Tab Options Executive Summary:
According to the Oil & Gas Journal (OGJ), Kazakhstan had proved crude oil reserves of 30 billion barrels as of January 2018–the 2nd–largest endowment in Eurasia after Russia, and the 12–largest in the world, just behind the United States. Kazakhstan has the largest proven oil reserves in the Caspian Sea region. Kazakhstan’s crude and condensateoutput in 2019 was 1.965 million bpd. It increased by 4.8% in 2018 and reached 1.814 million bpd. In 2017,Kazakhstan produced 1.73 million bpd of crude oil. Kazakhstan will produce 2.03 million barrels of oil and other liquids per day in 2020, according to the February Short-term Energy Outlook (STEO) of US Energy Information Administration (EIA).According to Business Monitor International, Kazakhstan’s net exports of crude oil is forecast to fluctuate around 1.42 – 1.55mbpd through 2027 as production increases from the prolific Kashagan and Tengiz fields. Kazakhstan is rapidly expanding production at its three large refineries; it has completed upgrades of the Pavlodar plant, Atyrau and Shymkent refineries. The total refining capacity of the three plants is increase from 13.8 to 16.5 million tons. They all are operated by JSC KazMunaiGas – Processing and Marketing. The government hasannounced plans to construct a fourth refinery to further expand refining capacity and production of light oil products and fuels.
Kazakhstan also has significant natural gas potential. Its proven gas reserves stand at 3 trillion cubic meters and projected reserves at 5 trillion cubic meters. The country also expects a lot ofoil-associated gas that will bring 1,000 cubic meters of gas for every new ton of oil (100 million tons of new oil will lead to 100 billion cubic meters of gas). Natural gas production is utilized for wellre-injection, exports and to meet domestic consumption (liquefaction and development of internal gas pipeline infrastructure).The country’s gas output - which is mostly associated gas - is forecast to continue an upward trend, reaching 29.6bcm in 2027.
Recovering oil prices have helped to stimulate Kazakhstan’s oil & gas sector, which is the maindriver of the economy. Large hydrocarbon resources and current investment in large production and transportation infrastructure projects in Kazakhstan provide significant commercialopportunities for U.S. companies.
While regulatory challenges exist, U.S. companies interested in Kazakhstan can look to thecountry’s national oil company KazMunaiGaz (KMG) and major international consortia foropportunities in the upstream, midstream, and downstream sectors. The Government ofKazakhstan and foreign investors continue to focus heavily on the hydrocarbons sector, which, since 1991, has received approximately 60% of foreign direct investment in Kazakhstan, andconstitutes approximately 53% of its export revenue. Opportunities exist for U.S. companies invirtually every sub-sector associated with oil extraction, processing, and transportation. Thegovernment of Kazakhstan has also revived efforts to develop a nuclearenergy program as it looks to diversify its energy mix in the country. Current Market Needs:
Kazakhstan continues to transform its economy to create a more transparent, less regulated, and more market-driven business environment.In 2015-2016, the government of Kazakhstan announced several measures to reform the economy, and remains engaged with U.S. and EU leadership, the AmCham, and other foreign investors in a dialogue on how to improve theinvestment climate. Nonetheless, this progress continues to be undermined by developments that cause concern for U.S. investors and other stakeholders.
The collapse of the global crude oil prices in 2014 has forced the Government of Kazakhstan to recalculate budgets and cut back on some ambitious infrastructure spending, while maintaining spending on social welfare and high visibility projects such as Astana Expo 2017.
In August of 2015 the Central Bank of Kazakhstan allowed the tenge to “float”. It immediatelydepreciated from a level of 187 tenge to the USD to its current level of 370s to the USD. While long overdue and welcomed by the foreign investment community, the sudden devaluation was a shock to the market. Throughout 2015 and the early part of 2016, importers saw a drop in large equipment purchases from the U.S. and EU. This is reflected in projected market figures for 2016. The tenge may now be at a “new normal”, closely tracking the Russian ruble and the price of oil. According to the June 2018 IMF Statement, the flexible exchange rate is serving Kazakhstan well by helping to absorb changes in the macroeconomic environment and supportingdepolarization. Changes in the ER reflect fundamental factors, including oil prices and dynamics of the Russian ruble.
Recent Market Trends:
Kazakhstan attracts significant investment in its vast upstream oil and gas resources, and it is more crucial than ever that the Government multiplies its efforts to increase the attractiveness of itsinvestment climate. For example, by the time the huge offshore Kashagan project startedcommercial production in October 2016 after years of delays, investment in the project wasestimated at $50 billion.Despite this large project, overall investment in Kazakhstan’s oil and gas industry declined to $12 million in 2016, from $18 million in 2013. Kazakhstan plans to increaseinvestment in the oil and gas sector through innovation development and investment stimulation measures that will be set forth in the new Subsoil Use Code and in the Tax Code.
Oil production at the Kashagan field started in October 2016 and reached 380,000 bpd in 2019. Oil and gas from the Kashagan field is processed at the onshore Bolashak plant. Kashagan isKazakhstan’s first offshore oil and gas field in the Caspian Sea and is the largest internationalinvestment project in the country. Kashagan is being developed by North Caspian OperatingCompany (NCOC) owned by KazMunaiGas Kashagan B.V. (16.9 percent), Shell KazakhstanDevelopment B.V. (16.8 percent), Total E&P Kazakhstan (16.8 percent), Agip Caspian Sea B.V. (16.8 percent), ExxonMobil Kazakhstan Inc. (16.8 percent), CNPC Kazakhstan B.V. (8.3 percent) and Inpex North Caspian Sea Ltd. (7.6 percent). The consortium is considering further investment of around USD2.0bn into the project, which would lift the output to around 450,000b/d.
Tengizchevroil (TCO) develops the Tengiz and Korolyov oil and gas fields in the Atyrau Region (west Kazakhstan). Tengizchevroil was formed between the Republic of Kazakhstan and ChevronCorporation in April 1993. Current partners are: Chevron, 50 percent; KazMunaiGas, 20 percent;ExxonMobil, 25 percent and LukArco, 5 percent.
Major projects include Tengiz, Karachaganak, CNPC-Aktobemunaigas, Uzenmunaigas,Mangistaumunaigas, and Kumkol, all of which account for 1 million bpd. The major end-users of oil and gas filed equipment and services are international consortia such as TengizChevrOil (TCO), the North Caspian Operating Company (NCOC) and Karachaganak Petroleum Operating B.V. (KPO). TCO’s Future Growth Project and the Wellhead Pressure Management Project (FGP-WPMP) hasincreased up to $45.2 billion from $36.8 billion after a detailed cost and schedule reviews. This TCO expansion project being developed primarily to increase the production capacity from the Tengiz oil field and the adjacent Korolev field. The project hit peak spending in 2018 and 2019 andengineering, fabrication, procurement, logistics, drilling and completion, and Tengiz infrastructure is 75% complete. The project will increase crude oil production at the Tengiz oil field by 260,000 bpd, gas production capacity by an additional 960 million standard cubic feet a day, and the field’s overall production capacity to approximately 850,000 bpd by 2022. NCOCO projects of Kashagan field expansion worth $2 billion being implemented since 2017 are aimed to reach oil output at the level of 420,000 barrels a day in 2022 and 500,000 barrels a day in 2027.
The national oil and gas company, KazMunaiGas (KMG), is largely responsible for arranging thelicensing tenders for oil and gas blocks. KMG also plays a role in almost all contracts with foreign oil and gas companies. KMG holds stakes in 47 enterprises conducting petroleum operations inKazakhstan, including TengizChevrOil, North Caspian Operating Company and the CaspianPipeline Consortium (CPC). Competitive Landscape:
Local production of oil and gas field equipment is not significant, but currently growing. Kazakhstan does not have much experience in oil and gas equipment manufacturing, especially for offshore work, and the country depends on imports (a fact the GOK would very much like to change).
Traditionally, the country has imported oil and gas equipment from Russia and other parts of theformer Soviet Union. According to KazMunaiGas (KMG), local production is estimated at less than 5% of the total amount of oil and gas equipment used in Kazakhstan. KMG, which is 100% owned by the GOK, is promoting a program to develop the domestic industry for oil and gas machinery.
According to the program, 16 Kazakhstani plants, mainly former defense industry plants converted for civil production, are to produce oil and gas field equipment and other products. Several plants have already started production, like pipe and tube mill industries. Most of the local equipmentproduction does not meet API, ASME and ISO standards. However, there are current trendsfor establishing partnerships and joint ventures with foreign partners to introduce these standards to Kazakhstani enterprises.
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Since the domestic oil and gas field equipment industry is still in the early stages of development, companies from the U.S., Western Europe, Russia, Japan and recently China, have been able to secure market share, securing much of the 90% of oil and gas field equipment Kazakhstan nowimports. The UK and Russia are the most active equipment suppliers and service providers, while U.S. firms seem to be concentrating on markets in the western hemisphere.
Best Prospects for U.S. Exporters:
Opportunities remain for U.S. companies in virtually every sub-sector associated with oil and gasextraction, processing, and transportation.Best prospects include drilling, research and datamanagement, laboratory studies, oil spill cleanup technologies, and pipeline equipment andservices. About 80% of the equipment used in the oil and gas sector and the mining industry isimported; most it produced in Russia and China.
To date, Kazakhstan has limited technical expertise in offshore production and operations.experience gap offers many opportunities for U.S. service companies in rig work, supportinfrastructure, and environmentally sensitive technologies.
The Caspian Basin’s oil-bearing formations are generally quite deep (15,000 feet), underconsiderable pressure, and often contain a high degree of sulfur and other contaminants, making U.S. technologically advanced drilling and processing equipment necessary.
U.S. oil and gas field equipment suppliers have the potential for solid growth over the next decade as new fields are brought on-stream and secondary recovery methods are introduced to existing and aging deposits.The most promising sub-sectors are the following: offshore/onshore oil and gas drilling and production equipment; turbines, compressors and pumps for pipeline applications; measurement and process control equipment for pipeline applications; industrial automation,control and monitoring systems for refineries, gas processing and petrochemical plants; seismic processing and interpretation; petroleum software development; sulfur removal and disposaltechnologies; well stimulation and field abandonment services.
There are significant opportunities for companies producing oil and gas field equipment andmachinery such as drilling and wellhead equipment, Christmas trees, valves, pumps, motors,compressors, electrical submersible and jet pumps, underwater repair equipment, and oil spillcontainment equipment. Good prospects also exist for firms offering downstream engineering and services such as fabrication, welding, engineering services and testing in accordance with API and ASME standards.
The best way to enter the Kazakhstani market is to establish a local presence, which is a crucial component of doing business in Kazakhstan for contacts or after-sales service. At a minimum, you should establish a representative office in country. Representatives in the oil and gas sectoremphasize that it is not enough to work through a local distributor. Finding a reliable, credit-worthy partner in Kazakhstan requires due diligence, caution, and attention to a potential partner’s achievements and reputation. U.S. firms are advised to verify trade references offered by potential partners, check banking records and correspondent account capability with Western banks, and verify the personal bona fides of key company officers.
Local companies in Kazakhstan are sensitive to pricing and contract financing terms. That is why when entering the market, it is necessary to balance sales opportunities with the risk ofnon-payment. It is advisable to start transactions on a full prepayment basis. (Generally, payment terms for equipment and materials are between 30-60 days.) A trading relationship should bedeveloped over time. Project financing opportunities offered by a U.S. company will increase the likelihood and potential amount of transactions.
U.S. companies in Kazakhstan use a combination of marketing methods including distribution or direct sales, working through a countrywide distributor or agent, working through more than one local-area distributor or agent, and/or distributing or selling products directly from a warehouse. Distribution channels require extensive training/service support, and project financing such asleasing schemes for equipment.
U.S. equipment suppliers should work closely with local and foreign engineering and servicecompanies involved in detailed engineering and design of oil field projects and pipelinedevelopment and maintenance, in order to ensure that their equipment is considered and,hopefully, specified in this sector. Close contact with end users is also critical in obtaining timelyinformation to quote on new projects. The availability of technical service also plays an important role. Any new product coming into the market must have a support system.
Regulations / Registration Process
According to provisions in the Subsurface Legislation and Petroleum law, Kazakh local contentrequirements for Kazakhstan goods and services is mandatory for all companies. In accordance with the import substitution policy and local content requirement, the GOK approved new rules on purchasing goods and hiring subcontractors for oil operations in 2017. The Ministry of Energy has been assigned to oversee compliance with the new purchase rules for goods and service for oiloperations.
U.S. companies interested in selling oil and gas field equipment to Kazakhstan should try as much as possible to meet Kazakh local content requirements. The major operators have offices that oversee local content provisions and are an asset for firms entering the market. A typical entry strategy includes the establishment of a joint venture with a local partner and local registration as a vendor. It should be noted that there is no exact legal definition for ”local” content, and it can vary from PSA to PSA. Often it means those companies domiciled in Kazakhstan. Many “local” companies are, in fact, wholly owned subsidiaries of foreign companies or joint ventures between Kazakhstani and overseas companies. This avenue, a joint venture or the establishment of a subsidiary company for sales, should be considered. The appointment of an exclusive agent/distributor is also favored for imported equipment.
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All goods entering the customs territory of Kazakhstan are subject to declaration and customsclearance at approved customs clearance points. A declaration must be filed within thirty days of arrival of the goods to Kazakhstan, but a brief declaration and notification on arrival of goods shall be submitted to the customs body within 24 hours after the goods cross the border and are placed at a temporary storage warehouse.With the exception of private persons permitted to transfer goods under a simplified procedure, a customs declaration must be filed by a Kazakhstanientity - that is, a business organization registered under Kazakhstani law or its affiliate orrepresentative located in Kazakhstan, an individual entrepreneur registered in Kazakhstan, or apermanent resident of Kazakhstan. Foreign entities cannot deal directly with customs officials inKazakhstan and are legally required to use services provided by licensed customs brokers having the right to operate in Kazakhstan. A party declaring commercial goods at a customs office inKazakhstan for their release for free circulation is responsible for submitting the paper and electronic copies of customs declarations (one copy of each per shipment), as well asaccompanying documents.Customs Cargo Declaration (5 copies) must be completed in either the Kazakh or Russian language.documents may be submitted in a foreign language.
The customs officer, however, has the authority to request a translation of such documents into Kazakh or Russian as well as a notarization of the translation.In addition to the Customs Cargo Declaration, a party declaring goods is required to submit a set of other documents including invoices, acontract for the supply of goods, an import/export transaction passport, and shipping documents (e.g., bill of lading, airway bill, etc.)The passport of transaction is the primary tool used in theframework of the currency control system. The passport of transaction represents a cross-agency document filled out by the exporter/importer and reviewed by customs officials and representatives of the exporter/importer’s bank.
Certification and/or conformity assessment procedures are part of the national system of technical regulation. In November 2015, Kazakhstan joined the WTO. To bring Kazakhstan standards more in line with international standards, in 2007 Kazakhstan adopted a number of laws and amendments to the existing Law on Technical Regulations including such laws as Safety of Chemical Products,Safety of Food Products, Safety of Toys, and Safety of Equipment and Machinery.The national file of standards now includes 70,500 rules and norms, including 16,110 representing internationalstandards (International Organization for Standardization) and 2,295 American national standards (American National Standards Institute).These standards are applied in all economic sectors.
Under the current regulations, safety standards acquire the status of normative documents,mandatory for consideration, while quality standards will gradually become voluntary.The functions of governmental bodies will be limited to dealing with safety control issues.Technical regulations will acquire the status of laws and will be intended to ensure the safety of life and health ofconsumers.Other standards relating to quality of goods will be given a voluntary status, andmanufacturers will no longer be forced to follow outdated requirements dictating a shape, or color of goods as it was under previous legislation.
Technical Barriers & Tariffs:
From January 2015, the Customs Union (CU) between Russia, Kazakhstan and Belarus was furtherIntegrated into the Eurasian Economic Union’s (EEU) legal framework and was enlarged to include Kyrgyzstan and Armenia. As a result, the average import tariff rate almost doubled and has reached 9.2%. Member countries opened their markets to each other, exposing domestic producers to more competition and forcing Kazakhstan to raise their customs duties to non-CU members, which led to price hikes on goods coming from outside of the union.
Currently, about 85% of tariffs are harmonized, although all tariff lines must be harmonized by 2025. The tariff lines cover pharmaceuticals, medical equipment, aluminum foil, rail wagons, andprefabricated buildings.In addition, a CU Party can increase tariffs for up to six months on selected goods without the consent of the other CU Parties.Agricultural combines and tractors will beexempt from customs duties if the import is financed through state programs.
Kazakhstan charges a 12% value-added tax (VAT) which is paid on top of all customs duties andexcise taxes at the time of customs clearance.Taxpayers need to have a VAT registration inKazakhstan if their turnover during the calendar year exceeds $320,000.Penalties for non-payment on VAT are up to 50% of turnover.The country also provides a refund of import duties and taxes when the imported goods are processed in Kazakhstan and exported within two years afterimportation.The processing operations that qualify for drawback include manufacturing andassembly operations and repairs.
Include the barriers (tariff and non-tariff) U.S. companies face when exporting to this country, such as:
Particularly high tariffs for certain products. Restrictions on selling to the government of the country. Import licensing requirements. Anti-dumping and countervailing duty measures. Products bans. Any quarantine measures for agricultural products. Procurement & Tenders:
State procurement is regulated by the 2015 Law on State Procurement and several amendments, and applies to ministries, state agencies, and companies and enterprises in which the state holds more than 50% of the shares.In 2014 the law was amended to allow vendors from membercountries of the Eurasian Economic Union to participate in public procurement tenders on equal terms with domestic suppliers.
The procurement system in Kazakhstan is highly decentralized with different government agencies and companies managing specific procurement projects, The Ministry of Finance developsprocurement policies and the Committee for Public Procurement is responsible for enforcing the laws and regulations on public procurement.
The state procurement process is implemented through mandatory tenders announced bygovernment agencies. Newspapers designated by the Committee for Public Procurement publish the tender opportunities. To facilitate the procurement process, the government created ane-procurement system. The State procurement website (only in Kazakh and Russian) was launched in 2008 and the E-commerce Center (website is in Kazakh, Russian and English) was assigned as the sole operator in electronic state procurement.
Kazakhstan’s state procurement regulations seek to provide international standards of transparency and public accountability.However, what appears in print and what happens in practice can be very different.Short deadlines for tenders (suggesting a preselected supplier), a lack oftransparency in business dealings, and nonpayment issues remain a challenge. The regulationsoften favor domestic suppliers over foreign companies.
U.S. companies are advised to approach any government tender deliberately. However, lucrative opportunities do exist and American companies have had success in Kazakhstan.should be wary of payment-after-service arrangements and use payment schemes providingadditional guarantees of timely payments.Not doing so puts any firm at risk, with little recourse through Kazakhstan’s judicial system.
The national oil and gas company, KazMunaiGas (KMG), is largely responsible for arranging thelicensing tenders for oil and gas blocks. It also plays a role in almost all contracts with foreign oil and gas companies. Kazakhstan’s share of the Caspian Pipeline Consortium (CPC) is also included in KMG’s portfolio. KMG holds stakes in 47 enterprises conducting petroleum operations (including TengizChevrOil, North Caspian Operating Company), pipeline and sea transportation ofhydrocarbons and water as well as services.
Getting Paid / Trade Finance:
Discusses the most common methods of payment, such as open account, letter of credit, cash in advance, documentary collections, factoring, etc. Includes credit-rating and collection agencies in this country. Includes primary credit or charge cards used in this country. As in other markets,payment methods and terms vary depending upon the U.S. company’s business model andrelationship with its trading partners. For companies that are new to this market, requestingadvance payment for goods and services from a Kazakhstani customer may be prudent until both parties establish a positive record of payment.Exporters should also keep in mind that Kazakhstani firms are finding it increasingly difficult to gain access to credit from local banks due to thedecreased access to international financing available to these banks following the globaleconomic crisis. The safest method to receive payment for a U.S. export is through an irrevocable letter of credit (L/C) confirmed by a major Western bank.In general, importers must deposit enough funds to cover the payment before applying for a letter of credit.Local companies may apply at any of several major local commercial banks to obtain an L/C, which, according to Kazakhstani banking legislation, must usually be confirmed by a reputable Western bank.
U.S. companies are strongly advised to reconfirm payment arrangements with the importer prior to shipping goods.number of U.S. banks accept letters of credit from some of the largestKazakhstani banks, especially those that have been approved by the U.S. Export-Import Bank.a U.S. firm has established a strong relationship with a local trading partner, it may wish to consider extending short- and eventually longer-term credit as a way to bolster sales volume.should be done with caution and only after careful evaluation and the establishment of successful payments.
Kazakhstan made the use of International Bank Account Numbers (IBANs) and Bank Identification Codes (BICs) mandatory in June 2010. If a U.S. company is paying a beneficiary in Kazakhstan orinitiating a payment from an account in Kazakhstan, you must provide the beneficiary’s IBAN and the beneficiary bank’s SWIFT BIC in the payment instructions. Failure to provide an IBAN may result in that payment being rejected, delayed or incurring additional charges.
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Best Prospects for U.S. Exporters:
There are many opportunities for U.S. companies producing oil and gas field equipment andmachinery such as a drilling equipment, drilling services both onshore and offshore, valves, motors and compressors.
Best prospects also include: angular and frontal crane trucks, drilling and pumping machines, solid carbon steel bars, crowns and trepans, drill bits, drilling and extraction ground machinery, large drills and reamers, no repulse drilling machines, stainless steel globe valves, reducer pressure valves, gas valves and parts, safety valves, measurement and controllers, gas reducers and regulators andcentrifugal pumps.
There are plenty of opportunities in the services areas, specifically for firms active in designengineering, project management, and construction: regional basin studies, geophysical andseismic survey, geo-modeling, well logging and formation evaluation, exploration and appraisaldrilling, 3D seismic works, drilling and well completion technology, well and extraction facilityinstallation including production facilities and pipelines, development drilling, process equipment, offshore drilling technologies and development systems, drilling operations, well completions, oilrecovery processes and production enhancement, innovative drilling and harsh environment drilling technology, reservoir engineering, monitoring and testing, offshore platforms and export facilities, tanker loading, pipelines and receiving terminals, production operations, reservoir maintenance, well system maintenance, logistics support and supply chain management, refurbishment andupgrading of facilities, project management, oil spill preparedness, environmental control, oil spill technologies and response, facilities and pipeline maintenance, drilling and production wastemanagement and treatment, employee safety training programs and occupational health,certification/licensing for scientific research and design works in Kazakhstan, adoption ofinternational standards.
Based on current purchasing trends, the following sub-sectors offer good sales opportunities for U.S. exporters:
Onshore Drilling equipment and appliances: Drilling rigs, bits, electric motors, winch rollers, rotary tables, sheds, hoisting blocks, monkey boards, crown blocks, gin holes, shackles, cutting bits, roller bits, diamond bits, and casing sleeves Horizontal-drilling equipment Rock-blasting tools and equipment Drilling technology/processes for horizontal, slant and directional drilling Technology and equipment for the construction and operation of horizontal wells Drilling fluids, oilfield chemicals Drainage pumps Oilfield tubes and pipes Well safety protection equipment Ground control stations for monitoring of production pumps Tools, materials and equipment for well cementing Gas well machinery and equipment Rock drill bits Offshore Drilling equipment and appliances: Offshore Oil and Gas Exploration/Exploitation equipment Floating-rig equipment Offshore drilling rig equipment and platforms Shelf development equipment Pontoons supported on columns, derrick drilling rigs Hoisting cranes, gravimeters and seismic monitors Water well drilling machinery TengizChevrOil’s Future Growth Project and the Wellhead Pressure Management Project
(FGP-WPMP) is an expansion project of $45.2 billion presents opportunities for U.S. equipmentsuppliers and service providers. The project will increase crude oil production at the Tengiz oil field by 260,000 bpd to reach the annual production of 850,000 bpd.FGP-WPMP are two integrated projects that are being executed simultaneously to expand Tengiz production and to maintain full production rates at the existing Tengiz facilities.
The Government of Kazakhstan is pursuing a development program for oil fields in the Caspian Sea that calls for increasing oil production to about 3 million bpd, and for the development of terrestrial infrastructure.The offshore development program also calls for more new offshore blocks toeventually be privatized through open tenders.also presents an opportunity for a logistical and transformational business and pipeline projects over the next few decades.
Local Industry Resources: U.S. Commercial Service Information:
Azhar Kadrzhanova, Commercial Specialist
U.S. Commercial Service, U.S. Consulate General in Almaty 41 Kazybek bi Street, Almaty 050010, Kazakhstan Email: firstname.lastname@example.org Website: https://www.trade.gov/kazakhstan
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