Development of investment Kazakhstan

. Research Objective. To study the investment potential of Kazakhstan and review the main challenges and trends of foreign direct investment development. Research Methodology. The study is classified as desk research; secondary information provided by the National Statistics Bureau of the Republic of Kazakhstan was collected and processed. Comparative methods, the Beri model, quantitative and qualitative methods of analysis were used in the study. Originality of the research. As part of the topical issue of attracting foreign investment in Kazakhstan, the authors conducted an analysis of the country's investment potential. The authors processed the statistical data of investment activity of Kazakhstan for 2017-2021, determined the level of riskiness of doing business in Kazakhstan according to the Beri model. For a deeper comprehension of the issue, the authors conducted a detailed analysis of the components of the net inflow of foreign direct investment, identifying their shortcomings and consequences for the country's economy, as well as assessing the current trends. Research results. The research results showed that Kazakhstan's investment activity, after a certain slowdown in growth related to the country's economic situation, showed a trend towards a recovery in the attraction of foreign capital in 2021. The Beri Business Environment Index of Kazakhstan indicates a favourable investment climate. However, analysis of the components of foreign investment showed that the level of foreign investors' income exceeds the net inflow of investment, and the share of accumulated investment is only a quarter of total investment, which negatively affects the balance of payments by increasing the country's external debt.


Introduction
The year 2022 started with a major upheaval for Kazakhstan, with January events and a special operation in Ukraine bringing the issue of foreign investment inflow into the domestic economy to the fore. Kazakhstan, as before, continues to rely on attracting investment, creating promising projects and promising maximum support for investors who will undertake them. But because of their own difficulties, foreign investors may be limited to the oil and gas sector, and for interest in other sectors, Kazakhstan's investment potential needs to be increased, otherwise there is a chance of seeing a decline in investment.
Before the pandemic Kazakhstan had stable investment attractiveness, mainly because of oil and gas industry. However, the suspension of supply and production due to quarantine restrictions led to a decline in foreign capital inflows into the country. Thus, in 2020 foreign investment fell by 30%, but already in 2021 it increased by 38%, rising to the level of 2017-2019. [1][2].
The unstable foreign policy of neighbouring states poses a threat to the country's external security, thereby prompting a downgrade of Kazakhstan's rating. In its latest rating assessment, S&P has kept Kazakhstan's investment grade status at 'BBB-/A-3', but with a negative outlook. The rating may be downgraded if the capacity of the CPC pipeline is reduced, leading to a reduction in exports, which would have a direct impact on the country's budget. This can be avoided by avoiding domestic risks, such as preventing a rise in inflation, timely fulfilment of public debt obligations and elimination of internal social conflicts. If the ratings are downgraded, Kazakhstan expects difficulty in finding external funding and its appreciation.

Methods and materials
A foreign investor, when placing capital, chooses a country by studying various factors, namely an analysis of the political climate in the country and an assessment of country risk [3]. The political climate in a country is assessed using the "old hands" and "grand tours" methods. The "old hands" method involves the examination of traditional reports produced by specialists who have knowledge of the country concerned and who have links to influential persons in the country. The "grand tours" method is based on the findings of a team of experts visiting the country in question and making contact with local leaders [4]. The methodology is based on expert judgement in weighing the factors that influence the value of risk. The subjectivity of such assessments reduces the reliability of the results obtained.
The use of these methods makes sense only when an experienced group of experts is involved, not only very well versed in the situation in the country being assessed, but also clearly aware of the objectives of the study [5]. An additional increase in the reliability of the analysis can be achieved by a quantitative structuring of the factors assessed, i.e. their systematisation, which would allow the rankings to break down the countries under study into groups, but intra-group more in-depth assessments of risk levels are difficult to achieve.

Results
A qualitative assessment can be relatively simple. Its main task is to identify the possible types of risk in carrying out a particular activity [6][7]. When determining the degree of influence of each factor on the performance indicator, later it is possible to manage these factors: search for control methods, ways to reduce the risk. The main criteria in qualitative analysis are the significance of the allocated factors and their mutual independence (table  1). Based on the factors presented above, investors assess a country's performance, its investment potential, and the existence of risks in order to decide whether to invest. In this context, governments need to improve the quality and level of economic and political indicators.
Quantitative approaches to assessing a country's indicators allow different countries to be compared on the basis of risk, using a single numerical risk factor. The complete list of possible risks with different degrees of potential impact on foreign investment is much broader, which makes it difficult to select factors and determine their relative weight in a quantitative method [9][10]. At the same time, the quantitative scale is difficult to adapt to country comparisons because of the sectoral focus of risks. For example, extractive industries are much more susceptible to expropriation than high-tech industries, or a risk factor such as political instability presents an additional opportunity for the militaryindustrial complex.
Below is a country risk calculation of Kazakhstan using the Beri model, which determined the level of risk of doing business in the country. The methodology of this model consists of three stages, where the first stage involves an expert assessment of 15 indicators of business riskiness, the next stage involves assigning a score from 0 to 4, and the third stage involves defining an index of country risk [11]. The ranges of qualitative interpretation of the index values are identified and presented in Table 2. Accordingly, the higher the value of the index, the lower the degree of riskiness of the country's business environment. The following table provides information on Kazakhstan's country risk index according to the Beri model. From the calculations, we can see that the result shows that Kazakhstan has a low level of country risk, but there is a need to strengthen it, as the index is at the borderline of medium and low risk, as on the basis of the business environment index, a foreign investor can decide to choose a particular market for the development of foreign economic activity of his company. And, in comparison with other countries, Kazakhstan should have a strong position, which requires further intensive development.
In this connection it is expedient to carry out the analysis of current investment potential of Kazakhstan.
At the end of 2021, the share of investment in GDP was 15.8%, showing a decrease of 1.4% compared to 2020, approaching the figure for 2017 (figure 1). In 2021, investments amounted to 13242.2 billion tenge, up 7.9% from the previous year ( Figure 2). In the reporting year, there was an increase in investment in fixed capital in the non-resource sector of the economy to 119%, among which manufacturing and trade increased investment flows by 1.3 times compared to 2020. In terms of sources of funding, the year 2021 saw a decrease in public investments by 11.9%, and conversely, an 11% increase in investments from own resources. The following table shows the dynamics of investments by sources of financing over the last 5 years.   [1][2] According to the National Bank for 2011-2021, the total inflow of foreign direct investment (FDI) into the economy of Kazakhstan amounted to USD 250.7 billion ( Figure  3). The National Bank reported total foreign direct investment (FDI) inflows into Kazakhstan's economy between 2011 and 2021 amounted to $250.7 billion (Figure 3), of which 30.4% were invested in the oil and gas sector, 23% in metal ore extraction and metallurgical development. The main investors in oil and gas and mining projects in Kazakhstan are the Netherlands, the US, Switzerland, Russia and China (Table 5). Major recipients of foreign capital in Kazakhstan include the Atyrau, Aktobe, West Kazakhstan and East Kazakhstan regions, as well as Almaty, which receives up to 29% of all FDI.
Samruk-Kazyna SWF JSC, "Baiterek National Management Holding", AIFC and other companies are actively involved in the process of attracting investment in Kazakhstan's economy. Transnational companies have implemented 12 projects in the processing sectors of the economy since 2015, worth a total of USD 967 million. These projects are in the logistics and logistics sectors. In industries such as logistics, gas chemicals and metallurgy, 5 projects worth USD 412 million have been implemented. The projects were implemented in the logistics, gas and metallurgy sectors worth USD 412 million, creating 690 jobs.
Despite the global crisis, Kazakhstan remains attractive for FDI and is a leader in terms of investment inflow among Central Asian countries. For example, during the quarantine restrictions, 41 investment projects with the participation of foreign investors were implemented in Kazakhstan in 2020, which created 7,000 new jobs [12][13]. However, in order to maintain and strengthen its position in the current geopolitical environment, it is necessary to be proactive in the fight for FDI, creating the most optimal conditions for their operation.
As we know, the indicator of net FDI inflows in Kazakhstan is formed of two components -equity participation and debt instruments. The first component also takes into account the indicator of reinvested earnings. Thus, part of the FDI inflow is the share of foreign investors in the income of domestic companies, rather than the actual inflow of money from abroad. This feature means that the amount of foreign investment depends on the revenues earned by foreign-owned companies. Since FDI is mainly concentrated in the oil and gas sector, the amount of investment also depends on world oil prices. The extent to which foreign investment inflows and oil prices are correlated also depends on the extent to which foreign investors' share of company profits in total FDI is high. Whereas in 2005 their share was 10.5%, it has risen significantly in recent years and stands at 66% of net FDI inflows in Kazakhstan [1][2]. This leads to a reduction in such components as equity participation, i.e., the volume of foreign investment in domestic companies, and debt instruments, which characterize loans issued by foreign parent companies.
The low participation rate of investors requires special attention. Since 2005, it has fluctuated between 4% and 58%, with an average of 25%, which is quite low. Consequently, the real flow of investment, understood as investment in domestic companies from abroad, has remained moderate even at the best of times.
Regarding debt instruments, it should be noted that they had more than half of the foreign investment inflows, which are reflected as debts of local subsidiaries to their foreign companies. It is these debts that constitute the 'inter-company debt', which is a major part of Kazakhstan's foreign debt, thus undermining the sustainability of the national financial system. Today, intercompany debt constitutes over 55% of Kazakhstan's gross external debt. A large share of debt instruments forms a long-term trend of increasing capital outflows from the country through debt and interest payments.
Another trend that has emerged in recent years is a significant surplus of investor income over net investment inflows, which has sometimes been as high as twice as large. As is well known, the negative balance sheet, which has developed due to high outflows of foreign investors' income, averaging around USD 20 billion per year, has caused a number of problems for the economy: pressure on the economy from the outflows of foreign investors' income. This has led to a number of problems for the economy: from pressure on the tenge exchange rate, resulting in devaluation and declining international reserves, to mounting debt that adversely affects credit ratings and declining positions on the global arena. The problem with the outflow of investment income from Kazakhstan is that this outflow is persistently high and while in years of favourable external economic conditions it is offset by a positive trade balance, when oil prices fall, this compensation disappears and the current account becomes negative, immediately giving rise to these problems.
Thus, a high share of foreign capital in the economy sometimes brings benefits, but also has negative side effects. When considering the withdrawal of direct investment income, it should be taken into account that not all income received by investors leaves Kazakhstan, some of it is reinvested. However, this proportion is small -the average share of reinvested earnings in total FDI earnings in Kazakhstan is 16%, but there was a period when it was close to zero. So the vast majority of Kazakhstan's direct investment income is still withdrawn by foreign investors from the country.

Discussion
Today, Kazakhstan is actively taking measures to develop the investment potential of the country, a legal framework has been formed, and the infrastructure to support investors is functioning. Throughout the country 13 special economic zones and 36 industrial zones, where investors are exempted from various types of taxes and duties, as well as provide access to infrastructure [14]. The government is a "single negotiator", providing a full range of services to support investment projects.
At the same time, there are weaknesses in investment attraction, which are also caused by the ongoing changes in the geopolitical arena, which require further improvement of the government's investment policy.
Clarification of the real scale of FDI inflows and accumulated volumes will make it possible to comprehend the reasons for the country's insufficient investment attractiveness among "real" foreign investors, to specify sectoral problems hindering their attraction, and to make adjustments in state policy at the level of methods and mechanisms to stimulate this process. In general, summarizing the review of the current situation in the field of foreign investment attraction in Kazakhstan, the following conclusions can be made: 1. The sectoral structure of foreign investment retains a pronounced commodity character, which is particularly evident in the attraction of direct investment; 2. most of the investments attracted into the country are borrowed funds of various types, i.e., repayable money that will have to be given back, and in a larger amount, the repayment of which means withdrawal of capital from Kazakhstan.
3. The share of accumulated capital investment is relatively small at 25% of foreign direct investment, i.e., investment in the classical sense of the term is only a quarter of total accumulated FDI.
4. The level of foreign direct investment income has steadily exceeded net FDI inflows since 2010, implying a negative impact of foreign direct investment on the balance of payments; 5. In the structure of FDI, the share of foreign investors in retained earnings is high, which is not an actual inflow of funds from abroad and is generated by Kazakh enterprises in Kazakhstan, but is reflected in statistics as foreign investment, which distorts the picture of the real inflow of funds of foreign investors. 6. A significant part of foreign investment inflow is funds of Kazakh companies (including national ones) conducted through their foreign subsidiaries, which overstates the amount of actual foreign investment.
According to the Message of the President of Kazakhstan dated September 1, 2022 it is planned to revise the principles of economic and tax administration, caused by geopolitical conditions, there is a possibility that the results of changes may not satisfy foreign investors, having a negative impact on the investment attractiveness of Kazakhstan or vice versa [15]. Also, the investment potential of domestic companies and the state becomes limited due to the end of the period of low interest rates, which will make the conditions for attracting capital less favourable. As you know, the soft monetary policy pursued by Western banks allowed many countries to attract cheap financial resources to many states, including Kazakhstan.
In the current environment, Kazakhstan needs to look for alternatives to external investment.
In the existing circumstances, one of the tools for attracting capital into the country's economy as an investment is the return of illegally exported capital. Measures have already been taken in this direction, and an interdepartmental commission has been set up to work on mechanisms for their return. Indeed, the repatriated capital could substantially help increase investments in the country's economy. However, this process is labour-intensive and time-consuming. Two mechanisms are likely, one is an amnesty for the return of the capital by the state, and the other is international arbitration, where it will be necessary to prove the illegality of the exported funds. There have been precedents in world practice when the state tried to return the capitals to the country. For example, in the 80-90s of the last century, the Chinese authorities appealed to wealthy ethnic Chinese living abroad to invest into the country's economy, and they answered this appeal in large quantities [16]. Israel also appealed to Jews around the world, and they did start investing in the Israeli economy. Using this experience, the government of Kazakhstan should also encourage its citizens to invest in the domestic economy by creating favorable conditions for this.
The next tool is domestic enterprises' own funds, as they are the source of fixed capital investment. In 2021, their share reached 71% of total investment [17]. In order to increase the investment potential of enterprises, it is necessary to improve the tax system, regulate procurement and reduce the shadow economy, which could free up more internal reserves for economic development. In reality, the capacity of domestic enterprises may be more modest, due to the low credit activity of commercial banks, and without this support they will not be able to create more jobs and work intensively. In turn, many enterprises, in order to optimize their tax payments, split their business into smaller companies, which will also prevent them from receiving full funding through the Kazakhstan Stock Exchange.
The withdrawal of global companies from the Russian market could have a positive impact on the Kazakhstani market, if they are offered to relocate their production. As of today, 45 companies have already decided to move to the Kazakhstani market, which can contribute to the development of the country's non-resource sector [18-20].

Conclusion
Indeed, in times of crisis, we must be proactive, as investors will be looking for places to invest available funds, and at this point we must be ready to offer favourable conditions for investment.
Kazakhstan retains its key investment advantages, such as geographic location, natural resources, access to markets and human capital.
Despite all sorts of risks and alternatives, Kazakhstan intends to continue the policy of attracting foreign investments according to the Investment Policy Concept until 2026. The main goal of the concept is to open new export-oriented and high-tech industries, which will integrate the country into regional and global value chains.
Kazakhstan remains a leader among CIS countries in terms of investment attractiveness. One of the indicators of a favourable investment climate is the constantly emerging pool of investment projects in the country. Inviting more large foreign and transnational companies to the country requires creating infrastructure for investors, maintaining end-to-end support for investment projects, as well as improving the image and awareness of Kazakhstan among the global business community.
Thus, to encourage foreign investors to invest in the domestic economy, problems with taxation, customs clearance, legal conflicts, and allocation of land plots and infrastructure need to be resolved. At the same time, the work of the Foreign Investors' Council, the Investment Ombudsman and the government-led Investment Staff should be improved.