Countries with transitional economies rely on capital inflows to fund economic growth by attracting foreign direct investment. Therefore, CIS8 countries are providing as more opportunities to foreign investors as they could to get a higher share of FDI inflow. Among them Kazakhstan was rated in top 3 most attractive investment locations by 32 %9 of respondents ranked Kazakhstan in the top three most favorable CIS investment locations, and 88 % of investors surveyed in Kazakhstan were ranked as the most attractive CIS investment venue. The only country in which Kazakhstan is inferior in terms of the amount of FDI is Russia, however if we consider that it is territorially 4 times larger than Kazakhstan, and in 2015 FDI of the two countries was almost identical. The evaluation of the attractiveness of country-specific investment depends primarily on the sector of the industry. Russia is often the first choice for industries that depend on the consumer market, considering the scale of
8The Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kirghizstan, Moldavia, Uzbekistan, Russia, Tajikistan, Turkmenistan, Ukraine.
9 Ernst&Young investment opinion survey
its consumer base. However, Kazakhstan is perceived to be more advanced in its implementation of best foreign practices compared to Russia. Russia started to draw increased investment volumes from its neighbors: the FDI stock grew by 61.1 percent - to
$6.1 billion. Only in 2010-2012 has the indicator been higher. However, in terms of FDI imports from CIS countries, Russia is behind Kazakhstan.
In the structure of mutual investments of the CIS countries, the traditional sector of specialization of Kazakhstan - the fuel complex (at the beginning of 2017, its share was 27%) dominates. Non-ferrous metallurgy (5.9%) and infrastructure networks (6.4%) followed by a wide margin. If Kazakhstan is compared to other transition economies, a strong superiority can be seen, as government policies favor foreign investors, minimize taxes, provide subsidies and inexpensive property, as well as a large reserve of natural resources.
Table 1 below shows the annual FDI net inflows of CIS transitionary countries in US$
billions for the period from 2014 to 2018. If 2018 stock marked collapse would be ignored, Kazakhstan did great in terms of foreign capital inflow. In 2015 total inflows of international capital were almost equal for Kazakhstan and Russia (6.853 billion USD for Russia and 6.578 billion USD for Kazakhstan) and in 2016 Kazakhstan’s FDI inflows were more than a half of Russia’s. Azerbaijan and Ukraine are also in a great favor of investors from abroad, however Azerbaijan’s oil and gas supplies are 2 times less than Kazakhstan’s and Ukraine has lost almost 35%10 of their capital reserves by 2018 making FDI shrink by almost 20 times comparing to what it was in the beginning of the decade. Most economists tend to assume that this sharp decline happened due to unsolved political issues inside country. Following the example of Ukraine, Belarus has also lost more than 40 percent of FDI from the original figure amid political problems within the country. Foreign investors arrived in Belarus primarily in three sectors: manufacturing of 24.4% of all FDI net, trade 17.3% and finance 17.2%11 .Those sectors had the highest level of labor productivity in Belarus in 2015 (along with manufacturing, transport, and real estate operations). However, Kazakhstan has total
10 Dnipropetrovsk State Investment Agency
Available at: http://dia.dp.gov.ua/ru/pryamye-inostrannye-investicii-v-ukrainu-dinamika-2015-2019-godov/
11 National Statistical Committee of the Republic of Belarus.
Available at: https://www.belstat.gov.by/en/
dominance in two out of three industries, because Kazakhstan has a large stock of land and labor in the industrial sector and the trade sector is advanced due to investment from Russia and China. In addition, considering the larger customer base of some of Ukraine, Kazakhstan is seen as more appealing to new entrants in some industries, such as the services sector, because it provides substantial untapped opportunities.
Turkmenistan and Uzbekistan’s competitiveness are slowly but surely continuing to grow.
Despite the 2018 financial crisis, Turkmenistan managed to receive more FDI than Kazakhstan, the figure exceeds Kazakhstan by more than US$ 1 billion. Hydrocarbons and associated industries continue to be highly dependent on economic development of Turkmenistan. However, the economy and the formal labor market continue to be dominated by the public sector and state monopolies, so FDI remains confined outside the hydrocarbon sector, severely diminishing Turkmenistan's chances of attracting large numbers of investors.
Uzbekistan had the highest growth rate from 2017 to 2018 of total 288%12 in FDI net inflows comparing to other Central Asia countries. The main sectors of investment in Uzbekistan are electrical engineering, metallurgy, textile production, leather and footwear and oil and gas sectors. However, due to the unfavorable location of the country, the country's investment is not at such a competitive level. According to the survey made by Ernst&Young (2010) Uzbekistan got less than 1% in investors’ location preference, whereas Kazakhstan got 32%.
Tajikistan and Armenia are least popular destination for foreign capital inflow, due to the poor socio-economic situation in these countries. Most of investment goes to the oil and gas industry in a few regions plus manufacturing in Tajikistan, that has a higher share of FDI inflow than natural resource sector by 1.23%.
Georgia has also strengthened its qualifications as a favorable country for investment over the years. This is all due to the improved market climate implemented in 2008 by tax reforms, globalization, privatization and public sector reforms. Over the past four years, however, the amount of foreign direct investment (FDI) in Georgia has decreased by 54 percent. The
12 The World bank, FDI inflow in Uzbekistan (BoP, current USD)
decrease is attributed in part to the completion of the TANAP13, the termination of the extension of the pipeline in the South Caucasus, and the completion of other railway infrastructure projects funded by foreign countries. TANAP gave the country $ 2 billion in the mid-2010s, according to the Georgian Investment Promotion Agency. Unsurprisingly, after construction was finished, FDI dropped sharply.
Table 1: FDI net inflow in transition economies, US$ billions
Source: The World Bank, Foreign Direct Investment, net inflow (BoP, current US$)
Available at:https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2019&locations = KZ&start=2014
Kazakhstan has shown strong success, especially in extractive industries, in attracting FDI.
But if the government is to achieve its ambitious plans to diversify the economy, it has to attract FDIs, which will not only bring financial transfers, but also transfer of technology, elevated equipment and human capital growth opportunities.
Many indicators alongside with statistical data prove that Kazakhstan is among top 3 destinations for investors. Its borderline with China provides a chance for prospective investors to supply China with oil reserves. For other industrial investors, for instance, the proximity of China could be more of a hazard than an advantage, given China's current competitiveness and cost-efficiency levels. Even so, the exposure to fast-growing markets in Russia, China and other parts of Asia has been seen by many investors, not only in manufacturing and natural resources, but also in financial services, as a real opportunity. For
13 Trans-Anatolian Gas Pipeline, 2010
Kazakhstan to fully realize its ability beyond the extractive industries, ongoing efforts to improve the investment environment need to complement its geographical advantages.