The Relocation Of Western Companies In Russia To Kazakhstan

Case studies and local Kazakh issues to be aware of     

More than a year has passed since the beginning of the Ukraine conflict and the imposition of anti-Russian sanctions. But what many predicted, even anticipated – that Western companies would rush to Kazakhstan instead – did not happen. A year on, less than 100 Western players have moved to Kazakhstan. We discuss who they are, and the underlying reasons for relocation.

In December 2022, the Kazakh Ministry of Foreign Affairs released data about which companies had; or were preparing to move to Kazakhstan from Russia. These included:

• Honeywell (USA) – opening of a regional office for Central Asia in Almaty (previously the regional office was in Moscow), setting up production of control cabinets in Almaty (Honeywell opened an assembly plant on July 20) and gas analysers in Atyrau (opening an assembly plant on November 25); together with the possibility of production of meters and electrical appliances in due course.
• InDriver (USA) – transfer of the regional office and relocation of the team of specialists. Previously, the regional office was located in Moscow, the company relocated to an office in Almaty.
• Ural Motorcycles (Russia/USA) – localisation of production of heavy motorcycles for export to third countries. The company moved part of its production facilities from the city of Irbit and launched production in Petropavlovsk.
• Weir Minerals (UK) – a production centre for the assembly and restoration of pumping equipment, hydrocyclones, valves. The opening of the production site took place in September on the territory of the industrial zone of Almaty.
• Fortescue (Australia) – moving the office to Kazakhstan, focusing Eurasian green hydrogen projects on Kazakhstan. The company closed its office in Russia and registered the company at the AIFC site.
• TikTok (China) – opened a regional office for Central Asia and the Caucasus and expanded cooperation with Kazakhstan. The company froze the activity of the office in Moscow and opened a regional office for the CIS markets in Almaty in October.
• Marubeni (Japan) – partial transfer of the representative office from Russia to Kazakhstan. The company implemented a partial transfer of the representative office. At present, the main activity of the company in the region is supervised by the office in Almaty.
• RIVAL (Russia) – production of car accessories. The company moved the production of car seat covers, interior and trunk mats to Kostanay.
• Zavod LSTK (Russia) – production of light steel thin-walled structures. The project has been relocated; land works are underway on the territory of the Qyzyljar FEZ.
• PKV Group (Lithuania) – relocation of production of LCD TVs. The project has been relocated, the launch of the first production line of TVs took place in December.
• Emerson (USA) – production of pressure sensors. The opening of their Kazakh assembly plant took place on October 12.
• Koppert (Netherlands) – production of biofertilisers and plant protection products. The company has relocated an office and employees to Almaty and plans to start construction of the plant in 2023.
• R-Vent Medical (Turkey) – production of breathing circuits for ventilators in cooperation with Novamed. The project has been relocated, a site in Astana has been identified, an agreement on technology transfer has been signed with Novamed (Netherlands). Delivery of equipment is expected before the end of the year.
• United Concrete Canvas (UK) – production of concrete canvases. The company opened an office in Astana in August.
• Knauff (Germany) – construction of a drywall plant. The company has made a decision to open a plant, project documentation is currently being developed.
• Reimann (Germany) – construction of a plant for the production of trailer agricultural machinery. The company is ready to implement the project on the territory of the Qyzyljar SEZ. Today, a package of documents is being prepared for registration as a participant in the SEZ. It is planned to allocate land.
• Great Wall Motors (China) car manufacturing. On November 16, Kazakh President Tokayev launched the construction of a car manufacturing plant in Astana.
• Trancso (Czech Republic) – opening of the office of a transport and logistics company. In August, the company announced the opening of a representative office in Kazakhstan after closing an office in Russia to maintain a presence in the region.
• AvtoVAZ (Russia) – assembly of Lada Granta and Lada Vesta models. The process of assembling the first experimental body for testing the technology and checking the composition of the vehicle kit has been launched.
• Air Liquide (France) new projects in decarbonisation for the production of blue and green hydrogen. The volumes of financing of projects intended for implementation by the joint venture Air Liquide Munai Tech Gases LLP in Kazakhstan were determined “Hydrogen production unit at POCR, production of compressed air and nitrogen for the production of polypropylene” at NINT SEZ.
• Alstom (France) – creation of service centres in Kazakhstan. Relocation of Russian component manufacturers. On November 29, a framework agreement was signed between the government of Kazakhstan and Alstom Holdings SA on the basic principles for the implementation of projects, production and maintenance of electric locomotives and equipment for rolling stock and railway infrastructure in Kazakhstan.

This list is not composed of Russian market leaders, while some are not foreign, but Russian brands that, for ease of access to spare parts, have moved their legal addresses to Kazakhstan. Some have been working in Kazakhstan for over a year as some businesses had already made decisions to boost their EAEU market presence by transferring assets from Russia. Sanctions in some cases accelerated a process that was already underway.

Largest Foreign Investors In Russia in 2021

Here are some of the largest foreign manufacturers in Russia and their Russian revenues for 2021 (pre-Ukraine sanctions). All are examining the Kazakh option.

• Volkswagen Group – ₽517 billion (US$6.71 billion)
• Leroy Merlin – ₽347.2 billion (US$4.5 billion)
• Groupe Renault – ₽310 billion (US$4.02 billion)
• Philip Morris International – ₽392.9 billion (US$5.1 billion)
• Apple – ₽266.3 billion (US$3.45 billion)
• JT Group – ₽345.5 billion (US$4.48 billion)
• Toyota Motor – ₽332 billion (US$4.31 billion)
• Ingka Group – ₽299.2 billion (US$3.88 billion)
• Samsung Electronics – ₽288.7 billion (US$3.74 billion)
• EloGroup – ₽278.8 billion (US$3.61 billion).

Issues To Consider When Relocating A Business To Kazakhstan

According to Kazakh financier Rasul Rysmambetov, the transfer of production by companies is usually considered for more than one year and implies an extremely complex and multi-stage process.

“A new economic model is being created, financial, logistical, operational, managerial – because moving from a country to another location, climate, time zone is not just building a new workshop, painting and supplying equipment. Moving is also fraught with personnel risks: will there be the necessary personnel, and will it be possible at first to bring the backbone from another country.

It would seem that it is easier when it comes to a group of programmers who need a computer, the Internet and a coffee shop. However, there is also an environment around the programmer clinics for treatment, schools for children, relatives, and so on, that is, even a simple move of the most mobile working group brings a lot of difficulties. Therefore, the process of transferring the activities of global companies to Kazakhstan from Russia is not a utopia, but rather a long-term and hard work,” Rysmambetov believes.

He noted that Kazakh consultants only began to receive requests from foreign diplomats and industry associations for consultations on the likely transfer of production from January this year.

“What will a foreign manufacturer need to transfer? It is all the same infrastructure that foreigners and locals have not been able to get for the previous 20 years: land, electricity, water, logistics, a transparent and understandable tax system, ready-made local personnel or the ability to bring them legally from another country. And of course, transparent court decisions on economic disputes. Now you can make a certain allowance for the fact that the Russian market is already developed, so a foreign manufacturer may have to put up with some standards slippage in new CIS markets” Rysmambetov noted.

But, according to Rysmambetov, there is a certain “Dr. Jekyll and Hyde” to Kazakhstan’s state apparatus: local authorities can be disappointing: for example, problems with obtaining land with convenient infrastructure and logistics. The tax system is simple, but conditions can change fast – new investors may be asked to pay part of the annual taxes at the beginning of the year. Technical conditions in the form of electricity and water are a separate headache.”

Most of all, potential investors can be put off by Kazakh officials often suggesting that when dealing with administration problems: “Don’t worry, we will raise the issue with the Government/President, and we will do everything for you in the best possible way.” If simple things have to be solved by the Presidential administration, then what about more complicated problems?

There are, according to Rysmambetov, other problems: A weak connection between the government and administrations: first, they paint on indicators on the ground, send them to the centre, and then they varnish them a little and show them to the president. And then the whole chain of performers wonders why they are given such complex assignments. For this reason, there are certain inconsistencies between the desired and the actual standards and administration processes.

In conclusion, it should be noted that the relocation of foreign business to Kazakhstan often infringes the rights of local companies due to the Government prioritizing foreign investors. This can create local problems.

Rysmambetov suggests that “The main source of wealth for Kazakhstan was the land, and raw commodities meaning that in budgetary terms, with rare exceptions. 88-90% of FDI has always been in oil and metals.

Today, we are on the verge of rethinking the meaning and essence of the existence of Kazakhstan as an energy based state, or as a country that can determine its own development.”

Nurbek Iskakov, an analyst with Esperio, believes that Kazakhstan is completely unprepared for the massive arrival of large Western enterprises.

“Many experts have spoken about this, and, apparently, they were right. Unfortunately, there is a misconception in society that the arrival of Western business in the country magically changes the infertile business climate to the same as a favourable one in advanced economies. This, of course, is not the case, because the emergence of the national economy to a new level is always preceded by the creation of suitable conditions in the country, and this is done not by business, but by the state. In the case of Kazakhstan, we are talking about the transition from a raw material model of the economy to a manufacturing one, the conditions for which are fundamentally different from the previous ones.

For the development of the manufacturing sector, an army of specialists is needed, more precisely, an effective state system for training an army of specialists. We need affordable capital for business, we need infrastructure (energy, communications, a scientific school, transport, comfortable living conditions, and others).

In addition, we need an environment for fair and tough competition, without which growth and development is impossible, we need special conditions to support private investment in modernisation, that is, a special tax regime, state business development institutions, and so on.

This is an approximate list of the main conditions, without which large manufacturing companies will not even look in our direction, because the payback period for the enterprises they will build exceeds 5-7 years. That is, they must be confident at least in the medium-term prospects of the country.

Can we honestly say today that Kazakhstan has all this? If we engage in populism, this ultimately leads to economic degradation and decline.  But if we are honest and tough with ourselves, then we can say that Kazakhstan not only does not have even a quarter of the required conditions, but, most importantly, it is not clear in what time frame they can be achieved.”

Translating the same honest and tough ray of attention to Russia, according to Iskakov, there are more requirements for fulfilling conditions for the transition from a raw-material to a manufacturing economy model.

“There is a system for training specialists, it just lacks synergy with existing enterprises. A strong Soviet scientific school has still been preserved in Russia, and there is a huge reserve of power generating capacities. Yes, Russia lacks affordable funding, but we see how this problem is being solved right now, thanks to Western sanctions that force Russian capital to stay inside the country. Russia also lacks access to technology, but, as far as we can see now, the Russian leadership is going to solve this problem with the help of China.

So, when the Ukraine conflict ends, the trajectory of the Russian economy will be completely clear this is the active development of the manufacturing sector, first for import substitution, and then for exports. Kazakhstan does not have such a trajectory, therefore, the economy of Kazakhstan, apparently, will cooperate with Russia. However, the caveat is that without the development of the required conditions it can be difficult to make progress during this process.

Source: Ahmet Talapuly for Caravan

Dezan Shira & Associates has a partner law firm in Kazakhstan that assists foreign investors into the country and can advise on legal and tax technicalities. For assistance, please contact Maria Kotova at maria.kotova@dezshira.com

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