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Kazakhstan: Foreign Investors May Face Troubles Over Pipeline Tariffs

Foreign investors in Kazakhstan may be facing trouble on several sides as a potential dispute with Russia over pipeline tariffs reopens an old issue. Oil companies have also appealed a new investment law to an international arbitration panel, arguing that the legislation will end their right to further appeals.

Boston, 7 March 2002 (RFE/RL) -- Problems for investors in Kazakhstan appear to be piling up at a time of uncertainty over legal and political change.

The latest cloud on the horizon involves the new Caspian Pipeline Consortium export route from Kazakhstan's rich oilfields through Russia to the Black Sea. The $2.6 billion line known as CPC officially opened last November after long delays.

According to an Interfax report last week, Russia is moving to classify its portion of the 1,580-kilometer line as a "natural monopoly," a move that would make its tariffs subject to review. The tariffs were supposed to be regulated under a 1997 agreement between the shareholders and the Russian government. But wrangling over rates continued long into last year, after the pipeline was built.

Now, Interfax claims that "giving CPC monopoly status will destabilize (the) consortium," which includes U.S. oil companies Chevron and ExxonMobil, as well as other foreign firms. The Russian government owns 24 percent of the venture, while Kazakhstan owns 19 percent.

The reported reason for the concern is that the monopoly status will make the tariffs subject to review by Russia's Federal Energy Commission. The same panel approves tariffs for the rival Russian pipeline monopoly Transneft, which was responsible for holding up the CPC's opening last year.

In a surprise move, Transneft agreed last week to build a link to CPC in Russia that would join the two systems, the "Petroleum Argus" newsletter reported.

This week, Kazakhstan's commercial television called the tariff development a "serious row," a "violation of interstate agreements," and a "virtual seizure of Kazakhstan's only oil shipment route."

It is not at all clear that the plan will rise to that level of conflict. But the reports may cast doubt on a statement made by President Nursultan Nazarbaev after meeting with Russian President Vladimir Putin at the CIS summit in Almaty over the weekend.

The RIA Novosti news agency reported Nazarbaev as saying that "Russia and Kazakhstan are facing virtually no unsolved problems in bilateral relations."

Instead, a number of problems have emerged both for interstate relations and investors in a country where clarity is often a precious commodity.

Last month, Moscow protested after Kazakhstan transferred the rights to 13 Caspian oilfields claimed by Russia to a private company, according to Kazakhstan television. Former Prime Minister Kasymzhomart Tokaev is said to have signed the decree two days before resigning his post.

In an interview with "Kazakhstan Today," Tokaev, who became foreign minister, defended his action. He insisted it was needed to speed up research, even though the Caspian border between Russia and Kazakhstan has yet to be decided.

Tokaev was quoted as saying: "In this situation, Kazakhstan is wasting time and tempo. It's vital to secure research by a private company to avoid possible bilateral problems between Russia and (the Republic of Kazakhstan), which might result from involving a state-owned company."

The decree was reportedly cancelled by the new prime minister, Imangaliy Tasmagambetov, who took office after a political crisis over the rise of an opposition party.

Among other concerns, the oilfield episode may raise questions about whether Russia and Kazakhstan are as close to an agreement on their Caspian borders as Moscow has claimed. It is unclear whether Russia's tariff move on CPC is a related tactic or an entirely separate matter, making the trouble even harder to address.

Foreign investors are also continuing to struggle with the threat of new investment legislation, which has been in the works for over a year. The law, which was supposed to take effect at the start of this year, has been delayed by marathon talks over its terms but is expected to be passed next month.

Kazakhstan argues that the law is needed to give local businesses equal opportunities with foreign oil companies, who won tax breaks in the early days of independence. But the companies object to provisions that would curb their rights to take disputes to international arbitration outside Kazakhstan's courts.

Last month, Kazakhstan television and the BBC reported that the companies took an appeal to the law itself before the International Center for Settlement of Investment Disputes on grounds that it would block future arbitration.

The dispute comes at a time when Kazakhstan has merged its two powerful state-owned oil and pipeline companies into a single and even more powerful petroleum monopoly.

After Nazarbaev's initial suggestions that Kazakhstan should reopen its foreign contracts, the president has repeatedly stressed that previous agreements will be observed. But officials have reportedly used the threat of the new law to pressure the firms into paring back their tax breaks.

Public Revenues Minister Zeinulla Kakimzhanov also stirred concerns that old contracts would be reviewed in an interview last month with the newspaper "Delovaya Nedelya," as relayed by the "Times of Central Asia."

Kakimzhanov said that any additional profits that foreign oil companies make from lower tax rates "must go to the state budget." He said the government is "negotiating to amend the previous contracts with these companies." Kakimzhanov also charged that some companies have artificially raised production costs to hide their taxable profits.

The statements are likely to undercut Nazarbaev's pledge that Kazakhstan will strictly honor its contracts with foreign firms.