June 1998

by Judith Robinson

The energy-rich countries of the Caspian Basin--Azer-baijan, Georgia, Kazakhstan, Turkmenistan, and Uzbekistan-- are collectively emerging as an important regional market for U.S. exports to the NIS. Combined, these countries represent a range of opportunities for U.S. exports, which grew 263 percent from 1995 to 1997, to $812 million. Continued growth is likely as major energy development projects get under way. U.S. companies interested in the region should consider specific export opportunities in individual countries, as well as opportunities connected with the region's energy projects, while keeping an eye on the realities of doing business in the Caspian Basin.

Energy
Commercial opportunities in the Caspian Basin vary according to the development priorities in each country. The common thread among these countries is the fact that oil and gas export revenues are being relied upon to fuel economic development in other areas--such as agriculture. Thus, inevitably, the need for oil and gas equipment, supplies, and services is paramount. Estimates of requirements in dollar amounts vary widely. U.S. companies entering these markets often do so by subcontracting, very often to the larger Western companies that are members of exploration and production consortia.

Future export opportunities may run into the billions of dollars. "Our government believes this region...is the most singularly exciting in the world in terms of the opportunities available," U.S. Trade and Development Agency (TDA) Director Joseph Grandmaison said at TDA's "Crossroads of the World Conference" in Istanbul May 27.

Trade with the Caspian Basin Countries
U.S. exports of capital goods grew from $116.1 million in 1995 to $381.1 million in 1997. The best prospects for U.S. exporters are in the areas of machinery and motor vehicles, where demand is driven chiefly by the larger Caspian countries' efforts to modernize their agricultural sectors. Prospects for electrical equipment and precision instruments (including medical instruments) are also significant, but more modest.

Kazakhstan and Turkmenistan have been the most important markets for U.S. machinery in the region. U.S. machinery exports to Kazakhstan grew from $9.6 million in 1995 to $73.3 million in 1997. Exports to Turkmenistan grew from $15.2 million to $56.1 million. Georgia has also seen U.S. machinery exports grow steadily since 1995, reaching $5.4 million in 1997.

Uzbekistan and Turkmenistan are the major regional markets for U.S. motor vehicles, primarily tractors. Georgia and Azerbaijan import smaller quantities of U.S. vehicles, mostly passenger cars, and related parts.

The Caspian Basin countries are all modest markets for U.S. exports of electrical equipment. Sales fluctuated widely in individual markets from 1995 to 1997, but altogether U.S. exports grew from $23.2 million in 1995 to $36 million last year. Kazakhstan, Azerbaijan, and Uzbekistan were the largest regional markets for electrical equipment in 1997, with U.S. exports of $18.2 million, $6.9 million, and $6.8 million, respectively.

Precision instruments is the major category of U.S. capital equipment whose exports have shown the most modest growth in recent years. U.S. exports grew from $15.3 million in 1995 to $16.1 million in 1997, despite a sharp drop to only $6.9 million in 1996. Uzbekistan and Azerbaijan were the most important regional markets for precision instruments. U.S. exports to Uzbekistan grew from $3.8 million to $6.8 million between 1995 and 1997, while exports to Azerbaijan grew from $2.9 million to $5.4 million during the same period.

Taxes & Tariffs
Despite the region's many opportunities, exporters face the same challenges they do elsewhere in the NIS: high and unpredictable taxes, underdeveloped commercial law, and burdensome regulations. All Caspian Basin countries have voluminous tax legislation, which is most easily enforced against foreign companies and joint ventures. Corporate income taxes, plus production royalties in some cases, and a host of other taxes and fees can exceed profits. Foreign investors are advised to check tax requirements carefully and seek qualified legal and accounting advice.

Russia, Kazakhstan, and Azerbaijan use the harmonized system of tariff nomenclature, and their valuation procedures approximate WTO standards. Import tariffs differ by country and change frequently, Azerbaijan's being the simplest at uniform rates of 15 percent, 5 percent, or zero. Russian and Kazakhstani tariffs tend to be higher. Duties in Georgia are set at 12 percent. Turkmenistan has no tariffs or duties, but virtually all foreign trade operations are conducted via the State Commodities and Raw Materials Exchange in Ashgabat, which charges a 0.2 percent commission. National customs authorities also charge a variety of processing fees.

Value added tax (VAT) is charged on imports throughout the region. VAT is 20 percent, sometimes reduced to 10 percent for foodstuffs and other selected products. VAT is sometimes subject to exemptions, often in connection with investment incentives. All Caspian Basin countries levy excise taxes on selected imports, usually luxury items or goods competing with a domestic industry that the government wishes to protect.

Regulation
Each country has individual regulations on such matters as company registration, tax registration, and a range of licenses for everything from use of a piece of medical equipment to drilling an oil well. Notarization of documents can also be a lengthy and detailed process. The Soviet-era GOST standards system is still used in all NIS Caspian countries (except Turkmenistan), which belong to the CIS Interstate Agreement on Standards, Metrology, and Certification, whose members honor GOST quality and safety certificates provided by their members' state certification bodies. Enforcement varies from country to country. For more information, visit BISNIS Online at http://www.mac.doc.gov/bisnis/country/causasus.htm and http://www.mac.doc.gov/bisnis/country/cntasia.htm.

Judith Robinson covers energy for BISNIS.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)