Transparency of the Regulatory System
Kazakhstan law sets out basic principles for fostering competition on a non-discriminatory basis.
Kazakhstan is a unitary state, and national legislation accepted by the Parliament and President are equally effective for all regions of the country. The government, ministries, and local executive administrations in the regions (“Akimats”) issue regulations and executive acts in compliance and pursuance of laws. Kazakhstan is a member of the EAEU and decrees of the Eurasian Economic Commission are mandatory and have preemptive force over national legislation. Publicly listed companies adhere to international financial reporting standards.
The government consults on some draft legislation with experts and the business community; however, the legal and regulatory process remains largely opaque. Draft bills are available for public comment, but the process occurs without broad notifications and some bills are excluded from public comment altogether. All laws and decrees of the President and the government are available in Kazakh and Russian on the website of the Ministry of Justice of the Republic of Kazakhstan: http://adilet.zan.kz/rus .
Implementation and interpretation of commercial legislation sometimes creates confusion among foreign and domestic businesses alike. In 2016, the Ministry of Health and Social Development introduced new rules on attracting foreign labor, some of which (including a Kazakh language requirement) created significant problems for foreign investors. After an active intervention by the international investment community through the Prime Minister’s Council for Improving the Investment Climate, the government canceled the most onerous rules.
The non-transparent application of laws remains a major obstacle to expanded trade and investment. Foreign investors complain of inconsistent standards and corruption. Although the central government has enacted many progressive laws, local authorities may interpret rules in arbitrary ways for the sake of their own interests.
In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. The reforms include the creation of a modern, transparent, and accountable state, strengthening of the rule of law, and industrialization and economic growth. The program calls for the formation of a results-oriented public administration system, a new system of audit and performance evaluation for government agencies, and introduction of an open government system with better public access to information held by state bodies. Initial implementation of this plan has already helped to improve accountability. For example, in addition to the Audit Committee that monitors government agencies’ performance, ministers and regional governors now hold annual meetings with local communities.
The “100 Steps” plan emphasizes the importance of foreign investment for the country and has objectives to attract transnational corporations in the local processing industry, transport and road infrastructure, agriculture, energy saving, and tourism.
International Regulatory Considerations
Kazakhstan is the part of the Eurasian Economic Union and EAEU regulations and decisions supersede the national regulatory system. Kazakhstan became a member of the WTO in 2015. It regularly notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations. Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in September 2015, notifying its Category A requirements in March 2016, and requesting a five-year transition period for its Category B and C requirements. In January 2018, the government established an intra-agency trade facilitation committee to implement its TFA commitments.
Legal System and Judicial Independence
Kazakhstan’s Civil Code establishes general commercial and contract law principles. Under the constitution, the judicial system is independent of the executive branch, although the government likely interferes in judiciary matters. According to Freedom House’s Nations in Transit report for 2016, public trust in the impartiality of the judicial system was low, and citizens held little expectation that justice would be dispensed professionally in court proceedings. The Department of State’s Report on Human Rights 2017 noted that business entities were reluctant to approach courts because foreign businesses have a historically poor record when challenging government regulations and contractual disputes within the local judicial system. Judicial outcomes were perceived as subject to political influence and interference due to a lack of independence.Regulations or enforcement actions are appealable and adjudicated in the national court system. Monetary judgments are assessed in the domestic currency.
Parties of commercial contracts, including foreign investors, can seek dispute settlement in Kazakhstan’s courts or international arbitration, and Kazakhstani courts will enforce arbitration clauses in contracts. Any court of original jurisdiction can consider disputes between private firms as well as bankruptcy cases.
The Astana International Financial Center, set to open in July 2018, includes its own arbitration center and court based on British common law and independent of the Kazakhstan judiciary. The court is led by former Lord Chief Justice of England and Wales Harry Woolf, and several other Commonwealth judges have been appointed.
Laws and Regulations on Foreign Direct Investment
The following legislation affects foreign investment in Kazakhstan: the 2015 Entrepreneurial Code; the Civil Code; the Tax Code (in force since January 2018); the Customs Code of the Eurasian Economic Union and the Customs Code of Kazakhstan (both in force since January 2018); the Law on Currency Regulation and Currency Control; and the Law on Government Procurement. These laws provide for non-expropriation, currency convertibility, guarantees of legal stability, transparent government procurement, and incentives for priority sectors. Inconsistent implementation of these laws and regulations at all levels of the government, combined with a tendency for courts to favor the government, create significant obstacles to business in Kazakhstan.
The 2015 Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and relations of entrepreneurs with the government. The Code reinstates a single investment regime for domestic and foreign investors, and thus, in principal, codifies non-discrimination for foreign investors. The Code contains incentives and preferences for government-determined priority sectors, providing customs duty exemptions and in-kind grants detailed in Part 5.2, Performance Requirements and Investment Incentives. This law also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the law’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration.
Competition and Anti-Trust Laws
The Entrepreneurial Code regulates competition-related issues such as cartel agreements and unfair competition. The Committee for Regulating Natural Monopolies and Protection of Competition and Consumers’ Rights under the Ministry of National Economy of the Republic of Kazakhstan is responsible for reviewing transactions for competition–related concerns.
Expropriation and Compensation
The bilateral investment treaty between the United States and Kazakhstan requires the government to provide compensation in the event of expropriation. The Entrepreneurial Code allows the state to nationalize or requisition property in emergency cases, but fails to provide clear criteria for expropriation or require prompt and adequate compensation at fair market value.
ICSID Convention and New York Convention
Kazakhstan has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since December 2001 and ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. By law, any international award rendered by the ICSID, a tribunal applying the UN Commission on International Trade Law Arbitration rules, Stockholm Chamber of Commerce, London Court of International Arbitration, or Arbitration Commission at the Kazakhstan Chamber of Commerce and Industry is enforceable in Kazakhstan.
Investor-State Dispute Settlement
The government is a signatory to bilateral investment agreements with 47 countries. The United States and Kazakhstan signed a bilateral investment treaty in 1994. Post does not have any information on if there have been claims by U.S. investors under the agreement.
Although the local courts do recognize arbitral awards by law, Post is not aware of any cases of enforcing arbitral awards against the government. The 2015 Entrepreneurial Code defines an investment dispute as “a dispute ensuing from the contractual obligations between investors and state bodies in connection with investment activities of the investor,” and states such disputes can be settled by negotiation, litigation or international arbitration. Investment disputes between the government and large investors fall to the Astana City Court and are appealable at a special investment panel at the Supreme Court of Kazakhstan.
A number of investment disputes involving foreign companies have arisen in the past several years linked to alleged violations of environmental regulations, tax laws, transfer pricing laws, and investment clauses. Some disputes relate to alleged illegal extensions of exploration schedules by subsurface users, as production sharing agreements with the government usually make costs incurred during this period fully reimbursable. Some disputes involve hundreds of millions of dollars. Problems arise in the enforcement of judgments, and ample opportunity exists for influencing judicial outcomes given the relative lack of judicial independence.
In an effort to encourage foreign investment, the government has developed dispute resolution mechanisms aimed at enabling aggrieved investors to seek redress without requiring them to litigate their claims. The government established an Investment Ombudsman in 2013, billed as being able to resolve foreign investors’ grievances by intervening in inter-governmental disagreements that affect investors. According to the Ministry of Investments and Development, since 2017 the Investment Ombudsman successfully addressed 50 investors’ requests.
Kazakhstani law provides for government compensation for violations of contracts guaranteed by the government. However, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts (e.g., the issuance of a license or granting of a land plot) necessary to facilitate an investment activity. Disputes arising from such cases may require litigation or arbitration.
International Commercial Arbitration and Foreign Courts
The 2011 law on mediation offers ways of alternative (non-litigated) dispute resolutions for two private parties. The 2016 law on arbitration defines rules and principles of domestic arbitration. As of April 2018, Kazakhstan had 17 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan (https://palata.org/about/ ). The government noted that the 2016 law brought the national arbitration legislation into compliance with UNCITRAL model law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on the International Commercial Arbitration.
Judgements of foreign arbitrations are recognized and enforceable under local courts. Local courts recognize and enforce court rulings of CIS countries. Judgement of other foreign state courts are recognized and enforceable by local courts, when Kazakhstan has bilateral agreement on mutual judicial assistance with respective foreign country or applies a principle of reciprocity.
When SOEs are involved in investment disputes, domestic courts usually find in the SOE’s favor. By law, investment disputes with private commercial entities, employees, or SOEs are in the jurisdiction of local courts. According to EBRD’s 2014 Judicial Decision Assessment, judges in local courts lacked experience with commercial law and tended to apply general principles of laws and civil code provisions with which they are more familiar, rather than relevant provisions of commercial legislation.
Even when investment disputes are resolved in accordance with contractual conditions, the resolution process can be slow and require considerable time and resources. Many investors therefore elect to handle investment disputes privately, in an extrajudicial way.
A 2017 investment dispute began when the Kazakhstani government declined to extend a U.S. company’s 20-year concession to operate two hydropower plants, returning the assets to the government’s control while allegedly failing to compensate the company for its substantial investments. The case is now in international arbitration.
Kazakhstan has a bankruptcy law from 2014. The law protects the rights of creditors during insolvency proceedings, including access information about the debtor, the right to vote against reorganization plans and the right to challenge bankruptcy commissions’ decisions affecting their rights. The bankruptcy is not criminalized, unless the court determines the bankruptcy premeditated.
The 2014 bankruptcy law improved the insolvency process by permitting accelerated business reorganization proceedings, extending the period for rehabilitation or reorganization, and expanding the powers of (and making more stringent the qualification requirements to become) insolvency administrators. The law also eased bureaucratic requirements for bankruptcy filings, gaves creditors a greater say in continuing operations, introduced a time limit for adopting rehabilitation or reorganization plans, and added court supervision requirements.
There are public and private credit bureaus. The National Bank subsidiary, the State Credit Bureau (www.mkb.kz ), and the privately-owned First Credit Bureau (https://www.1cb.kz/main/ ) provide credit dossiers upon requests.