A Brief Introduction to Kyrgyzstan SCHNEIDER GROUP April 2020 Contents

A brief introduction to Kyrgyzstan SCHNEIDER GROUP April 2020 Contents

General Overview Main Economic Indicators EAEU and Kyrgyzstan Doing Business 2020 Key Industries in Kyrgyzstan Mining Hydropower Agriculture Tourism Visa-free Regime Foreign Direct Investments State Guarantees to Foreign Investors Investment Opportunities Free Economic Zones (FEZ) of Kyrgyzstan SCHNEIDER GROUP Services

Kyrgyz Republic is a land-locked, lower-middle-income Population: 6.32mn country located in the heart of Central Asia. The capital is Bishkek. It has borders with Kazakhstan to Surface area: 200 000 sq.km. the north, Uzbekistan to the west, Tajikistan to the GDP 2018: 8.09bn USD southwest, and the People’s Republic of China to the Real GDP growth 2018: 3.5% east. The country is divided into seven provinces (oblasts), Doing Business 2020 rank: 80 which are Batken, Chuy, Djalal-Abad, Issyk-Kul, Naryn, Osh and Talas. 53% of the country’s territory is agricultural land, 3.4% is forest land. Of the agricultural land, 12.3%, is arable totalling 1.3mn hectares. The remaining are mountainous pastures and meadows. Nearly 90% of Kyrgyz territory is in the Tien Shan mountain range. The economy is vulnerable to external shocks owing to its reliance on one gold mine, Kumtor, which accounts for about 10% of GDP, and on worker remittances, equivalent to about 27% of GDP in 2018.

GDP in million USD GDP growth in Kyrgyzstan during last decade was in average about 4.5% per annum. Annual GDP growth in 7468 7703 8093 7335 6678 6813 2019 was 4.2%. The services sector, driven by wholesale and retail trade, tourism, communications, and the financial sector, became the main contributors to overall growth. Kyrgyzstan exports commodities, mainly gold, copper, and 2013 2014 2015 2016 2017 2018 agricultural products. In 2019, export volume amounted to 2.1bn USD, which is around 28% of GDP. GDP per capita, in USD Main export partners are: Switzerland (27% of total exports, exporting only gold), Kazakhstan (17%), Russia (15%), the UK (11%) and Uzbekistan (8%). 1282 1279 1281 1243 The main import partner is China, with around 34% of total imports, supplying Kyrgyzstan with machinery, clothing, and 1121 1121 other manufactured products. Russia is the second main import partner with 26% of total imports, followed by Kazakhstan with 13%. 2013 2014 2015 2016 2017 2018

Kyrgyzstan has been a member of the EAEU Countries Eurasian Economic Union (EAEU) since 2015. This has removed barriers between the key trading partners of Kyrgyzstan - Russia and Kazakhstan. The membership in the customs union between Russia, Belarus, Armenia, Kyrgyzstan, and Kazakhstan will boost trade Russia Armenia flows and economic growth in the long term. Belarus The EAEU countries constantly work on Kyrgyzstan support and development of mutual trade and Kazakhstan improving cooperation with regional partners on such issues as international transport corridors, the creation of a common energy market, energy transportation, mutual investments, and labor migration.

EAEU Countries 2020 Category

Starting a Business 42

Trading Across Borders 89 Russia Armenia Belarus Paying Taxes 117 Kyrgyzstan Enforcing Contracts 134 Kazakhstan Getting Credit 15 Registering Property 7 Rank RUS BEL KAZ ARM KGZ Construction Permits 90 Overall 80 2020 28 49 25 47 80

Kyrgyzstan has rich endowments, including beautiful nature, mountains, lake Issyk-Kul, mineral reserves, forests, arable land, and pastures. There is significant potential for the expansion of its agriculture sector, mining, textiles, tourism, and hydroelectricity generation. Low labour costs, low cost of utilities such as fuel and electricity, abundant hydropower resources, good weather conditions for agriculture, attractive landscapes for tourism and overall competitive taxation and trade preferences with access to EAEU markets – factors attractive for investors.

Gold reserves in Kyrgyzstan: Kyrgyzstan has considerable gold reserves as well as rare- 7th place in the world earth, ferrous, and non-ferrous mineral deposits, such as antimony, bauxite, copper, coal, fluorspar, gypsum, iron ore, Other minerals: copper, mercury, lead, natural gas, petroleum, sulphur, sand and gravel, silver antimony, silver, uranium, lead, rare earth tin, tungsten, and zinc. metals, tin, tungsten, coal, decorative Kyrgyzstan’s mining potential attracts investments in granites, colored marbles, limestone geologic and prospecting activities. There are considerable shells. investments in gold mining exploration and extraction. The Canadian firm Centerra Gold Inc., through its subsidiary Kumtor Gold Company JSC, is a significant investor in Kyrgyzstan. Kumtor Gold has considerable influence on country’s economy through its gold extraction and basic refining activities, which accounts for about 10% of GDP. Kumtor, one of the highest gold deposits in the world, is situated in the southern region of the Central Tien-Shan at an altitude of 4,000 meters above sea level in a permafrost zone. The deposit is located 350 kilometers from Bishkek. Sources: World Bank; https://www.kumtor.kg/ market entry | accounting | ERP | import | legal | tax 8 Mining

The Kyrgyz Republic is richly endowed with minerals, including precious metals, rare earths, and uranium. There are over 150 known mineral deposits that are currently in production or exploration. KAZ Minerals is a copper producer with mining operations in Kyrgyzstan. The Group employs approximately 1,000 staff in Kyrgyzstan where it operates the Bozymchak copper-gold mine. Bozymchak is a copper-gold open pit mine in Kyrgyzstan with confirmed reserves of 23 tonnes of gold, 140 tonnes of silver and 146 000 tonnes of copper. In 2019, Bozymchak mined 1.081 mn tons of ore and processed 1 mn tons at a copper grade of 0.82%, producing 7,300 tons of copper and 41,000 oz of gold. The mine is currently operating as an open pit with up to 1 mn tons of ore extraction per year. Bozymchak is expected to have an average annual output of 6,000 tons of copper cathode and 28,000 oz of gold bar over the life of the mine. Over the period from 2020 to 2024 a further USD 15 million per annum will be required for the development of the underground phase at Bozymchak, which will extend the mine life. Sources: World Bank; https://www.kumtor.kg/; https://www.kazminerals.com market entry | accounting | ERP | import | legal | tax 9 Hydropower

The Kyrgyz power sector is dominated by hydropower. Power generation depends on the water level. The share of generation from hydropower plants (HPPs) is greatest during summer months due to lower domestic demand and higher output from the Naryn cascade, among other things, due to water release from the Toktogul reservoir to fulfill irrigation agreements with neighboring countries. Winter power generation critically depends on the water level of the Toktogul reservoir. The installed capacity of the power system is 3,786 megawatts, with hydropower plants accounting for more than 80%. The rest is provided by Bishkek combined heat and power (CHP) plant and Osh CHP plant. Kyrgyzstan has vast reserves of unexploited hydropower, with high potential for developing a cost-effective, export-oriented industry. Less than 10% of the capacity has been developed. The Kyrgyz government is interested in potential investors for the projects to build up to five new hydropower plants. China, UAE, and Japan indicated possible interest in the project. market entry | accounting | ERP | import | legal | tax 10 Hydropower

Russian Kyrgyz Development Fund The Russian Kyrgyz Development Fund has financed the small Tegirmenti Hydropower Plant LLC (3, 077 kW). In 2017 the plant was opened. Equipment for the plant was from the company CINK HYDRO from Czech Republic. The Asian Development Bank (ADB) has approved a USD100 mn financing package to modernize aging equipment and improve power generation capacity at the Uch-Kurgan hydropower plant (HPP), the oldest of the six HPPs installed along the Naryn River cascade in the Kyrgyz Republic. Kyrgyzstan is a clean energy hub in Central Asia, supplying 90% of the region’s hydropower. Kyrgyz power exports are expected to grow. The export of hydropower should improve the energy sector’s financial situation and compensate payments for the import of energy power from Kazakhstan and Uzbekistan during winter months when HPP energy generation is lower, due to seasonal fluctuations in water levels.

Agriculture is important for the livelihoods of the majority of the people in the Kyrgyz Republic. More than 65% of the population live in rural areas. Agriculture contributes 15% of the country’s total gross domestic product (GDP) and provides employment to 30% of the economically active population. Over 90% of the country’s territory is covered by mountains and about 4% by glaciers. Out of a total area only 7% is arable, of which approximately 44% is used for pastures. Approximately 9.9% of total exports and 14.9% of total imports are related to the agricultural sector. Leading agricultural products for export are vegetables, fruits, cotton, tobacco, meat, and dairy products. Livestock remain a key agricultural commodity for most farmers. Among most prospective areas for agriculture there are several interesting areas: pistachio and walnut development projects; aquaculture and fisheries development projects; national livestock sector development projects. market entry | accounting | ERP | import | legal | tax 12 Tourism

Tourism has been growing steadily in recent years in Kyrgyzstan. There are a lot of business opportunities in development of premium tourism facilities, specialized tourism products and services focused on specific topics, like traditions, culture, wellness, recreational tourism. Winter tourism has also incredible potential for development. In Kyrgyzstan there are 3 UNESCO World Heritage Sites: Chang'an-Tianshan Corridor of the Silk Road Routes Network; Sulaiman-Too Sacred Mountain; Western Tien-Shan Mountains. Lake Issyk-Kul is the world’s second largest alpine lake, lying at 1609 m (5,279 feet) above sea level. The lake is surrounded by protected marshlands, two mountain ranges, and many popular resorts and destinations, including Karakol and Cholpon-Ata. The lake region has a unique combination of mountainous and maritime climates, magnificent beaches, crystal-clear water mineral sources, mud and thermal sources. This region has the great potential for further development as a world-class spa. Sources: www.invest.gov.kg; UNESCO market entry | accounting | ERP | import | legal | tax 13 Visa-free Regime

Kyrgyzstan has a visa-free regime for 61 countries. In 2019 Kyrgyzstan has introduced a simplified visa regime for the citizens of Algeria, Bangladesh, Egypt, India, Jordan, Lebanon, Morocco, Nepal, Pakistan, Tunisia, and Sri Lanka, who are permanently and legally residing in any of the following states: Bahrain, Brunei Darussalam, Kuwait, Oman, Qatar, and the United Arab Emirates and are in a possession of a resident card of these mentioned countries. These rules are applicable since 11 August 2019. Furthermore, the short-term tourist visas for visits to Kyrgyzstan of a period of up to 1 month are also issued in a more simplified manner, on the basis of personal request and without the need for an invitation, by providing resident cards and resident visas (residence permits), from any of these states. It is expected that the introduction of this simplified visa regime will attract visitors from the Middle East, especially in view of new opening flights from Gulf countries to Kyrgyzstan.

Foreign Direct Investment (FDI), Foreign Direct Investment (FDI) is welcomed in net inflows in Kyrgyz Republic every sector of the Kyrgyz economy without in million USD restrictions. 1144 Kyrgyzstan has adopted a clear foreign direct investment legal framework, low tax rates, and efficient business bureaucratic procedures. Corporate and personal income tax rates are low 686 and profits are high, which encourage FDI. 619 612 FDI inflows are mostly directed towards mining- 473 related activities, led by exploration of gold. 377 343 There are investments in other sectors as well: 261 finance, manufacture of petroleum products, 189 144 construction of hydroelectric power generation, manufacture of textiles, and many others. Major investors in recent years have been from 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Canada and China, and to a lesser extent the UK, -107 Russia, and Kazakhstan.

Kyrgyz Republic provides the following guarantees to foreign investors:  equal investment rights of domestic and foreign  the right to establish legal entities of any organizational investors, no intervention into the business and legal form in accordance with the legislation of activities of investors; Kyrgyz Republic; open branches and representative  protection against expropriation; offices on the territory of Kyrgyz Republic; select any organizational and managerial structure for the business  the investor has the right to freely use the income entities, unless a different structure is explicitly required derived from their activities in Kyrgyz Republic; by the law for the given organizational and legal form of a  the freedom to invest in any form into objects and business entity; acquire property (with the exception of activities not prohibited by the legislation of land plots), shares, other securities, including Kyrgyz Republic, including the activities subject to governmental securities; participate in privatization of licensing; state property, establish associations and other unions;  freedom of monetary transactions, free hire local and foreign employees subject to legislation of conversion of currency, unbound and unrestricted Kyrgyz Republic; and engage in other investment money transfers; activities not prohibited by legislation in Kyrgyz Republic;  free access to open-source information;  other guarantees specifically provided in bilateral and  recognition of all intellectual property rights of multilateral international agreements on the investment foreign investors by public authorities and officials promotion and protection signed by Kyrgyz Republic. of Kyrgyz Republic;

Kyrgyzstan is located at the crossroads between Rapidly growing dairy and beef sectors in Europe and Asia – it has the potential to become Kyrgyzstan increasingly target export markets a regional transport and logistics hub. within and outside Central Asia. Favorable Mineral resources attracting significant investment conditions, like low cost of production, the good from foreign mining companies. quality of soil and pastures are favorable for cattle, breed investments. Unpolluted natural landscapes attract increasing numbers of tourists. Tourism is an important Investments in regional food value chains and the growth sector: the World travel and Tourism food processing industry are also very attractive. Council expects the contribution of travel & In Kyrgyzstan there is room for development in tourism to the Kyrgyz Republic’s GDP to grow by areas like: large-scale processing plants with 8.2% between 2016-2026. sanitized storage facilities for fruits and vegetables; greenhouse agriculture; modern The Kyrgyz government has identified foreign packaging for fruits and vegetables; modern direct investment as a key component to boost cooling systems for products. economic growth in the coming years. In order to attract more incoming investment, the government The low minimum wage considerably reduces is making efforts to make the investment climate labour costs and makes Kyrgyzstan very attractive more attractive to foreign investors. for labour intensive industries.

Free Economic Zones (FEZ) provide special customs privileges to exporting and importing companies. Companies operating in FEZ may import, store, produce or sell goods in the territory of the zone without paying taxes or customs duties. Companies also may sell goods from FEZ to the domestic Kyrgyz market, if products have undergone significant processing in the zone. FEZ Investment Incentives Kyrgyzstan has five FEZ in the border regions: FEZ “Bishkek”, FEZ “Maimak”, FEZ “Naryn”, FEZ  Efficient transport connections “Kara-Kol”, FEZ “Leilek”.  Streamlined customs procedures Park of Innovative Technologies provides  No restrictions on capital repatriation exemption from profit tax, customs duties and  Income tax exemption VAT; employees taxed at a reduced rate of 5%.  Exemption from customs duties and trade tariffs

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