreign investments to 15% of the GDP.

The growing competition in attracting direct foreign investments is bound to have a positive effect on the republic's economic development and step up the implementation of further reforms directed at improving the investment climate and attracting a large amount of foreign capital. Such factors as strategically important resources, a high level of population education, cheap highly-qualified labor, a relatively high development level of the infrastructure and social sphere, and proximity to the Euroasian market undoubtedly aid most countries with a transitional economy in their efforts to attract direct foreign investments. However, experience shows that these factors alone are not enough, comprehensive structural reforms and an active state policy are also required to achieve this goal.

According to the Kyrgyz National Statistical Committee, Foreign Direct Investment (FDI) totaled $335.6 million in 2006, $210.3 million in 2005, $176 million in 2004, $147 million in 2003, $116 million in 2002 and $90 million in 2001. For the first nine months of 2007, FDI amounted to $324.5 million (1.7 times higher than at the same point in 2006).

The problem of registering and tracking numerous new private businesses has rendered government statistics on employment, the tax-base and national economic performance questionable. 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 conduct contract work for 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, and the Kyrgyz Petroleum Company. A U.S.-Turkish-Dutch joint venture operates a Coca-Cola franchise that bottles its soft drinks locally, and the Canadian gold-mining firm Centerra Gold has formed the largest western joint venture 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 2006: Kazakhstan 40.78%, Germany 15.92%, Great Britain 11.32%, Cyprus 6.83%, Russia 5.9%. For the first 9 months of 2007 the largest sources of FDI were Kazakhstan 46.66%, Great Britain 13.29%, Germany 8.93%, China 6.37% and Turkey 3.48%.

Bishkek and the surrounding Chui region absorbed more than 85% of FDI in 2007. An additional 10% went to the Talas region, with the remaining amounts scattered among the other five regions of the country, primarily the Jalalabad and Issyk-Kul regions.

In fact, foreign investors not only brought finances to the economies of our countries (where capital was in such short supply after the breakup of the Soviet economy), but also new technologies and the experience of modern management. Kyrgyzstan was one of the first to adopt a law on foreign investments that conferred a number of privileges and advantages on foreign investors (depending on the sphere of investment). It must be acknowledged that this law did significantly contribute to attracting the interest of foreign investors. In addition, Kyrgyzstan approved a statute on free economic zones, the goal being to create (with the assistance of foreign investors) productive zones that were exempt from taxation.

It may also be useful to consider the experience of developed countries like the United States and the countries of Europe. For example, during periods of economic downturn, the government of the United States has established a fixed exchange rate and placed limits on the interest rate for credits.

The goal here is to protect investors from bankruptcy and to give them an opportunity not only to repay credits but also to earn a profit. The economic recession observed in recent years in the United States has generated active measures from the presidential administration. In particular, the government has raised the tariffs on steel, a step which provoked a stormy reaction in the countries of Europe, but which received much support from the steel producers in the United States. Moreover, at the beginning of 2002, the U.S. government increased its subsidies for American farmers. The agricultural subsidies are one form of state investment that has been extensively employed in Europe and in the United States. Beside the tariff regulation and subsidies, the countries of the European Union and North America actively employ measures of nontariff regulation. A study conducted by experts from the IMF shows the presence of a direct correlation between the level of nontariff regulation and the level of development of an economy. The conclusion is as follows: the richer the country, the lower its average tariff rates. However, as far as nontariff barriers are concerned, the situation changes radically: the richer the country, the higher its average level of nontariff barriers and the more discriminatory their character.

Russia, which has demonstrated encouraging results in economic growth during the last three to four years, has begun to use the policy of import-substitution. It has raised import duties on a number of goods that are produced domestically by using the instruments of hard-currency regulation and by placing restrictions on the export of capital. Many observers link the economic growth of Russia and Kazakhstan above all to the increase in oil prices and assert that such a growth cannot be sustainable. However, a number of economists attribute the growth of these countries to their protectionist policy, which is aimed at creating and protecting domestic markets.

Thus, there are grounds to assert that the growth in Russia and Kazakhstan results not only from the favorable conditions on the oil market but also from the state's economic policy.

The Bakiev's regime made some very positive steps to improve the investment climate. Taxes were lowered, a new Tax Code was enacted, and a package of legislative changes affecting the minerals sector was before parliament. The President personally chaired an Investment Council with senior representatives of government, business, and the donor community. Concrete proposals were discussed, minuted, and followed through. A declared objective of President Bakiev was to boost the Kyrgyz Republic's ranking in the World Bank Doing Business league table, and indeed the republic achieved a ranking of 41 out of 183 countries in the 2010 report. In the area of protecting investors, Doing Business ranked the Kyrgyz Republic as number one in Eastern Europe and Central Asia. (Investment Now, Journal, the Investment Climate In Kyrgyzstan: Two points of view, 2010).

Thus, over the past five years there was an increase in FDI by a factor of almost 3 times, with a peak in the year 2008, when the volume of FDI amounted to 866.2 million US dollars. In 2009 there was a slight decline in FDI, due to the global financial crisis. However, income of $661 million in 2009, in a difficult time, also indicates the strengthening of investor confidence towards the Government. Currently 50 projects are being implemented within the Public Investment Program in various sectors of the economy. The main partners include Asian Development Bank, World Bank, Islamic Development Bank, European Bank of Reconstruction and Development, and the Government of Switzerland.

Paradoxically, in Transparency International's 2009 Corruption Perception Index the Kyrgyz Republic ranked near the bottom of the table, number 166 out of 180 countries.

In short, the formal investment climate was improving, but there were some serious shortcomings that did not seem to be receiving the attention they deserved.

Good business in the Kyrgyz Republic is based on good relationships. Tax regimes, the legislative environment and ease of dealing with administrative procedures are all essential factors in any investment decision.

Measures on increasing investment in the KR

Score

Investors' rights protection and their activity guarantee

5.6

Legal framework for investment

4.9

Stability of decisions taken by regulatory authorities

4.8

Legislation encouraging investment in the KR

4.2

Presence of transparent procedures that notify business of the changes in legislation

3.9

Effective public policy in promoting Kyrgyzstan to world markets

3.3

According to this table we can see that Protecting the rights of investors and guarantee their work, taking into account the current political situation was considered as the most important question. During the first days following the revolution, business experienced anarchy and a lack of safeguards to protect investments and businesses. The legal framework for investment and The stability of decisions taken by regulatory authorities were adopted as the next ones in importance. These factors were pre-determined by actions of the government on a number of business structures, in other words by introducing the mechanisms such as external management and nationalization. Issues that are related to stimulating investment are lower in priority than the priority of protecting the existing ones. This is a fairly clear signal that the Government needs to address the problems of serving existing, real, investors rather than improving conditions for the future ones, that is virtual investors.

2. Major sectors of the economy

The Kyrgyz economy is undergoing gradual transformation to recover from the negative effects of the Russian crisis. The agricultural sector recorded growth in the first nine months of 2000 and provided a higher contribution to the GDP, maintaining a growth trend that started in this sector in the mid-1990s. Fluctuating trade relations with neighbours such as Kazakhstan and Uzbekistan have affected the development of the leading sectors and of exports. Mining and light industries play a considerable role in the economy, as Kyrgyzstan is rich in minerals. However, the services sector, created since transition began, may have the most potential as it is not burdened with any inheritance from the centrally planned Soviet economy.

Agriculture is a priority development sector for the government, which aims to increase production levels to meet domestic needs and export any surplus. Increasing net export income in agriculture would consolidate the sector's position in economic development. Stimulating an active agribusiness sector through improved efficiency is another government objective. The main agricultural product is grain, followed by vegetables, cotton and tobacco. Adverse weather conditions and an unprecedented drought in the region yielded lower than expected production levels in 2000. (Investment Profile, Business Forum, Major sectors of the economy, London, 2001).

There are several government projects under way to boost agribusiness, supported by international financial institutions. The Agriculture Area Development Project, worth a total of US$ 45 million, to which the Asian Development Bank (ADB) has contributed a concessional loan equivalent to US$ 36 million, aims to develop agribusiness in the Chui region in the north. The balance of costs is being met by the government and beneficiary farmers. Of the total project cost, US$ 7 million will be used to develop agribusiness, US$ 12.5 million to strengthen agribusiness materials and technology, and US$ 21 million to upgrade the irrigation systems. The Chui region has been selected for investment because it accounts for 30 per cent of the country's agricultural output, has high potential for agricultural growth and is the focus of other investments designed to raise farm productivity. Agriculture in Chui depends on irrigation, but there is a lack of well regulated water inflows. This project aims to increase the income of farming households threefold to US$ 50 per hectare of irrigated land over the next decade. It complements a World Bank project to provide other agricultural support services. The two IFIs are forming a joint implementation unit for drainage and irrigation, and the World Bank is considering extending a US$ 8.4 million credit line for the further development of irrigation systems in Chui Valley. The ADB will extend some US$ 180 million credit over the next three years for the development of the agro-industrial complex in Kyrgyzstan. Kyrgyzstan's Agricultural Financial Corporation also extends cheap credits to farmers.

Kyrgyzstan is also a pilot country in the World Bank's Comprehensive Development Framework (CDF). The CDF takes a holistic approach to development and seeks a better balance in policy making by highlighting the interrelationship between all elements of development - social, structural, human governance, environmental, economic, and financial. Under this approach, the Kyrgyz government is designing and defining its Kyrgyz 2010 Vision with the active participation of key domestic actors - parliament, civil society, the business and international communities - and is developing the first National Poverty Reduction Strategy. The objectives of the World Bank's assistance programme for the Kyrgyz republic in agriculture is basically to facilitate restoration of economic growth, particularly in the rural sector. To this end, The World Bank has various projects, among which is an Agricultural Privatisation and Enterprise Adjustment Credit to support the government's programme to demonopolise agro-conglomerates, develop land markets, and eliminate remaining trade and price distortions.

Wimm Bill Dann (Russia) plans to invest US$ 5 million in the development of milk and juice production in Kyrgyzstan. The company, which has dairy plants across Russia, already holds 42 per cent of shares in the Bishkeksut dairy plant and is aiming for a controlling stake. Coca-Cola, the world's largest soft drinks producer, opened a plant in 1997 with a capacity of 24,000 glass bottles and 7,000 plastic bottles per hour. The total investment was around US$ 20 million. Additional investment of around US$ 15 million was made in 1998. Coca-Cola's investment comes 5 per cent from its US-based parent, 90 per cent from a Turkish affiliate and 5 per cent from the Kyrgyz side.

Large state-owned enterprises in the wool, silk and cotton industries will be privatised under the large-scale enterprise rivatisation programme. The wool, cotton and silk industries are dominated by a number of large enterprises located in the industrial centres. The most important production sites are Bishkek (woollen yarn and fabrics), Osh (cotton fabric and silk), and Tokmok (wool scouring and yarn manufacture). Camco Corporation (UK), which owns a controlling stake in the Kasiet Spinning factory, aims to increase production to 3,500 tonnes a year, and also aims to diversify its activities in the country. Henrich Glaiser Textile Company (Germany) has built a cotton oil plant in the south, with a processing capacity of 10,000 tonnes of seeds per year. The company started its operations in Kyrgyzstan in 1998, since when it has invested about US$ 15 million. (Investment Profile, Business Forum, Major sectors of the economy, London, 2001).

Tobacco processing is an attractive area for foreign investors. A German-Kyrgyz joint venture, Reemtsma-Kyrgyzstan, is manufacturing cigarettes to meet the country's annual cigarette demand, estimated at 7 billion. After the acquisition of Kyrgyzstan's only cigarette production plant in 1998, Reemtsma started building a new factory, which is scheduled for production start up in 2001. As a result, sales have more than doubled compared to 1998, and Reemtsma has gained the market lead with a share of about 35 per cent.

Kyrgyzstan's best known foreign investment project is the US$450 million development of the Kumtor gold mine, one of the largest in the world. Kyrgyzstan has important gold reserves and is the tenth largest producer and seller of gold in the world. Kumtor, the biggest gold mine, extracts about 18 tonnes of gold annually. During January-August 2000, it produced 12.9 tonnes of gold, up 6.6 per cent year-on-year. Apart from Kumtor, Kyrgyzstan has 65 other areas of potential prospecting interest to gold mines. Gold is just one of various opportunities beckoning foreign investment to the country. Cameco Gold (Canada) holds 30 per cent in the venture, and state-owned Kyrgyzaltyn 70 per cent. Financial support has been provided by a bank syndicate consisting of Chase Manhattan as the lead manager, the EBRD and the International Finance Corporation (IFC). The EBRD has advanced a US$ 30 million senior loan and a US$ 10 million subordinated loan to the Kumtor Gold Company for the development of Kumtor gold deposit, located in the Issyk-Kul region.

Priority industries also include hydroelectric power. Potential reserves total estimated 170 billion KW/H and Kyrgyzstan is the leading exporter of HEP to Kazakhstan & Uzbekistan. Kyrgyzstan has vast water resources originating from its mountain rivers, which are currently used at a capacity of about 10 per cent. Hydroelectric energy accounts for 20 per cent of the country's total exports. With the rapidly increasing energy needs of neighbouring countries, this sector offers opportunities for investment. There are untapped gold deposits, coal, aluminum, copper, tungsten, uranium, mercury, tin, marble, granite and salt. Today Kyrgyzstan ranks third world-wide in mercury production, contributing 20% of the overall volume in the world. Kyrgyzstan is the only one country who possesses ferrous ore deposits in Central Asia.

Oil & gas resources are concentrated in the southern part of the republic. They include five oil deposits, two oil & gas deposits and one gas condensate deposit.

Three countries, Kazakhstan, Kyrgyzstan and Uzbekistan, are heavily dependent on each other for their energy needs and for sharing water resources. For instance, the Dostyk canal, which provides water for the irrigation of cotton crops, is divided between all three as well as Tajikistan. The Kyrgyz Ministry of Agriculture and Water Resources signed an agreement with Kazakhstan in September 2000 for joint use of Kyrgyz hydroelectric facilities and to cover any costs incurred as a result of water used by each side. The agreement will come into effect in 2001. Kyrgyzstan, Kazakhstan and Uzbekistan also have an agreement on the joint use of water and power resources on the Naryn-Syrdarya river system and its cascades. Volumes of power and commercial details of the agreement are updated on an annual basis. Kazakhstan's Energy Grid Operating Company has commissioned a bridge reactor with a total capacity of 180 MW at the Zhambyl-500 substation. It will link up the Tashkent-Zhambyl-Shymkent (Kazakhstan) - Bishkek intersystem grids, ensuring reliable electricity supplies between the neighbouring countries. In October 2000 Kyrgyzstan and Uzbekistan made a gas for water agreement, under which Uzbekistan will deliver 700 million cubic metres of gas to Kyrgyzstan. Kyrgyzstan will make 50 per cent of the payment by providing Uzbekistan with water for 2.2 billion kWh of electricity production.

Conclusion

The Kyrgyz investment climate remained sufficiently attractive, enhanced by the liberal tax, exchange and customs legislations, not to mention all the advantages associated with WTO membership. The government prioritizes the development of small and medium enterprises (SMEs), and is further improving the conditions for all businesses by decreasing the average tax burden.

In 2006, the country achieved considerable success in attracting foreign direct investments. FDI from CIS countries increased more than threefold to USD 157 million. An additional USD 178 million was attracted from other countries, such as Germany (15.9%) and United Kingdom (11.3%).

Large Kyrgyz enterprises draw substantial benefits from cooperation with foreign direct investors, who introduce advanced technologies, new equipment and quality operating standards to Kyrgyz businesses. Prime example of such international cooperation include the Kyrgyz-Canadian gold-mining company Kumtor, Gazpromneft Asia, `Kant cement-slate industrial complex, Interglass glass production factory, cellular communications operators Sky Mobile, Megacom, Fonex and telephone operator SaimaTelecom, as well as a host of others.

Kyrgyzstan aims to create a favorable investment climate and is making an effort to provide beneficial conditions to foster further investment. To this end, the country pursues policies aimed at reducing the inflation rate, providing profit tax incentives for companies with foreign investments as well as exemption from payment of VAT and taxes on the import of technological equipment and associated spare parts, and granting favorable terms for credits in foreign currencies received from foreign banks and credit institutions.

Kyrgyz foreign investment legislation guarantees protection for foreign investors from expropriation, nationalization, and similar actions. It also protects against bureaucratic delays within the Kyrgyz government structure. However, laws affecting business in Kyrgyzstan are not absolutely explicit and are not always implemented consistently. The interpretation of laws by different agencies can at times vary.

Though the Kyrgyz Republic has experienced some political instability in recent months resulting in a lack of confidence from foreign investors, many protections available to potential foreign investors may be being overlooked. These protections afforded through existing legislation and bilateral protection treaties may offer investors increased security and the ability to bypass inconsistencies in the national legislation regime by providing a number of tools which can help to eliminate or minimize some of the risks of investing in the current political climate. (Investment Now, Journal, Protection of Investment in the Kyrgyz Republic, 2010).

Sources

1. Business Information Service for the Newly Independent States, Kyrgyz Government takes foreign investment seriously, September 2001

2. Business Information Service for the Newly Independent States, The Kyrgyz Republic: fiscal year 2004 country commercial guide, August 2003

3. Crespo, Nuno and Maria Paula Fontoura, 2007. Determinant Factors of FDI Spillovers - What do We Really Know? World Development, Vol. 35, No. 3: 410-425.

4. Department of Commerce, United States Kyrgyz Republic: 2003 investment climate statement, August 2003

5. Investment Profile, Business Forum, London, 2001.

6. Investment Now, Journal, 2 (19) 2010.

7. Kyrgyzstan - A Jewel of Central Asia, 8, 2001 by Eric G. Postel and Yuri Nevenchanny.

8. Romer, P, 1993. Idea Gaps and Object Gaps in Economic Development. Journal of Monetary Economics. Vol. 32, No. 3: 543-573.

9. State Committee of the Kyrgyz Republic on State Property and Direct Investments, Investment Guide 2002 (State Committee of the Kyrgyz Republic on State Property and Direct Investments: Bishkek, 2002).

10. UN-ESCAP, Country reports on investment climate: Kyrgyzstan in Foreign direct investment in Central Asian and Caucasian economies: policies and issues, Studies in Trade and Investment, No. 50, 2003 (ESCAP: Bangkok, 2003), pp. 136-177.

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