Identified as a priority country by the Global Markets Action Plan, Kazakhstan is an emerging opportunity for Canadian suppliers, particularly in the resources industries where Canadians capabilities are a natural match for Kazakhstan’s needs.
According to Kazakhstan’s official statistics, in 2012-2015, bilateral trade between Kazakhstan and Canada exceeded $7-billion, with the main flow of Canadian investment directed to the oil, gas and mining sectors.
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Russian Federation and CIS, Export Development Canada
How would you describe the Canadian presence in Kazakhstan as well as Canadian opportunities?
Kazakhstan is a fairly challenging market, where Canada doesn’t have a large exporter presence yet. But there are similarities between the two countries that can give Canadian companies an advantage. First, Kazakhstan’s economy is focused on extractive and agricultural resources. And in these areas – such as oil and gas, mining and agriculture – Canada has high-quality innovative machinery and equipment that is well suited for Kazakhstan, which also has similar geography and topography. Since the Kazakh economy depends on the country’s ability to provide resources and develop infrastructure, Canadian expertise can be a good fit. Business opportunities also include telecommunications and the aerospace industry.
What should companies take into account when considering this market?
The Kazakh market is not too dissimilar to Canada, where we have a very large neighbour whose situation affects our own. In the case of this region, the state of affairs in Russia spill over to adjacent markets and affect the pace of economic development that we currently observe in Kazakhstan. Yet challenges in Russia might also cause some companies who have experience in the region to look more at Kazakhstan. There is a common customs union between Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia, where you can move goods border-free and customs-free. Companies find their experience in one of the markets is quite portable to other parts of the region.
Any challenges and cultural considerations?
It’s a challenging market, especially in terms of financing. Many local companies don’t have financial statements prepared to international standards, for example, so it’s difficult for us to get comfortable with their credit profile. For that reason, strategic partnerships are very important. We are working very closely with the Trade Commissioner Service and the Canada Eurasia Russia Business Association (CERBA), and are looking to build more partnerships despite current economic challenges.
Kazakhstan is a central Asian market – the business culture is partly Russian and partly unique Kazakh. To make good progress, it’s necessary to have a local presence or travel there frequently. What we call ‘parachute-selling’ – where you market goods from abroad and parachute them in – doesn’t really work in Kazakhstan. At times, it can be helpful to schedule extra time in Kazakhstan because the pace at which things move forward can be uneven. And, as in Russia, when you sit down for a large dinner the toast circuit will start and your turn will come – it’s always good to prepare a short friendly toast for occasions like that.
Chairman of the Board of Directors,
Canada Eurasia Russia Business Association (CERBA) Kazakhstan
Where can Canadian businesses learn about opportunities in Kazakhstan?
Contacting any of the Canada Eurasia Russia Business Association (CERBA) chapters would be a great place to begin. CERBA Kazakhstan can facilitate business by building bridges between prospective investors, co-operators and/or potential partners in trade. Throughout its network, CERBA organizes and sponsors numerous networking events to bring people together and showcase trade and investment opportunities both in Kazakhstan for Canadian businesses and organizations, and in Canada for Kazakh businesses interested in investment or forging partnerships with Canadian businesses. Other options include contacting the commercial section of the Canadian Embassy in Astana or the Embassy of the Republic of Kazakhstan in Canada (Ottawa), which has put together a very useful resource titled Kazakhstan – Canada Business Guide, (available for free electronically on www.kazembassy.ca).
What are the most common hurdles to expect?
Some of the challenges Canadian companies can expect include language barrier (Kazakh is the official national language while Russian is accepted as the business language), lack of transparency, heavy bureaucracy, and to a certain extent, rule of law. Fortunately, the Republic of Kazakhstan is generally viewed as a more stable market than many other countries in Eurasia, since the stability and longevity of the government has created a rules-based system that does not change as abruptly or as often as it does in other countries, notably Russia.
What about currency?
Some may view the currency weakness as a new hurdle since the national currency (Kazakh Tenge – KZT) has undergone a serious devaluation over the last two years. The government recently decided to devalue the currency by abandoning a peg-to-the-dollar policy and allowing the markets to set the value. Low oil prices have certainly influenced this new ‘free flow’ currency trend as this oil-producing country has to make due with a new economic reality of an oil barrel being valued under $50. This, however, may have a very positive side and be an opportune time for Canadian businesses to invest in Kazakhstan since the exchange rate is quite favourable towards the Canadian dollar.
How important are partnerships for a market like Kazakhstan?
In Kazakhstan, like in other markets, the likelihood of your success often depends on the relationships you have with either local partners or service providers. From an office in Canada with a time difference of 13 or 14 hours, it’s difficult to get a clear picture what’s happening in the market and respond to opportunities and requests in a timely manner. You need someone on the ground who can get the right information and whom you can trust.
How do you find the right partner?
There are a number of ways for Canadian companies to draw on local expertise by working either with a distributor, a channel partner or a local partner in a joint venture model. I’ve been fortunate in forming partnerships through the connections I have with CERBA, the Canadian trade commissioner service and the European Bank for Reconstruction and Development. But there is no magic formula – to find a reliable partner, you have to make a significant investment in time and resources. Even though it’s difficult to frequently travel to that part of the world, most opportunities come from a commitment to the market that is observed by potential partners, clients and investors. There’s nothing that beats building a relationship face to face – you can maintain a relationship through Skype and technology, but for the initiatives I’ve been involved in, it’s the physical presence that made the difference between a good idea and a good execution.
For me, visiting Almaty is always a highlight. People in Kazakhstan are very warm and welcoming. It’s also a country at the crossroads of Asia that is used to a lot of different cultures so people are patient with visitors.
How can you help facilitate partnerships?
Dostyk is the Kazakh word for ‘friendship.’ Our company is a partnership with a well-established Almaty businessman with a high level of expertise in the application of environmental technology in the resource and oil and gas sector. From our perspective, Kazakhstan makes a lot of sense for Canadian expertise. We are now working with a number of Canadian companies who have an interest in developing relationships with clients in Kazakhstan. We offer the links for companies that are hesitant to go into a new market: relationships and entry points. Instead of companies having to build a presence in Kazakhstan and do the heavy lifting in terms of building relationships, Dostyk Venture comes into the middle and works with Canadian companies as well as Kazakh clients.
What are some key entry barriers Canadian companies can encounter?
While I have experience in many sectors of the Kazakh economy, my main area of expertise is working in the oil and gas sector. Since it’s heavily influenced by the price of oil, there are limited investment programs for the industry at the moment. In the longer term, there are certain projects that can benefit from Canadian expertise and technology. Kazakhstan is lacking experience in off-shore production and operations, for example, and opportunities exist for service companies specializing in rig works, support infrastructure, work in ice conditions and environmentally sensitive technologies. But I find that potential customers may not be aware of Canadian products and services.
Underdeveloped infrastructure remains a major barrier for the development of the national economy. Other hurdles include corruption, inefficiency and a long lead-time for marketing and negotiations with potential partners.
What about competition?
Currently, there is a strong focus on cost savings. Kazakhstan traditionally has close links with Russian technology and suppliers and there’s a preference to Chinese equipment due to price considerations. There often is low transparency in procurement practices. In addition, there are government policies that aim to significantly increase local content of supplies. According to the Subsurface Use Law and the Petroleum Law, for example, subsurface users are obligated to purchase goods, both works and services, provided by Kazakhstan entities — if they meet certain requirements — as well as give preference to the employment of local personnel.
Any first steps you recommend for companies looking to come here?
The first step should be a thorough market study. If you believe that there is a demand for your equipment or service, I would recommended to meet representatives of the service companies operating in Kazakhstan to discuss the potential for receiving a contract or a sub-contract on one of their projects. At the same time, it is worthwhile to talk with those Canadians who work or have worked in Kazakhstan in the past who can be a valuable source of local information. Provided you are successful in preliminary negotiations, you should plan on visiting the country and start considering an appropriate local partner. I’d also recommend visits to professional events and trade shows, such as the Kazakhstan International Oil & Gas Exhibition and Conference (KIOGE) held each year October in Almaty (www.kioge.kz).
Manager, Member & Advisory Services,
How would you characterize the risk of corruption in your region?
Kazakhstan is considered a high risk country for corruption. The 2017 TRACE Bribery Risk Matrix, which measures business bribery risk, ranks Kazakhstan 150th out of 200 countries and gives an overall moderate-high risk score of 57 – citing a low-moderate expectation of bribes and moderate regulatory burden for businesses operating there, moderate enforcement of anti-bribery laws, and a low degree of media freedom.
The Kazakhstani government acknowledges the need for reform and has made advances in lowering the regulatory burden, but it still presents a challenge. The high level of bureaucracy allows petty corruption, such as facilitation payments, to persist. As recently as a few years ago, over 25% of firms reported having received at least one bribe demand when accessing public services in Kazakhstan.
A common source of bribe demands is customs. In general, the process for importing or exporting is costly and time-consuming. Companies have complained of the irregular application of the customs code and unclear documentation requirements.
Public procurement is another area of risk for corruption. Many international investigations into alleged bribery of Kazakhstani officials involve the awarding of government contracts in the oil and gas industry (for example, Rolls-Royce Energy Systems and Baker Hughes).
How do these risks affect Canadian businesses?
Corruption is a significant risk for foreign investors in Kazakhstan and especially for companies that interact frequently with government officials. The prevalence of petty corruption and facilitation payments means that Canadian companies should be prepared to face bribe demands when engaging government officials to secure routine government services, such as setting up electricity and import licenses.
Canadian companies are subject to Canada’s foreign anti-bribery law, the Corruption of Foreign Public Officials Act (CFPOA), which prohibits businesses and individuals from bribing foreign government officials. The current exception for facilitation payments under the CFPOA is set to end, making any such payments – which are illegal under international anti-bribery laws, such as the U.K. Bribery Act, and local Kazakhstan law – a risk under Canadian law as well.
How can Canadian businesses guard against these corruptive practices?
Canadian companies may reduce the opportunity for bribe demands by utilizing Kazakhstan’s e-government website to access public services online instead of in person whenever possible. Links to this and other helpful resources may be found at Invest in Kazakhstan, a website maintained by Kazakhstan’s foreign investment agency to assist foreign investors and businesses interested in operating in the country.
Canadian companies should also be careful of third-party liability stemming from local business partners. Third parties and their knowledge of local laws and customs can be instrumental for foreign companies doing business in Kazakhstan, but they also increase the risk of inappropriate payments. It is essential that Canadian companies conduct thorough due diligence on all third parties they seek to engage in their Kazakhstan operations. Companies may choose to work with TRACE Certified entities, which have completed a rigorous due diligence process based on international standards as well as anti-bribery training.
Export Development Canada does not endorse or favour any organizations listed above and is not responsible for the actions of those parties.