Transparency of the Regulatory System
Despite receiving technical assistance from donors to develop law and regulations are consistent with international best practices, the legal and regulatory system of the Kyrgyz Republic remains underdeveloped. Implementation of regulations and court orders relating to commercial transactions remains inconsistent. In some case, court decisions, which appear to contradict established procedures, have been implemented expeditiously with outside influence. However, heavy bureaucracy, lack of accessibility among government officials responsible for investment promotion hinder the conduct of business.
There have been no known cases of U.S. investors being discriminated against during the reporting period. After the 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 former workers of these entities, business associations, rights organizations, the media, and independent experts in respective areas. The objective of these councils is to provide citizen oversight of policy formulation and execution, though their efficacy remains in question.
Rule-making authority is vested in the Kyrgyz Parliament, which features robust committees that oversees 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 (Financial Intelligence) 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 Ministry of Economy, assists investors with regulatory compliance. 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, Prime-Minister 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 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 Subsoil Use, 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 exploitation of mineral resources to the State Inspection for Environment and Technical Security. Also in July 2016, then-President Almazbek Atambaev approved several reforms aimed at streamlining law enforcement bodies. Among other things, the reforms dissolved the State Drug Control Service and transferred it into the structure of the Ministry of Interior, and transferred authority to investigate economic crimes from the State Committee on National Security to the State Service of Combating Economic Crimes (Financial Police).
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, the Kyrgyz Republic has yet to secure the benefits of increased bilateral trade with EAEU member countries, citing unilaterally-imposed trade barriers restricting the flow of Kyrgyz exports. Numerous Kyrgyz entrepreneurs have criticized non-tariff measures that emerged after the country’s accession to the Union, preventing 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 general principles of the reformed legal system of the Kyrgyz Republic, 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 weak Kyrgyz judicial system often fails to act as an independent arbiter in the resolution of disputes. Since most disputes are lodged by foreign investors against the Kyrgyz Government, local courts serve as an executor of the authorities’ political agenda. Regulations and enforcement actions can be appealed and are adjudicated in the national court system. International Court of Arbitration at the Chamber of Commerce and Industry of the Kyrgyz Republic (ICA). mediation services for public-private disputes remain a protracted and often impartial process in the Kyrgyz Republic.
Laws and Regulations on Foreign Direct Investment
The Kyrgyz Republic’s main legal framework for foreign direct investment remainsthe “2003 Law on Investments.” with multiple amendments up until 2018. The justice system in the Kyrgyz Republic is inefficient and lacks independence, and cases can take years to be resolved. The Kyrgyz Republic does not have a business registration website. The Investment Promotion and Protection Agency of the Kyrgyz Republic (IPPA) maintains the country’s main website for investment queries, https://invest.gov.kg/ .
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, 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, 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 April 2016, the government expropriated four Uzbek-owned resorts on Lake Issyk-Kul on the grounds of the claimant’s failure to make payment to the Kyrgyz Social Fund. Post has no information on whether fair market value compensation was offered following expropriation. (Note: The Kyrgyz 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. End Note.) In December 2017, the Kyrgyz Government returned the resorts to the claimant and extended the temporary rental of the lands on the basis that the claimant withdrew its claim filed to international arbitration, improved infrastructure at the resorts, and guaranteed that 80 percent of labor force will be Kyrgyz citizens.
On August 27, 2019, the Kyrgyz government finalized the terms of the Strategic Agreement with Canada-based gold mining company Centerra Gold Inc. Negotiations were concluded following a protracted investor dispute over the Kumtor gold mine. In 2016, a Kyrgyz court issued an interim ruling that prevented Kumtor Gold Company, the wholly owned subsidiary of Centerra, from transferring property or assets, declaring or paying dividends, or making loans to its parent company. Citing this action by the Kyrgyz judicial system, Centerra suspended all dividend payments to shareholders. After the parties signed a new agreement in September 2017, which required Centerra to support rural and environmental funds, in June 2018 current Prime-Minister Abylgaziev’s government demanded that the agreement with Kumtor be revised to increase environmental payments. According to the new strategic agreement, Centerra’s obligation to the State’s Regional Development and Nature funds will increase from USD 87 million to USD 150 million.
Both the executive and legislative bodies perpetually discuss how and when to allocate, reallocate, revoke, suspend, and otherwise handle mining licenses. In January 2019 President Jeenbekov called the issuing of mining licenses the most corrupt in the government. 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.
Post is unaware of any claims made by U.S. investors under the agreement since it entered into force. In January 2019, the local media outlet Tazabek.kg, citing the Kyrgyz Center for Legal Representation, reported that between 2014-2018, twenty lawsuits were filed against the Kyrgyz Republic totaling over USD 2.2 billion in claims. Eleven international 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 payment 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. In August 2019, following Centerra’s withdrawal of all claims and acquiescence to increase revenue payments to USD 150 million for contribution to the State’s Regional Development and Nature funds, the parties signed a new strategic agreement.
Stans Energy Corporation, a Toronto-based resource development company focused on mining rare earth metals, was involved in a long running, high profile investment dispute with the Kyrgyz Republic. Between 2013-2014, the Kyrgyz government revoked Stans Energy’s mining licenses for two mining deposits, including the Kutessay II rare earth mine, claiming the company had bribed Kyrgyz officials to obtain licensing rights. In 2015 and 2017, the mining company unsuccessfully filed multiple lawsuits in arbitration courts in Canada and Moscow. In August 2019, the UN Commission for International Law and Trade (UNCITRAL) concluded arbitration proceedings, ruling in favor of Stans Energy and awarding it USD 24 million in compensation for improper expropriation. The company has yet to receive compensation and the Kyrgyz government has sought to undo this ruling.
International Commercial Arbitration and Foreign Courts
Code of Arbitration Procedures allows for international and domestic arbitration of disputes. 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 UNCITRAL. Recognition and enforcement of international arbitration awards in the Kyrgyz Republic is carried out in accordance with the New York Convention and Kyrgyz laws. However, there are a number of features related to the recognition and enforcement of arbitration awards. In particular, Kyrgyz law expands a list of the grounds for refusal of recognition and enforcement of foreign arbitration awards in comparison with a list of the grounds referred to in the New York Convention.
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 multiple amendments in December 30, 1998, July 1999, September 2000, June 2002, March and August 2005, January and July 2006, June 2007, July 2009, April 2015, June, July and December 2016, May 2017, and December 31, 2019) 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 or peaceful settlement between the enterprise and its creditors, which can be made at any stage of the liquidation process. The World Bank ranked the Kyrgyz Republic 82 out of 190 countries in “Resolving Insolvency” in its 2019 Doing Business report.