Transparency of the Regulatory System
Although many laws and regulations in the Kyrgyz Republic were developed with technical assistance from donors and are consonant with international best practices, the legal and regulatory system of the Kyrgyz Republic continues to develop slowly. The process of implementing regulations and court orders relating to commercial transactions remains inconsistent. Some court decisions, which appear to contradict established procedures, can be implemented expeditiously in certain cases and are subject to outside influence. The Kyrgyz system is heavily bureaucratic and investors must overcome a great deal of formalities in order to conduct business.
After the former president was deposed in 2010, the interim government established public supervisory boards in ministries, state agencies, and state committee. These bodies are typically comprised of former government employees and representatives from non-state actors, including business associations, rights organizations, the media, and independent experts. The objective of these committees is to provide citizen oversight of policy formulation and execution, though their efficacy remains in question. There have been no known facts where U.S. Investors had been discriminated against during the reporting period.
Rule-making authority is vested in the Kyrgyz Parliament, which features robust committees that oversee legislation and regulations affecting several areas of the economy, including: the Committee on Economic and Fiscal Policy; the Committee on Fuel, Energy, and Subsoil Management; the Committee on Transport, Communications, Architecture, and Construction; and the Committee on Budget and Finance. The Office of the Prosecutor General is the supreme legal and regulatory enforcement body in the Kyrgyz Republic. The State Service on Financial Market Regulation and Supervision and the State Service on Combating Economic Crimes under the Kyrgyz Government both play important regulatory roles. The Anticorruption Service under the State National Security Committee is the state body tasked to prevent, suppress, and identify corruption within state agencies.
Accounting procedures tend to adhere to internationally recognized accounting rules, such as the International Financial Reporting Standards (IFRS), and audits are conducted regularly, often in compliance with agreements with international financial institutions (IFIs). Audit results of state organizations tend to be publicly available, unlike those of private organizations. Draft bills or regulations are posted on Parliament’s web site and are typically open to public comment for 30 days prior to consideration by Parliament and its committees. Parliament often holds public hearings on draft legislation, and is open to the participation of representatives of civil society organizations and the business community in relevant hearing.
The Investment Promotion and Protection Agency (IPPA), under the Government of the Kyrgyz Republic, assists investors with bureaucratic procedures. This agency also consolidates information about potential investment projects in the Kyrgyz Republic. However, the efficacy of this office in assisting firms with setting up shop is limited since official bureaucratic procedures comprise only some of the hurdles to opening a business. Investment councils, under the auspices of the Office of the President and Parliament respectively, exist to further regulatory improvements for the business climate. Contradictory government decrees often create bureaucratic paralysis or opportunities for bribe solicitation in order to complete normal bureaucratic functions. As often in the Kyrgyz Republic, the legal and regulatory framework is largely sound but reports about weak implementation and enforcement abound.
Regulatory enforcement bodies are known to conduct periodic inspections according to standards defined by law. However, businesses often complain about the uneven application of rule of law in the Kyrgyz Republic. Businesses that do not meet legally defined standards are often fined depending on the severity of the violation, and the enforcement process is reviewable through the judicial system.
International Regulatory Considerations
In August 2015, the Kyrgyz Republic acceded to the Eurasian Economic Union (EAEU), whose current members also include Russia, Kazakhstan, Armenia, and Belarus, and adopted the Union’s b. The Kyrgyz Republic continues to harmonize its laws to comply with regulations set by the Eurasian Economic Commission, the executive body of the EAEU. However, transition-related issues still continue to persist, and numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, which act as barriers that prevent some local exporters from fully accessing the wider EAEU market.
The United States and other international partners provided substantial technical assistance to the Kyrgyz Republic in support of its accession to the WTO in 1998, and the country’s regulatory system reflects many international norms and best practices. The Law on the Fundamentals of Technical Regulation in the Kyrgyz Republic, which provides for standardization principles under the WTO Technical Barriers to Trade Agreement, entered into force in 2004. To Post’s knowledge, the Kyrgyz government notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). In 2016, the Kyrgyz Republic ratified the WTO Trade Facilitation Agreement.
Legal System and Judicial Independence
The formal legal system of the Kyrgyz SSR largely mirrored that of other union republics. The legal system has undergone a dramatic transformation since the breakup of the Soviet Union. The general principles of the reform encourage ideological and political pluralism, a socially oriented market economy, and the expansion of individual rights and freedoms. Major barriers to foreign investment derive from a lack of adequate implementation rather than gaps in existing laws.
The judicial system is technically independent, but political interference and corruption regularly besmirch its reputation and undermine its effectiveness. Resolution of an investment dispute within the Kyrgyz Republic depends on several factors, namely who the parties are and the amount of investment.
The key problem in dispute resolution is the weak and opaque Kyrgyz judicial system that often fails to act as an independent arbiter, according to local business associations and councils. Since most of these disputes are between foreign investors and the Kyrgyz Government, local courts often serve as executors of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system.
Laws and Regulations on Foreign Direct Investment
The Kyrgyz Republic’s main legal framework for foreign direct investment remains
the “2003 Law on Investments,” and the “Law of the Kyrgyz Republic on Amendments to the Law on Investments,” adopted in February 2015. Cases that have gone through the justice system however, have been reported to take years, with the process characterized by a lack of judicial independence.
The Kyrgyz Republic does not have a business registration website. The IPPA maintains the country’s main website for investment queries, www.invest.gov.kg. The site also contains information regarding current legislation and regulations affecting potential investors. Registration of legal entities, branches, or representative offices in the Kyrgyz Republic is based on “registration by notification” and the “one stop-shop” practice.
Competition and Anti-Trust Laws
The State Agency for Anti-Monopoly Regulation under the Government of the Kyrgyz Republic conducts unified state antitrust price regulation in the economy. The main tasks of the State Agency are:
- to develop and protect competition
- to control compliance with legislation in the field of anti-trust, price regulation
- to protect the legal rights of consumers against manifestations of monopoly and unfair competition
- to ensure observance of legislation on advertising.
To Post’s knowledge, there have been no developments in any significant competition cases over the past year.
Expropriation and Compensation
According to the Law on Investments in the Kyrgyz Republic, investments shall not be subject to expropriation (nationalization, requisition, or other equivalent measures, including actions or omissions by the government bodies of the Kyrgyz Republic which have resulted in forced withdrawal of investors’ funds or in depriving them of an opportunity to gain on the investments’ results), except as provided by Kyrgyz laws when such expropriation is in the public interests and is carried out on a non-discriminatory basis and pursuant to a proper legal procedure with the payment of timely, appropriate and feasible reparation of damages, including lost profit.
In December 2017, the Kyrgyz government agreed to return four Uzbek-owned resorts on Lake Issyk-Kul, which the government had expropriated in April 2016. The resorts trace back to the Soviet Union, when the neighboring socialist republics of Uzbekistan and Kazakhstan built resorts to help boost the region’s tourism potential.
The Kyrgyz government spent much of 2013 and 2014 renegotiating the agreement underpinning foreign investment in the Kumtor gold mine and many aspects of the dispute remained unresolved until September 2017. In 2016, a Kyrgyz court issued an interim ruling that prevented Kumtor Gold from transferring property or assets, declaring or paying dividends, or making loans to its parent company, Centerra Gold, Inc. While the order did not prohibit the company from using its cash resources to operate the Kumtor mine, cash generated from mining operations (a reported USD 350 million in 2017) was held by Kumtor Gold and was not distributed to Centerra. Citing this action by the Kyrgyz judicial system, Centerra suspended its dividend payments to shareholders. In September 2017, the Kyrgyz government and Centerra Gold reached a comprehensive agreement, resolving outstanding disputes. The Kyrgyz government universally dismissed its claims against Centerra, allowing freedom of movement for Centerra’s staff after a nearly 18-month travel ban and permitting Centerra to repatriate profits out of the country. Centerra, in exchange, agreed to a USD 60 million lump sum payment in addition to a tenfold increase in annual environmental damage payments.
Both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. Foreign investors have the right to compensation in the case of government seizure of assets. However, there is little understanding of the distinction between historical book value, replacement value, and actual market value, which brings into question whether the government would provide fair compensation in the event of expropriation.
ICSID Convention and New York Convention
The Kyrgyz Republic is a member of the International Center for the Settlement of Investment Disputes (ICSID). It signed the ICSID agreement on June 9, 1995, and ratified it on July 5, 1997. The Kyrgyz Republic became a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards on March 18, 1997.
Investor-State Dispute Settlement
The Code of Arbitration Procedure specifies that, if an international treaty of the Kyrgyz Republic establishes the rules of court procedure other than those provided by the legislation of the Kyrgyz Republic, rules of the international treaty shall apply. The U.S.-Kyrgyz BIT outlines procedures by which parties may consent to binding arbitration. The U.S. Embassy is unaware of any claims made by U.S. investors under the agreement since it entered into force.
Cases of investment disputes have been reported to be subject to corruption during the judicial process. Since most of these disputes are between foreign investors and the Kyrgyz government, local courts serve as the executors of the authorities’ political agenda.
In September 2017, a local media outlet, citing the Kyrgyz government’s center for legal representation, reported that, between 2011 and 2017, eighteen lawsuits were filed against the Kyrgyz Republic totaling over USD 1.8 billion in claims. 11 of these arbitration disputes totaling over USD 1.6 billion in claims had been settled.
The most well-known investment dispute centers on the Kumtor gold mine. Since the mine began commercial production in 1997, Canadian-based Centerra Gold, whose mine is operated by local subsidiary, Kumtor Gold, has renegotiated the terms of their investment with the government more than three times at the request of the Kyrgyz Government. In December 2015, both sides tabled the talks without resolution. In 2016, Kyrgyz law enforcement officials raided the Bishkek headquarters of Kumtor Gold on accusations of financial irregularities, and prevented expatriate officials from exiting the country. A local court issued an injunction to preclude the company from making financial transfers to Centerra, and later fined Kumtor for nearly USD 98 million in alleged environmental damages. Shortly afterward, Centerra elevated its dispute with state corporation KyrgyzAltyn over environmental, dividend, and land use claims to a court of international arbitration. In September 2017, the two parties negotiated a settlement without a decision from the arbitration court, but subsequent changes in the Kyrgyz government have delayed full implementation of the agreement and made yet another renegotiation possible.
Stans Energy Corporation, a Toronto-based resource development company focused on mining rare earth metals, has also been involved in a long running, high profile investment dispute with the Kyrgyz Republic. In 2009, Stans acquired a 100 percent stake in the Kutessay II rare earth mine in the Kyrgyz Republic. Claiming the acquisition process was tainted, a Kyrgyz parliamentary committee revoked the company’s permits, prompting Stans to file a lawsuit against the Kyrgyz government claiming it took expropriatory actions against the firm’s interests. In June 2014, an international arbitration court in Moscow awarded Stans a USD 118 million judgment. The company has yet to receive compensation, and contends the Kyrgyz government has sought to undo this ruling. Canadian courts rejected Stans efforts twice, preventing the miner from seizing shares of Centerra Gold belonging to state-owned company KyrgyzAltyn as compensation.
As of 2017, the Kyrgyz Republic had not yet compensated a Turkish company despite a 2009 ICSID tribunal determination. In 2005, armed personnel raided the Pinara (now the Ak-Keme Hotel), a Turkish-owned hotel in Bishkek. An ICSID tribunal determined in 2009 that the Kyrgyz government’s actions related to the incident were tantamount to expropriation, and the government bore full responsibility for reparations, a decision subsequently recognized by arbitration courts in the United States, Canada, and France. To date, the Kyrgyz Republic has failed to provide compensation – currently in excess of USD 11.6 million – to the Turkish company Sistem Muhendislik Insaat Sanayi Ve Ticaret Anonim Sirketi in accordance with the international tribunal.
International Commercial Arbitration and Foreign Courts
The Code of Arbitration Procedures allows for international and domestic arbitration of disputes. If feasible, the arbiter and the terms of arbitration should be identified in the initial contract. Establishing the terms for arbitration beforehand may prevent further complications in the event of a dispute. According to local media, seven arbitration claims against the Kyrgyz Republic totaling USD 250 million remain unresolved.
Parties can agree to any judicial institution, including third-party courts within or outside of the Kyrgyz Republic, or domestic or international arbitration. If the parties fail to settle the dispute within three months of the date of the first written request, any investment dispute between an investor and the public authorities of the Kyrgyz Republic will be subject to settlement by the judicial bodies of the Kyrgyz Republic. Any of the parties may initiate a settlement by recourse to:
- the International Centre for Settlement of Investment Disputes under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States or;
- arbitration or a provisional international arbitration tribunal (commercial court) established under the arbitration procedures of the UN Commission for International Trade Law (UNCITRAL)
The Kyrgyz Republic has a written law governing bankruptcy procedures of legal persons and insolvent physical persons (Law of the Kyrgyz Republic “On Bankruptcy” September 22, 1997, with amendments of December 30, 1998; July 7, 1999; September 29, 2000; June 17, 2002; March 7, 2005; July 4, 2005; August 10, 2005; January 27, 2006; July 27, 2006; June 13, 2007; July 24, 2009; April 20, 2015; June 22, 2016; July 7, 2016; December 16, 2016; April 20, 2017; and May 12, 2017) which covers industrial enterprises and banks, irrespective of the type of ownership; commercial companies; private entrepreneurs; foreign commercial entities. Bankruptcy proceedings are conducted by the court of arbitration competent for the district in which enterprise is located. The procedure of liquidation can be carried out without the involvement of the judicial bodies if all creditors agree on out-of-court proceedings. Chapter 10 of the law on bankruptcy provides for the possibility of an amicable settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank has ranked the Kyrgyz Republic 119 out of 190 countries in “Resolving Insolvency” in its 2017 Doing Business report.