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Kazakhstan: Nazarbaev Ignores Investor Concerns, Signs Investment Law

After nearly three years of debate, Kazakh President Nursultan Nazarbaev has signed a new investment law that has worried foreign companies in the country's growing oil sector. The move comes two months after Kazakhstan's largest joint venture halted a $3-billion project due to a tax dispute with the government.

Boston, 10 January 2003 (RFE/RL) -- Kazakh President Nursultan Nazarbaev seems to have brushed aside the objections of foreign oil companies in signing a new investment statute into law this week.

Foreign firms have been fighting for nearly three years against the legislation, which replaces the country's 1994 investment code. The law, which was initially planned to take effect in January 2001, will be put into force with publication following the signing, the Interfax news agency says. Kazakhstan's Parliament passed the final version last month after numerous drafts.

The new measure represents a compromise on early proposals that sparked even stronger opposition. The law would uphold the terms of past government contracts with foreign companies against future legal changes, but it would not extend those protections to new agreements with either domestic or foreign entities.

Kazakh officials have argued that the changes are needed to create more local opportunity and redress the generous allowances granted to foreign companies in the past decade, when Kazakhstan's rich oil fields drew the lion's share of CIS investment.

But critics have argued that the legal changes are part of broader pressures on foreign companies that go beyond the letter of the law. While the government has given repeated assurances, it has also sought concessions on dozens of existing contracts. Investment sources say growing rights violations and the jailing of opposition leaders has added to the fears of foreign businesses, which normally shun political affairs.

While investors are concerned about contract protections, they have had even less success on the issue of arbitration. The old law gave foreign companies the right to take legal disputes in Kazakhstan to international arbitration courts. The new law implies that government approval could be needed for such appeals from now on.

The question is pressing because Kazakhstan's biggest investors are in the midst of just such a dispute. In November, foreign companies shelved a $3-billion expansion project for the Tengiz oil field after splitting with the government over funding and some $600 million in tax payments. U.S.-based ChevronTexaco is the operator of the Tengizchevroil joint venture, which has been the largest single taxpayer in Kazakhstan.

Speaking shortly after the dispute became public, Kazakh Finance Minister Zeinullah Kakimzhanov suggested the possibility of arbitration, saying, "If it will be necessary to bring some problems to the international arbitration authorities, as the authorized tax body I say that if this need arises then we will go in this direction."

It is unclear whether the recourse is still available under the new law.

Kazakhstan has also fined Tengizchevroil more than $70 million for storing 5 million tons of sulfur that was separated from oil extracted at Tengiz. Although the joint venture has appealed the penalty, it is now questionable whether it can take the appeal outside Kazakh courts.

Daniel Witt, president of the International Tax and Investment Center in Washington, an independent foundation representing investors, told RFE/RL in a phone interview that there may be a bright side to the changes on contract protection, if it means that Kazakhstan will pursue stable tax policies from now on.

Witt said, "It looks really bad. As I read it, it does look bad. But at the same time, I'd rather have pressure driving the Kazakh government to maintain the normal, stable laws that don't require individual contracts to protect investors. You shouldn't have to contract your tax regime."

Investors may be just as worried about the context of conditions in Kazakhstan that led to the passage of the new law as the legislation itself. Witt said, "All of these pieces together paint a rather troubling picture." He added, "It's the whole investment environment, and that's the message I've been sharing with the Kazakhs."

Witt said much will depend on the government's next steps. Now that the law is in place, foreign companies will be waiting to see how it will be applied. Companies could prove reluctant to sign new contracts if arbitrary measures increase.

Witt said, "There will be a market test there. If this is onerous, the Kazakhs will pay a price for that."