- The Washington Times - Saturday, July 14, 2001

ALMATY, Kazakhstan — Since the Soviet Union was dissolved 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 a year, the banking sector works and more than $12 billion has poured in, much of it in projects to drill for oil that Soviet-era planners had considered too difficult to recover.
When another $25 billion will have been 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 to 4 million barrels per day of oil exports. This would place Kazakhstan, which is four times the size of Texas, among the top three or four petroleum exporters in the world.
But the newfound confidence in the country's leaders has paradoxically marred the ways foreign investors are being perceived and led to a sweeping revision in the laws that govern their activities, which threatens to cloud Kazkahstan's rosy future.
In the past few months, newspapers in this country have devoted increasing space to criticism of foreign companies, with many accusing them of making unfair profits at the expense of ordinary citizens. 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 it no longer needs to offer in order to attract capital.
Officials say these privileges to foreign investors discriminate against local capital, which has been growing, 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 for the return of capital illegally squirreled at home or abroad will bring several hundred million dollars — out of an estimated $1 billion to $3 billion — back into circulation.
The 20-day period was extended by 10 days early this month and was to expire this week. According to the Russian news agency Interfax and other reports, the outcome of Kazakhstan's attempt to encourage people to legalize hidden cash by depositing it in domestic banks — untaxed and with no questions asked — was being closely watched by Russia and other ex-Soviet states, where new entrepreneurs made windfall profits and evaded taxes in the early 1990s.
But an examination of the first part of the legal overhaul — done by the British law firm Denton Wilde Sapte, the largest in Almaty, Kazakhstan's former capital and still its commercial center — found that the changes would not improve 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, concurs. He recently brought up the issue with President Nursultan Nazarbayev during a regular meeting of the Foreign Investors Council, which advises the Kazakh leader on how to make the most of international capital.
Mr. Lemierre, whose bank has invested $600 million in Kazakhstan and was instrumental in bringing in another $700 million in foreign investments, is a member of the council.
"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," he 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."
The examination by Denton Wilde Sapte of the proposed foreign-investment law, which is expected to be introduced in the country's parliament this summer, concluded that it tore down several legal pillars on which foreign investments rested. The changes include:
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 that 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 by the banks that finance them.
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 Foreign Investors Council said, these measures "will most certainly result in a sharp drop in foreign investment."
In his remarks to the council, Mr. 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 press 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 series 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 not clear what effect the foreign-investment law ultimately 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."

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