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Kazakhstan: Government May Move Toward Nationalization

A new investment law in Kazakhstan may give the government more power to nationalize companies and make it harder for foreigners to take disputes to international arbitrators. Our correspondent Michael Lelyveld says the changes seem to follow a pattern of increasing pressure on foreign investors in recent months.

Boston, 1 May 2001 (RFE/RL) -- As tensions increase with foreign investors, Kazakhstan has written a draft law that could make it easier to nationalize their property.

The legislation appears to be the latest sign of friction between Kazakhstan's government and foreign investment interests. Within the past month, Kazakh officials have lodged a series of complaints against oil firms on issues ranging from pollution to labor laws, taxes and local contracting.

Two weeks ago, the Interfax news agency reported that the government was working on a new law to put "foreign and domestic investors on equal footing," because of concerns that foreign companies have been granted better tax breaks than Kazakh firms.

A copy of the draft law obtained by RFE/RL appears to deal with the question by denying investment-tax preferences to ventures in natural resources, such as oil. It is not clear whether the law would cancel the concessions on corporate and property taxes that were granted in the past.

But a provision dealing with expropriation could be of greater concern to foreign companies. The new law would give the government more power to nationalize property and leave foreign investors with less legal recourse to fight such moves.

According to the draft dated 17 April, nationalization of an investor's property "is allowed in the exclusive cases stipulated by the legislative acts of the Republic of Kazakhstan, under conditions of equivalent compensation."

The previous investment law of 1994, has tougher wording in its guarantees to investors. It states that "Foreign investments may not be nationalized...except for instances when such expropriation is effectuated in social interests in compliance with a legal order and is done without discrimination and with payment of prompt, adequate, and effective contributory compensation."

Perhaps just as important, the new law does not appear to assure investors that they will be permitted to settle disputes by appealing to international arbitration.

The 1994 law gives foreigners the right to take a dispute to an international arbitration body. The new law, which is to take effect in January 2002, calls for such settlements "by the agreement of the investor and the state body." In other words, the consent of the Kazakhstan government could be needed to take a dispute beyond Kazakh courts.

It is unclear whether the new law reflects any intention to change the treatment of foreign investors in Kazakhstan. But recent events suggest that a change may already be under way.

Since last December, foreign oil companies have been resisting a government order to channel all exports through KazTransOil, a monopoly headed by Timur Kulibayev, President Nursultan Nazarbayev's son-in-law. Since early April, the companies have been under pressure to increase local contracting following a series of labor complaints.

Last week, the government ordered a halt to operations at the Kashagan oil field in the Caspian Sea after a small spill of 210 liters of oil. A prosecutor also cited the joint venture at the giant Tengiz field with violations related to dumping wastes and burning gas.

In the past month, Hurricane Hydrocarbons of Canada has also faced a takeover battle from Kazakh banking interests, which have been linked to Kulibayev.

While each problem may have separate causes, it seems that tensions with foreign companies have increased since last year following reports that U.S. law enforcement agencies have been investigating alleged payments to Nazarbayev and other officials. Kazakhstan has also taken strong exception to an annual human rights report by the U.S. government.

It is too soon to say whether the draft law is meant simply as a refinement of current statutes or as a new tool to pressure foreign investors. But companies may have to be prepared for further changes in Kazakhstan.