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Kazakhstan: Astana Still Lacks Investment Law

Kazakhstan appears to be using a controversial draft investment law to pressure foreign companies into increasing payments to the government. The pending legislation was scheduled to take effect at the start of 2002, but it may already be proving useful as a political tool.

Boston, 13 February 2002 (RFE/RL) -- After a year of debate and a long series of drafts, there has been no visible progress on a new Kazakhstan investment law that was supposed to take effect at the start of this year.

U.S. officials say the controversial legislation was submitted to Kazakhstan's parliament in October but has yet to emerge.

The draft law, which would replace a 1994 investment code, has been the source of continuing tension between foreign companies and Kazakhstan, which has attracted over $13 billion in foreign direct investment since independence a decade ago, according to government figures. The vast majority has come in the oil, mining, and metal industries.

But foreign investors and Western governments have been quietly waging a long battle against the new law, which top Kazakhstan officials say is needed only to restore a "balance" between foreign and domestic businesses by offering equal opportunities.

Officials point to generous tax preferences that were granted to foreign oil companies in the early days of independence. They argue that foreign companies now enjoy greater benefits, because Kazakhstan has lowered its value-added tax and social welfare assessments by 20 percent.

In December, President Nursultan Nazarbaev altered the argument slightly, telling a meeting of the Foreign Investors Council in Astana that "the balance between the interests of the state and businesses" should be observed, the Interfax news agency reported.

The issue is difficult on both sides because Nazarbaev's government did grant preferences and contract breaks that went beyond the usual "tax holidays" that are used throughout the region to lure investment.

Officials on both sides have told RFE/RL that duty-free imports of items like cigarettes for foreign oil workers have found their way onto local markets in the past, competing unfairly with domestic sales. But the practice was ended when the oil company in question gave up the import break voluntarily.

The issue is about more than cigarettes because the government has been aggressively pushing a policy of import substitution and insisting that foreign companies use local labor and contractors. In the December meeting, Nazarbaev said the companies were starting to comply with the demands.

The trouble for the foreign companies now is that the draft law would make it easier for the state to expropriate, or nationalize, foreign holdings. The firms could be forced to fight such moves in Kazakh courts, because the new law, unlike the old one, requires government consent to take complaints to international arbitration.

Government assurances about the risk have been marred by a series of demands and statements. In May, the government established a special commission on subsurface development with the power to review past contracts that were considered "disadvantageous" for Kazakhstan. A Kazakhstan Press report on the commission was carried by the BISNIS commercial service of the U.S. Commerce Department.

In September, the Caspian News Agency reported that Nazarbaev told lawmakers to review previously signed contacts, saying, "The question is whether Kazakhstan undertook too much international obligations and whether all these obligations meet interests of Kazakhstan?"

Since then, after talks with U.S. officials, Nazarbaev and other government leaders have repeatedly assured Western audiences that existing contracts will be observed.

In February, Foreign Minister Qasymzhomart Tokaev brought a similar message to the World Economic Forum in New York, days after stepping down as prime minister. Tokaev said, "Our government, and the present government, they are strictly in favor of sustaining stability of previous contracts with all American companies."

But there are also signs that the draft law is being used to pressure foreign companies as long as it remains in limbo. In December, Nazarbaev noted that 33 of 47 foreign companies had agreed "to increase royalties and relevant taxes in connection with the growth of their profits," Reuters reported. In other words, it appears that the companies are being approached one by one.

The question of the new law and its enactment remain uncertain. During Tokaev's recent meetings in Washington, he gave two conflicting answers on successive days. According to a participant, Tokaev said first that perhaps it was not the time for such a law because Kazakhstan still needs foreign investors. On the next day, he said that it may be enacted in April.

The situation has been muddied further by the political turmoil in Kazakhstan since November, when a group of ousted officials formed the opposition movement Democratic Choice of Kazakhstan. The group has said it is seeking decentralization of power and wealth.

In a January speech, Nazarbaev charged the opposition with saying, "We must cancel contracts with foreign investors," as one of its demands. Nazarbaev concluded: "This set is good for comic broadcast but not for political life. The authorities has simply to stop this low farce."

Nazarbaev may have succeeded in tangling up the investment question with greater issues of democracy and wealth distribution. But Kazakhstan does not appear to be moving quickly on any of those fronts.