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 still heavily bureaucratic and investors must overcome a great deal of red tape in order to conduct business.
After former president Bakiyev was deposed in 2010, the interim government established observation councils in ministries, state agencies, and state committees. These bodies are typically comprised of representatives from non-state actors, including business associations, rights organizations, the media, and independent experts in their respective areas. The objective of these councils is to provide citizen oversight of policy formulation and execution, though their efficacy remains in question. There have been no known cases 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 (Financial Police) both play important regulatory roles.
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 IPPA, under the Prime Minister, 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 observed in the Kyrgyz Republic, the legal and regulatory framework is largely sound but implementation and enforcement are weak.
In July 2016, the Kyrgyz government issued a decree to restructure several state regulatory bodies. The decree abolished the State Agency for Geology and Resource Management, replacing it with the State Committee for Industry, Energy and Resource Management, and dissolved the State Agency for Communications and Centre for e-Governance, merging its functions into the State Committee of Informational Technology and Communications. The decree also expanded the Ministry of Agriculture’s functions to include food industry development. It has assigned state oversight functions of multiple areas including the exploitation of mineral resources to the State Inspection for Environment and Technical Security. Also in July 2016, President Almazbek Atambaev approved several reforms aimed at streamlining law enforcement bodies. The reforms dissolved the State Drug Control Service and transferred it to fall within the Ministry of Interior. These reforms also transferred authority to investigate economic crimes from the State Committee on National Security to the State Service of Combating Economic Crimes (Financial Police).
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.
Comprehensive reports by the IMF, World Bank and other international institutions on Kyrgyz public debt are readily available.
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. 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 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 Soviet Socialist Republic (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 country depends on several factors, namely who the parties are and the size of the investment.
The key problem in the resolution of disputes is a weak Kyrgyz judicial system that fails to act as an independent arbiter. Since most of these disputes are between foreign investors and the Kyrgyz Government, local courts often serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system. However, the International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic (ICA) offers mediation services to resolve public-private disputes instead of relying on the 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.” The justice system in the Kyrgyz Republic is often inefficient and lacks independence, and cases can take years to be resolved.
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 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 and 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 interest 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 April 2016, the government of the Kyrgyz Republic expropriated four Uzbek-owned resorts on Lake Issyk-Kul and announced plans to do the same to several Kazakh-owned resorts in the same area as a result of failing to pay government-mandated contributions to the Kyrgyz Social Fund. 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 Law on Investment specifies that the amount of reparation shall be equivalent to the fair market price of the expropriated investment, and that the reparation must be feasible and shall be payable in a freely convertible currency within the term agreed on by the parties. However, Post is unaware of the financial terms of the aforementioned acts of expropriation. The Kyrgyz Government’s efforts to resolve the dispute in December 2017 resulted in the return of the resorts to Uzbekistan and an extension of the properties’ rental agreements. In response, the Kyrgyz Government required that its Uzbek counterpart agree to withdraw their claim filed in international arbitration courts, improve infrastructure at the resorts, and implement a policy establishing that 80 percent of resort employees be Kyrgyz citizens.
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 remain unresolved. In 2016, a Kyrgyz court issued an interim ruling that prevents Kumtor Gold from transferring property or assets, declaring or paying dividends, or making loans to its parent company, Centerra Gold, Inc. While the order does not prohibit the company from continuing to use its cash resources to operate the Kumtor mine, cash generated from mining operations (a reported USD 237 million in 2016) continues to be held by Kumtor Gold and is not being distributed to Centerra. Citing this action by the Kyrgyz judicial system, Centerra suspended its dividend payments to shareholders. In September 2017, then Prime Minister Sapar Isakov signed a new agreement with Centerra, establishing greater financial responsibilities on the part of the mining firm for the protection of the environment. However, in June 2018 current Prime-Minister Abylgaziev’s government stated that the agreement will have to be revised to, among other conditions, increase environmental payments.
Both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. At the Security Council meeting in January 2019 President Jeenbekov specifically criticized the corruption associated with the issuance of 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 when an international treaty of the Kyrgyz Republic establishes the rules of court procedure differing from 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. Post is unaware of any claims made by U.S. investors under the agreement since it entered into force. A weak judicial system fails to act as an independent arbiter in investment disputes. 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 January 2017, a local media outlet, citing the Kyrgyz government’s center for legal representation, reported that between 2014-2016, fourteen lawsuits were filed against the Kyrgyz Republic totaling over USD 1.8 billion in claims. Nine arbitration disputes totaling over USD 1.5 billion in claims have been settled to date.
The most well-known investment dispute centers around the Kumtor gold mine. Since the mine began commercial production in 1997, the Canadian company, Centerra Gold, whose local subsidiary Kumtor Gold operates the mine, 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 nearly USD 98 million for 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, based on an agreement with the Kyrgyz Government, Centerra agreed to a ten-fold increase of annual environmental damage payments from USD 300,000 to USD 3 million, a one-off installment of USD 50 million into a fund to support the Kyrgyz economy, and an adjustment to Kumtor’s management structure requiring that Kyrgyz citizens fill several key management positions.
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.
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.
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.
- 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 and amended December 30, 1998) which covers industrial enterprises and banks, irrespective of the type of ownership; commercial companies; private entrepreneurs; and 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 or peaceful 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 82 out of 190 countries in “Resolving Insolvency” in its 2018 Doing Business report.