Transparency of the Regulatory System
Kazakhstani 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 indicate that they adhere to international financial reporting standards, but accounting and valuation practices are not always consistent with international best practices.
The government consults on some draft legislation with experts and the business community; draft bills are available for public comment at www.egov.kz under Open Government section, however, the comment period is only ten days, and the process occurs without broad notifications. Some bills are excluded from public comment, and the legal and regulatory process, including with respect to foreign investment, remains largely opaque. All laws and decrees of the President and the government are available in Kazakh and Russian on the website of the Ministry of Justice: http://adilet.zan.kz/rus.
Implementation and interpretation of commercial legislation is reported to sometimes create 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 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.
Many foreign companies say they must defend investments from frequent decrees and legislative changes, most of which do not “grandfather in” existing investments. Penalties are often assessed for periods prior to the change in policy. For example, foreign companies report that local and national authorities arbitrarily impose high environmental fines, saying the fines are assessed to generate revenue rather than for environmental protection. Government officials have acknowledged the system of environmental fines requires reform, and Parliament passed legislation in March 2016 reducing maximum penalties for environmental violations. The Ministry of Energy plans to submit a revised version of the Environmental Code, compliant with OECD standards, to Parliament in 2019 and is meeting with businesses and other stakeholders on the new Code’s development.
In 2015, President Nazarbayev announced five presidential reforms and the implementation of the “100 Steps” Modernization program. 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 improved 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.
Public financial reporting, including debt obligations, explicit liabilities, are published by the Ministry of Finance on their site: http://www.minfin.gov.kz/. However, authorities have indicated that contingent liabilities, such as exposures to state-owned enterprises, their cross-holdings, and exposures to banks, are not fully captured there.
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 notifies the WTO Committee on Technical Barriers to Trade about drafts of national technical regulations (although lapses have been noted). Kazakhstan ratified the WTO Trade Facilitation Agreement (TFA) in May 2016, notified its Category A requirements in March 2016, and requested a five-year transition period for its Category B and C requirements. Early in 2018, the government established an intra-agency Trade Facilitation Committee to implement its TFA commitments. By the end of 2018, Kazakhstan notified the WTO Trade Facilitation Committee that it has fulfilled its implementation commitments for Category A at 57 percent, for Category B at 19 percent, and for Category C at 24 percent.
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 interferes in judiciary matters. According to Freedom House’s Nations in Transit report for 2018, the executive branch dominates de facto the judicial branch. Allegedly, pervasive corruption of the courts and the influence of the ruling elites results in low public expectations and trust in the justice system. The Department of State’s Report on Human Rights 2018 noted that foreign 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 are perceived as subject to political influence and interference. Regulations or enforcement actions can be appealed 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, which opened in July 2018, includes its own arbitration center and court based on British Common Law and independent of the Kazakhstani judiciary. The court is led by former Chief Justice of England and Wales, Lord 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 Entrepreneurial Code; the Civil Code; the Tax Code; the Customs Code of the Eurasian Economic Union; the Customs Code of Kazakhstan; the Law on Government Procurement; and the Law on Currency Regulation and Currency Control (will enter in force from July 1, 2019). 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, have been reported to create significant obstacles to business in Kazakhstan.
The Entrepreneurial Code outlines basic principles of doing business in Kazakhstan and the government’s relations with entrepreneurs. The Code reinstates a single investment regime for domestic and foreign investors, 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 4, Industrial Policies. The Code also provides for dispute settlement through negotiation, use of Kazakhstan’s judicial process, and international arbitration. U.S. investors have expressed concern about the Code’s narrow definition of investment disputes and its lack of clear provisions for access to international arbitration. The government’s single window for foreign investors, providing information to potential investors, business registration, and links to relevant legislation, can be found here: https://invest.gov.kz/doing-business-here/invest-guide/.
A revised Law on Currency Regulation and Currency Control, which comes into force July 1, 2019, expands the statistical monitoring of transactions in foreign currency and facilitates the process of dedollarization. In particular, the law will treat branches of foreign companies in Kazakhstan as residents and will enable the National Bank of Kazakhstan (NBK) to enhance control over cross-border transactions. The NBK is currently developing a list of companies that will keep their non-resident status; the majority of these companies are from extractive industries (see also Part 6, Financial Sector).
The legal and regulatory framework offered by AIFC to businesses registering on that territory differs substantially from that of Kazakhstan, although the Center is quite new, and experience is limited. A more detailed analysis of the legal and regulatory implications of operating within AIFC can be found here: http://www.ftseglobalmarkets.com/news/astana-international-financial-center-can-it-become-a-regional-finance-hub.html.
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 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.
Post is aware of cases when owners of flourished and developed businesses had to sell their businesses to companies affiliated with high-ranking and powerful individuals.
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 rules of the UN Commission on International Trade Law Arbitration, 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 48 countries. These agreements recognize international arbitration of investment disputes. The United States and Kazakhstan signed a Bilateral Investment Treaty in 1994. The U.S. Mission to Kazakhstan does not have any information on claims by U.S. investors under the Treaty during the last five years.
Kazakhstan does recognize arbitral awards by law. In October 2018, ICSID ordered Kazakhstan to compensate a foreign company for USD 30 million in investments in oil transshipment and storage facilities. In 2015, this company appealed to ICSID for Kazakhstan’s breach of its bilateral investment treaty and Energy Charter Treaty. The 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 may be settled by negotiation, litigation or international arbitration. Investment disputes between the government and large investors fall to the Astana City Court and may be appealed to 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.
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.
Kazakhstani law provides for government compensation for violations of contracts guaranteed by the government. Yet, where the government has merely approved or confirmed a foreign contract, the government’s responsibility is limited to the performance of administrative acts necessary to facilitate an investment activity (e.g., the issuance of a license or granting of a land plot). The resolution of disputes arising from such cases may require litigation or arbitration.
International Commercial Arbitration and Foreign Courts
The Law on Mediation offers alternative (non-litigated) dispute resolutions for two private parties. The Law on Arbitration defines rules and principles of domestic arbitration. As of April 2019, Kazakhstan had 20 local arbitration bodies unified under the Arbitration Chamber of Kazakhstan. Please see: https://palata.org/about/. The government noted that the Law on Arbitration brought the national arbitration legislation into compliance with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the European Convention on 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 a bilateral agreement on mutual judicial assistance with the respective 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 the European Bank for Reconstruction and Development’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. In February 2018, a U.S. company initiated arbitration against the Kazakhstani government for failure to pay approximately USD 75 million for the return of two hydropower plants, operated under a 20-year concession agreement. In April 2018 the government responded by denying liability and seeking over USD 480 million in counterclaims. The final evidentiary hearing is scheduled for July 22-26, 2019.
Kazakhstan’s 2014 Bankruptcy Law protects the rights of creditors during insolvency proceedings, including access to information about the debtor, the right to vote against reorganization plans, and the right to challenge bankruptcy commissions’ decisions affecting their rights. Bankruptcy is not criminalized, unless the court determines the bankruptcy premeditated. The Bankruptcy Law improves 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 eases bureaucratic requirements for bankruptcy filings, gives creditors a greater say in continuing operations, introduces a time limit for adopting rehabilitation or reorganization plans, and adds court supervision requirements. In 2018 the government introduced a bill to improve rehabilitation and bankruptcy procedures.