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Kazakhstan: Contract Review Causes Foreign Investors Concern

Kazakhstan says it will reopen past contracts with foreign companies to give them more favorable terms. The move seems likely to raise the political risk of doing business in the country, which has drawn billions of dollars in oil investment over the past decade. RFE/RL correspondent Michael Lelyveld reports.

Boston, 2 July 2001 (RFE/RL) -- In the latest sign of trouble for foreign investors, Kazakhstan's finance minister has said that the terms of major contracts will be reviewed.

Speaking last week (26 June), Mazhit Yesenbaev said the examination will cover contracts for "subsoil" development. These are the oil, gas, and mining deals that have accounted for most of the investment in Kazakhstan since independence a decade ago.

Yesenbaev said the reviews would be conducted within the bounds of the law and by "seeking civilized approaches," the Interfax news agency reported. But he also said that changes would be made "in favor of amplifying and strengthening the positions and interests of Kazakhstan."

The comments seem to mark the latest step in what oil company officials have privately called "creeping nationalization." The term refers to a gradual campaign to take back assets that Kazakhstan has sold to foreign firms through contracts that are starting to prove profitable.

The country's biggest assets include the Tengiz and Kashagan oil fields, two of the largest recent oil discoveries in the world.

Unlike the sudden nationalization of foreign oil investments that took place in Iran with the Islamic Revolution of 1979, the trend in Kazakhstan has been a matter of steady but rising pressure this year.

Although conflicts have previously erupted in specific sectors like refining and power generation, the strains on foreign investors have broadened since March.

Foreign oil companies have been cited for numerous pollution incidents and labor complaints, although it is unclear whether their practices have changed greatly from previous years.

In April, Kazakh lawmakers drew up a new draft investment law, making it easier to nationalize property and prevent recourse to international arbitration for claims. The legislation is scheduled to take effect at the start of 2002.

Oil companies have also been trying to resist the rise of Kazakh monopolies on oil transit and exports, which have the power to set tariffs at will.

Some Western analysts believe the aim is to squeeze foreign investors and slowly push them out of the most attractive ventures, leaving them with the burden of financing the rest.

Kazakh officials have cited numerous reasons to justify the trend. In mid-June, President Nursultan Nazarbaev told the country's Foreign Investors Council that there were "objective grounds" for reviewing foreign contracts.

Nazarbaev argued that Kazakhstan has reduced its payroll tax and other assessments since the subsoil contracts were signed. Further cuts in the value-added tax and the social tax were set to take effect 1 July.

Kazakh officials believe the benefits to foreign companies are a reason to set new terms in the interest of Kazakhstan. But three months ago, officials also argued that they were justified because old contracts gave foreign investors bigger tax breaks than those granted to Kazakh businesses.

These reasons make it seem that the government has decided to alter the contracts and is finding explanations for its actions as it goes along. There has been little mention of the huge bonuses that foreign oil companies have paid to the government in order to secure their contracts.

But officials also appear to be ignoring one of the reasons why foreign investors often demand high rates of return for projects in countries like Kazakhstan. The political risk for investments is far higher than in Western nations where contracts cannot be arbitrarily changed. A primary rule of investing is that greater risk must be compensated by greater rewards.

Yesenbaev's statement that reviews will be conducted within the bounds of the law has no meaning if the law can be altered at will. In the future, foreign companies that invest in Kazakhstan will have to take that risk into account and seek even higher returns. That problem could lead to even more political pressure against foreign firms.

So far, Kazakhstan has relied on the attraction of its oil resources to keep foreign investors engaged. But the attraction could lose its luster if the trend toward creeping nationalization goes on.