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Kazakhstan: International Compromise Sought On Investment Law

Kazakhstan is seeking a compromise with foreign investors on a new law that may limit their rights to international arbitration and appeal. After more than a year of negotiations, the latest draft legislation seems to be an attempt to end the debate by leaving the issue deliberately vague.

Boston, 12 July 2002 (RFE/RL) -- A new version of Kazakhstan's proposed investment law shows the results of long negotiations with foreign companies and an effort to compromise on their most serious concerns.

The latest draft of investment legislation, published this week by the American Chamber of Commerce in Kazakhstan and the U.S. Commerce Department, suggests that Astana is trying to calm a controversy that has troubled foreign oil companies for over a year.

After 15 months of debate, Kazakhstan is continuing to craft an investment statute that would limit breaks for foreign firms that were granted under 1994 legislation in the early days of independence. The new law, which has passed through countless drafts, has been bogged down for months.

Officials have argued that changes must be made to curb unfair advantages for foreign companies and create opportunities for Kazakh businesses. But investors are concerned that the law could be used to reopen their contracts and bar access to international arbitration for disputes.

The 1994 law allowed foreign investors to take disputes to international arbitration bodies, if they chose to do so. But last year, the government proposed that disputes should be transferred outside Kazakh courts only with the consent of "the state body."

In February, a group representing foreign companies appealed the entire draft law to the International Center for Settlement of Investment Disputes, Kazakhstan television reported.

The latest version of the law, dated 19 June, tries to finesse the issue, saying that "the settlement of disputes shall be carried courts of the Republic of Kazakhstan, as well as at international arbitration courts as agreed by the parties."

It does not say specifically that state approval would be required for any international appeal. Instead, the language leaves it open to interpretation by making it vague as to whether agreement is needed only on the choice of international courts. The phrasing varies only slightly from the original April 2001 version that met with protest.

The issue has been followed closely because of Kazakhstan's success in attracting some $15 billion in cumulative investment, primarily to the country's huge petroleum fields. But as the country's success has grown, so have the doubts.

Since last year, the government has pursued a series of complaints against foreign oil majors, saying that some have done too little local hiring and contracting, while others have broken environmental rules. Kazakh officials also point to generous investment "preferences," such as tax and customs breaks, that were written into early contracts. They argue that big companies are now making excess profits because Kazakhstan has since cut its tax rates for all firms.

But Kazakhstan has also created a powerful monopoly called KazMunaiGaz to manage all its oil, gas, and transit interests. Analysts believe that the draft law is aimed more at gaining power over the growing oil business than distributing wealth.

Many foreign companies have quietly renegotiated their contracts under pressure to give back some of their more generous incentives. But they have also insisted that the new law must not compromise "contract stability." The latest draft would limit any new tax preferences to five years.

In recent months, President Nursultan Nazarbaev and Foreign Minister Qasymzhomart Toqaev have repeatedly pledged that existing contracts will remain intact. But concerns have remained about provisions that would make it easier to nationalize property or override contracts, or to deny recourse outside Kazakh courts.

Under the draft law, contracts could be altered in cases of new international treaties or laws enacted "in order to provide national and ecological security, health care, and ethics." It does not define or limit the terms.

Doubts about legal protections have been aggravated by recent trials of dissidents and closing of newspapers in the worst rash of repression in the past decade.

Speaking last week in Astana, the president of the European Bank for Reconstruction and Development, Jean Lemierre, praised the investment environment but added that "the practice of passing laws in Kazakhstan has provoked a number of questions among investors," according to Interfax. Lemierre spoke following a meeting of a foreign investors' council.

In response to questions about the rule of law, Nazarbaev said: "Naturally, I am sad that there has been talk recently that the pace of democratic reform in Kazakhstan is slowing down. I don't think that is the case." He added, "There is no way that Kazakhstan is going to turn away from democratic reforms, because this is the way that Kazakhstan has selected as the way of its economic and political development."

Although business and democratic rights are often dealt with separately, investors are likely to become uneasy with the recent trends in Kazakhstan because both are affected by the balance between legal protections and government power.

In the case of the draft law, vague language may not be reassuring in an environment which seems to be protecting power at the expense of legal rights.