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. Last Updated: 07/27/2016

Kazakhs Wary of Foreign Capital

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ALMATY, Kazakhstan — Since it seceded from the Soviet Union a decade ago, this sprawling nation of steppes and mountains astride Central Asia has made remarkable progress in mastering its economy and attracting foreign investment.

The currency is convertible, inflation is down to 8 percent per year, the banking sector works and more than $12 billion have poured in, much of it in projects to drill oil that Soviet-era planners had considered too difficult to recover.

When another $25 billion of expected investment is added to that in the next 15 years, Kazakhstan's 15 million people — a third of whom are of Russian descent — will be sharing the income from 3 million to 4 million barrels per day of oil exports. This would place Kazakhstan, which is four times the size of Texas, among the three or four top oil exporters in the world.

But the newfound self-confidence in the country's leaders has paradoxically yielded a souring of the ways foreign investors are perceived and a sweeping revision in the laws that govern their activities, which threaten to cloud Kazakhstan's rosy future.

In the last few months, Kazakh papers have given increasing coverage to criticism of foreign companies, with many papers accusing them of reaping unfair profits off the backs of the Kazakhs. Most foreign companies, however, claim that they are still investing and have yet to make any profit.

"Who is making money in this country?" asked an indignant senior oil executive. "Nobody in the oil industry is, that's for sure. We're spending money, not earning it."

The government says the existing foreign investment law dates from 1994, when the economy was in much worse shape, and that it accords foreign investors privileges that Kazakhstan no longer needs to offer in order to attract capital.

Government officials say these privileges to foreign investors discriminate against local capital, which has been accruing inside the country, and that it is time to level the playing field.

They say Kazakhstan now has sufficient capital inside the country and that a 20-day amnesty period on the return of capital illegally squirreled abroad is expected to bring several hundred million dollars — out of an estimated $1 billion to $3 billion — back into the country.

But an examination of the first part of the legal overhaul, made by the London-based British law firm Denton Wilde Sapte, the largest in Almaty, found that the changes would not improve the conditions for local capital and would have a detrimental effect on foreign investment.

The head of the European Bank for Reconstruction and Development, Jean Lemierre, concurred.

He recently brought up the issue with Kazakh President Nursultan Nazarbayev during a regular meeting of the Foreign Investors Council, which advises the leader on how to make the most of international capital. Lemierre, whose bank has invested $600 million in Kazakhstan and was instrumental in bringing in another $700 million in foreign investments, is a council member.

"Kazakhstan is losing large sums of money already because existing investors face unnecessary obstacles in their operations," he said in a speech to the council. "And for many prospective new investors, Kazakhstan is still too inaccessible and too unreceptive.

"The patience of foreign investors is not endless," Lemierre continued. "When returns are inadequate or business is too difficult, investors will move away and new investment will fail to come."

He urged the president to hold "further discussions on the new law."

Denton Wilde Sapte's examination of the proposed foreign investment law, which is expected to be introduced in the country's parliament this fall, concluded that it tore down several legal pillars on which foreign investments rested. The law includes:

•A revocation of the so-called stabilization clause for new investors, a government guarantee that changes in legislation that negatively affect the position of foreign investors will not apply for the first 10 years of the investment or for the term of a contract entered into with state authorities. Instead, the law firm — whose views were echoed in letters to the prime minister by the European Business Association of Kazakhstan and the American Chamber of Commerce — recommended the clause be extended to local investors, thus discouraging capital flight.

•A sharp narrowing of access to international arbitration in disputes, which is considered an important safeguard by businesses and the banks that finance them.

•The removal of customs exemptions on capital investment and possibly even on the personal effects of expatriate staff — measures unheard of in developing countries that are competing for foreign investment.

Taken together, the European business group said, these measures "will most certainly result in a sharp drop in foreign investment."

In his remarks to the council, Nazarbayev did not address these issues.

Instead, in response to investor concerns that the government is seeking to renegotiate existing contracts because of recent changes in the tax legislation, he told journalists and investors at a conference after the meeting, "We are not talking about renegotiating any contracts, but we just want to re-examine contracts in connection with their tax burden in a candid and friendly manner."

The proposed investment law is the first in a train of changes to legislation that will include amendments to the petroleum law, the subsoil law and a new tax code, among others. Because these laws will also affect the oil industry, it is unclear what effect the foreign-investment law will have on major oil-related investments such as refineries.

"We won't get the total picture until the final amendments on all these laws are adopted," said a lawyer familiar with the situation. "But the draft investment law is certainly sending out a signal that Kazakhstan is a less friendly place to invest than it used to be."