Chapter 3. The policy framework for the balancing of investor protection and the government’s power to regulate
This chapter looks at the policy framework for investment protection at the domestic and international level. A key focus is on the balancing between investor protection and the government’s power to regulate. The chapter analyses protection provisions available to all persons in the general laws and those available only to investors in specific legislation, such as certain provisions under the Entrepreneurial Code. The issue of regulatory stability is addressed separately, both for contracts and investments generally and for investments in the subsurface sector in particular. The chapter also provides an overview of dispute resolution mechanisms, such as the Kazakh court system, arbitration, and mediation, and analyses recent reform efforts. Finally, the chapter analyses Kazakhstan’s investment treaties and dispute settlement under these treaties, identifying options for their review.
The restrictions and conditions faced by foreign investors, both when they first establish their investment and in their on-going operations, is only one part of the overall investment environment. Transparency and predictability, non-discrimination, and the protection of property rights, combined with effective enforcement mechanisms are important pillars of a sound investment climate. Investment protection therefore plays a crucial role for the investment climate. The term describes relevant provisions and policies which define the rights of investors, and in particular the level of treatment they may expect in their dealings with the government.
Investment protection policy involves efforts to achieve a balance between investor protection and governments’ right to regulate. Protection of investors from improper treatment can lower their perception of risk for new investments, and investors who perceive lower risks will generally make capital and resources available at a lower cost. At the same time, governments need latitude to regulate investment and to address evolving situations through changes in policy over time. Reconciling these goals involves a challenging process of balancing through a potentially wide range of policy tools.
A first level of protection for investors is under laws and procedures that apply to people, as well as businesses generally. The rights and interests of investors can be protected by different legal instruments, such as Kazakhstan’s Constitution and different laws and regulations that apply to all persons. They are also protected by a range of administrative law doctrines as well as by good administrative practices. In many advanced economies, these are the principal protections applicable in practice to most investors under domestic law.
A second level of treatment under review here involves laws in Kazakhstan that apply specifically to investors and investments, or to some investors and investments, and that provide them with additional protection. Many emerging economies provide for additional protections for all or defined categories or investors or investments. These laws can provide important protections to some or all investors, make protections easier to identify for the relevant investors, and consequently encourage additional investment. A new Entrepreneurial Code seeks to achieve greater coherence in this area in Kazakhstan and is discussed below along with sectoral legislation. At the same time, to the extent that these laws provide rights for investors that are not available to other constituencies affected by investment, they can affect the relative influence of different constituencies on government policy.
In addition to domestic law, investment treaties or international investment agreements (IIAs) between Kazakhstan and other countries can provide additional protection to foreign investors covered by the treaties. The second section below addresses Kazakhstan’s treaty network and treaty policy.
Since the OECD Investment Policy Review of 2012, the Kazakh authorities have introduced reforms to improve Kazakhstan’s framework for investment protection. Policy reform on the national legal framework, aiming to increase the consistency and transparency of the applicable legal rules and thereby strengthen investor confidence, is underway. The new Entrepreneurial Code and current efforts to improve the rules applicable to investments in the Subsurface sector, for example, testify to this dynamic. In the field of enforcement and dispute resolution, the authorities have introduced new institutions and mechanisms, with the overall objective of providing investors with effective recourse to protect their rights. The Kazakh authorities also intend to modernise their policy on international investment agreements.
The national policy framework
General national law regulating and protecting all persons
The Kazakh authorities have undertaken efforts to improve the general rule of law and consequently the policy framework for investment. “Ensuring the Rule of Law” is a key pillar of the 100 steps set out by Kazakhstan’s president to implement institutional reform. As outlined in Chapter 5, an attractive investment climate facilitating new investment and retaining existing investment depends to a large degree on sound administrative procedures and high quality regulations. Predictability and coherence in the government’s regulatory activity enhance investor confidence, particularly when they are accompanied by consistent applications of the rules in force. These elements, which in themselves constitute important assurances for investors, are complemented by provisions in the general national law ensuring additional protection that also apply to investors.
The Constitution provides that the scope of property rights and guarantees of their protection shall be determined by law. It also specifies that “[p]roperty shall impose obligations, and its use must simultaneously benefit the society.”1 These provisions would appear to provide for a degree of protection against illegal measures affecting property. They would appear to provide limited protection against changes in the law that restrict the scope of property rights or other regulatory changes. The Constitution also generally provides for non-discrimination.2 While these constitutional principles are important, they appear to play a less immediate role in practice than more specific legislative provisions protecting investors as discussed below.
The Entrepreneurial Code: specific legislation regulating and protecting certain investors and investment
The Entrepreneurial Code (EC)3 entered into force in 2016 and replaces the previous Investment Law, and other laws regulating and protecting business activity (Dentons, 2015). It aims to increase the consistency and transparency of the applicable legal rules for businesses,4 and investors specifically, and to thereby strengthen investor confidence.
The EC grants all investors protection against direct expropriation, referred to as “nationalisation and requisition”. It provides that seizure of property is only permitted in exceptional cases stipulated by legislative acts and that compensation has to be paid.5 In case of nationalisation, the investor shall receive full compensation for the damages sustained. The investor shall receive the full market value in case of requisition,6 which is to be determined in accordance with the legislation.7
From the provisions it is not clear whether cases of indirect expropriation are covered, i.e. cases where the investor still holds the property title but where government measures have an impact on the property which is considered to be tantamount to expropriation (see below section on “indirect expropriation” under international investment agreements).8
The EC provides generally that investors can obtain damages as compensation for illegal government action or inaction.9 Article 276 provides that investors are entitled to compensation for harm caused by unlawful statutes, and unlawful action or inaction by the Kazakh authorities.10 In contrast to this approach, damages remedies for investors for illegal government action are generally used sparingly under the administrative law of advanced economies, which instead favour non-pecuniary remedies such as annulment or injunctions (Gaukrodger and Gordon, 2012: 24-29; OECD, 2012b).
The EC investment definition is relatively broad, including all types of property. However, the EC also introduces distinctions between different categories of investors and investments with different legal rights. For example, only investments that meet certain criteria, and/or are placed on administrative lists, qualify for some benefits, in particular relating to the stability of the legal framework (see below).11
These complexities can raise a number of issues. In general, Kazakhstan should seek to provide a sound investment climate for all investors in order to ensure that capital is efficiently allocated to its most valuable uses in the market rather than being allocated in light of administrative benefits. Multiple categories of treatment may also give rise to disputes about whether particular investors or investments fall into the specially protected categories. The additional costs of special regimes for different types of investors/investment should generally only be incurred where they are justified by a strong need to encourage particular, well-defined types of investment and where the costs of treating all investors the same are excessive.12
Protection and enforcement of intellectual property rights
The granting and protection of intellectual property (IP) rights, e.g. through patents, trademarks, and their enforcement are an important component of any policy aiming at attracting investment. Protection of IP rights also fosters development and innovation (OECD, 2016a). The protection of IP rights also involves balancing issues: While IP rights provide an incentive to invest in research and development, societies have an interest in having new products priced affordably.13 High levels of IP protection might impede access to pharmaceutical products at affordable prices, for example.
Kazakhstan’s main legal instruments on IP rights include the Civil Code, the Patent Law from 1999, and the Law on Copyrights and Neighbouring Rights from 1996. Kazakhstan has also signed and ratified a number of international IP agreements, including agreements under the WTO, such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).14
The legal framework for IP rights in Kazakhstan has evolved considerably since the country gained independence in 1991. While the 2012 OECD Investment Policy Review described several changes to the legislative and institutional landscape improving the protection and enforcement of IP rights, the enforcement in particular was identified as an area where domestic and foreign operators expressed concerns. Additional changes have occurred in the context of Kazakhstan’s accession to the WTO. In the 2015-16 period alone, six of the main IP laws were amended.15
Protecting different types of IP rights
Patents can be obtained at the national level by filing an application with the patent office of Kazakhstan. In line with international practice, the authorities undertook in 2016 a comprehensive assessment of Kazakhstan’s compliance with the novelty and inventiveness requirements (OECD, 2016a). The protection of minor innovations can be a stepping stone towards patenting: since the amendment of the Patent Law in 2015, so-called utility models allow for such applications. For utility models, there is only a novelty but no inventiveness requirement. Obtaining this type of IP rights needs to be more time-efficient, less cumbersome and less costly in order to be an attractive alternative to patents (OECD, 2016a). Information by Kazakhstan’s National Institute for Intellectual Property (NIIP) shows that the cost for a utility model application is 20% lower than for invention patent application (OECD, 2016a: 80).
Kazakhstan has also adhered to several instruments at the international level that facilitate the filing of patents. Together with Armenia, Azerbaijan, Belarus, Kyrgyzstan, Russia, Tajikistan, and Turkmenistan, Kazakhstan is a member of the Eurasian Patent Organisation (EAPC), which provides for a single patent application procedure. Compared to the application numbers under the national system, the patents filed under EAPC are relatively low (OECD, 2016a: 81). As a member of the Patent Co-operation Treaty, patent applicants can seek protection in all member countries simultaneously.
Specific rules apply to the protection of intellectual property rights in individual areas, such as industrial design, trademarks and appellation of origin, or copyright.16 The Ministry of Healthcare and Social Development is involved in some areas, such as compulsory drug licences. Changes implemented in the WTO accession process include increased protection for pharmacy companies’ of new types of medicine; and modified provisions on the possibility of issuing compulsory licences (OECD, 2016a: 85).
Improving the enforcement of IP rights
Enforcement of IP rights continues to be a challenge and constitutes a policy priority for Kazakhstan (OECD, 2016a: 14). Kazakhstan’s laws provide for the enforcement of IP rights both through civil and criminal proceedings. In civil cases, remedies include injunctions, damages, and accounts of profits. Criminal sanctions under the Criminal Code include fines, correctional work, public works, arrest and imprisonment. The Administrative Code provides for the administrative liability of IP rights infringement, including through fines and the restitution of goods (OECD, 2016a: 75). In addition to the courts, the customs authorities are also involved in the protection of IP rights.
These enforcement mechanisms, however, do not appear to be used effectively yet. The United States noted in their 2015 report on trade barriers that while some efforts have been taken by Kazakhstan, there was a need for applying more effectively customs control against imported IP rights-infringing goods (United States, 2015: 230). The United States also noted that although civil courts have been used effectively in IP rights enforcement, judges often lack technical expertise (United States, 2015: 232). In light of the low number of cases, improving capacity of judges appears to be a better option than creating a special court for IP rights enforcement (OECD, 2016a: 68). The ongoing efforts to improve the functioning of the Kazakh court system and to enhance capacity of judges (see sections below as well as Chapter 5 on investment facilitation) suggest that the authorities are taking the issue seriously.
Regulatory stability and balancing efforts
A substantial degree of regulatory stability is a key element of a good balance between investment protection and the right to regulate
The OECD Policy Framework for Investment recognises that predictability is a key concern for investors. In March 2014, the Kazakh President underlined the importance of the stability of contracts and legislation for the investment climate.17 As noted throughout this report, Kazakhstan has engaged in numerous reforms. While reforms are necessary and valuable in many areas, it is important to bear in mind that regulatory change imposes costs and that repeated changes in particular can cause uncertainties and compliance costs. Regulatory stability has value in itself and should be included in the cost/benefit analysis for new regulation.
Beyond inclusion of restraints on regulatory change as a matter of good general regulatory practices, specific government commitments to provide regulatory stability, through stabilisation clauses in contracts or legislative provisions, may be a tool to increase investor confidence. Specific commitments for regulatory stability should not, however, be seen as a permanent substitute for a broadly sound legislative and regulatory environment. Research suggests that OECD member countries, with high rule of law standards, generally refrain from offering investors specific stability assurances. Where they offer stability assurances, these are typically much narrower than in countries with weaker governance and rule of law standards (IFC, 2009). This suggests that stability assurances are not necessary for an attractive investment climate if the overall legal framework provides for the rule of law and sufficient predictability. As a general matter, they should best be seen as a useful policy to increase investor confidence until an improved overall legal framework ensures adequate predictability and protection for investors.
Stability commitments need to be used carefully. They directly constrain the government’s future ability to regulate economic activity. For example, tax policy designed to encourage particular outcomes – such as decreased consumption of carbon – will be of limited effect if the government must indemnify investors for the increased taxes. Where stability commitments are provided to some investors and not others, they can affect competitive conditions. By their nature, they also apply differently to different investments made at different times, and consequently create high levels of legal complexity.
Many emerging economies provide for a regime for stabilisation commitments for certain types of contracts or investments in legislation.18 This allows the legislature, rather than individual officials, to define the proper scope of stabilisation commitments. The application of the regime to particular contracts or investments is then agreed upon or not in the context of the specific negotiations. This allows the government to limit the application of stability commitments – and the consequent exposure to damages including for regulation needed in the future – to contracts and investments where they are necessary. Kazakhstan appears to have applied a more general regime of commitments that apply automatically to all contracts or investment of particular types. This may lead to a large number of stabilised arrangements.
Government commitments on stability in the Entrepreneurial Code
Stability commitments can apply to contracts or more broadly to investments. The EC contains both types.
Article 276(3) of the EC contains a stability commitment for investor-state contracts. However, its operation is not fully clarified. The law states only that Kazakhstan guarantees the stability of contracts between investors and state bodies. The notion of stability is not defined.19 Moreover, although there are specific dispute resolution provisions for such contracts (see below the statutory regime for “Investment Disputes” as defined), remedies for breach of the stability commitment are not specified.
The Code provides for exceptions for the fields of import, production, sales of excisable goods restrictions,20 national security, health and morality.21 The important issue of environmental regulation, however, is not addressed clearly. The previous Investment Law contained an express exception for environmental measures, but the EC does not. Some environmental measures could conceivably be covered under general headings such as national security22 or health, but such coverage is unclear. The Kazakh authorities have explained that environmental measures do fall under the national security exception.23
The EC also provides for stability commitments for certain investments. A section on “State investment support” contains stability provisions applicable to two types of legislation: i) tax legislation; and ii) legislation “on employment in the field of attracting foreign labour”.24 Protection from change to tax and foreign employee legislation under this regime applies to the investment as a whole rather than to only the investor-state body contract. The impact of regulation on other contracts and aspects of the investment can thus be taken into account.
Only some investments, however, qualify for this stability assurance: “priority investment projects” and “strategic investment projects”. “Priority investment projects” are defined as those carried out by newly established legal entities with activities defined in a list approved by the government and having a certain volume. “Strategic investment projects”, defined in a list, are able to “exert strategic influence on the economic development” of Kazakhstan.25 The list, approved by government decree in 2009, is not subject to any changes, according to the Kazakh authorities.
Government commitments on stability to the extractive industries
Article 30 of the Kazakh Law of Subsurface and Subsurface Use (Subsurface Law) from 2010 provides that investors in this sector shall be guaranteed protection of their rights under the laws of Kazakhstan and that changes and additions to legislation which adversely affect entrepreneurial activity do not apply to contracts entered into prior to making these changes and additions. The Subsurface Law includes carve-outs for legislation relating to national security, defence, environmental safety, health, taxation and customs regulation.
The Kazakh government is currently preparing a new Subsurface Use Code to replace the Subsurface Law. Although earlier reports suggested that the new Code would exclude stabilisation commitments, a preliminary February 2016 draft of the Code still contains stabilisation provisions. Under the draft, legislation which comes into force after the investor’s rights are granted, and which detrimentally affects the investor’s situation, would not apply to the investor. Carve-outs apply for national security, defence, environmental and industrial safety, health care, taxation and customs regulation.26 Issues that appear to be raised by the new draft include defining the meaning of a detrimental effect on the investor’s “situation”, coverage of environmental legislation, and the advisability of automatic application to all new Subsurface investments given the resulting complexity and government liability exposure.
The natural resources sector plays an important role for the country’s economy. This box addresses selected aspects and changes in the legal framework which are relevant for the extractive industries:
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Transparency and corruption
The natural resources sector is often seen at the centre of challenges relating to corruption and a lack of transparency. This sector is also the focus of important initiatives, such as the Extractive Industries Transparency Initiative (EITI). The EITI Standard requirements include transparency of the legal framework and disclosure of relevant information on exploration and production, company payments and government revenues, revenue allocations, social expenditures and the impact of the extractive sector on the economy. Kazakhstan participates in EITI and according to the EITI website, is compliant with requirements set out in the EITI Standard. Increased transparency in this sector is also one of the explicit goals of the 100 steps set out by the Kazakh President Nursultan Nazarbayev to implement institutional reform (see Step 74). In addition to helping combat corruption, transparency can contribute to foster investor confidence and stakeholder dialogue.
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Diversification of the Kazakh economy, local content requirements, and the WTO accession process
Previous OECD work points out that oil-based growth, for example, poses challenges for macroeconomic and financial sector stability and the development of the non-oil economy (OECD, 2016b: 94). Ongoing diversification efforts notwithstanding, the Kazakh economy still relies heavily on the natural resources sector (OECD, 2016b: 118). The legal framework for investment in this sector can have an important impact on diversification efforts: It appears that many of Kazakhstan’s investment contracts in the extractive industries contain so-called “local content requirements”, which can oblige the investors to use for example local personnel or products.
The WTO accession reduces the opportunity for using such a policy tool (see sections on local content policies in chapter 2). In addition, some of Kazakhstan’s existing international investment agreements place limits on performance requirements such as local content requirements.27 Such requirements in future investment contracts must be tailored in light of these new obligations. A transition period seeks to ensure the effectiveness of commitments undertaken in existing contracts (Dentons, 2015).
Kazakhstan has also established mechanisms, such as the National Fund of the Republic of Kazakhstan (NFRK), which seek to ensure that the revenues of the natural resources sector are well-managed and used to allow a diversification of the economy.
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International co-operation on extractive industries
The draft Subsurface Use Code from 2016 contains a reference to international co-operation,28 through which the country seeks to benefit from other countries, as well as international organisations, to create an environment favourable for investment and modern technologies. International agreements, such as the Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of Kazakhstan on Partnership in the fields of Raw Materials, Industry and Technology from 2012, already testify to such co-operation efforts. According to the German government, the agreement seeks to facilitate the access of German companies to natural resources and will also be linked to a contribution from German firms to the industrialisation of Kazakhstan (German Ministry for Economic Affairs and Energy, press release, www.bmwi.de/EN/Press/press-releases,did=474976.html). According to information provided by the Kazakh authorities, the co-operation under the agreement has led to more than 25 investment projects by German companies.
Dispute resolution: the national framework and commercial arbitration
The balancing between investor protection and government’s power to regulate is also at issue in policies relating to dispute settlement.29 For businesses operating in Kazakhstan, it is important to have well-functioning contract enforcement and dispute settlement mechanisms because they help increase predictability in commercial and investment activities. The court system has a fundamental role in enforcing contracts and in settling disputes, both among private actors and between an investor and the state. In addition to the court system, businesses may rely on commercial arbitration, and other alternative dispute resolution mechanisms. The identity and characteristics of adjudicators in different systems may have important consequences for the relative importance that is accorded to investor protection and the power to regulate in concrete cases (which can also create precedents for the future).
The EC generally grants businesses the right to recourse before the Kazakh courts under the procedures established by the Civil Procedure Code (CPC).30 The EC also provides for a wide range of alternative dispute resolution mechanisms, including arbitration and mediation.31
The EC again provides a special regime for “Investment Disputes”, defined as those arising out of contracts between an investor and a state body. Generally, Investment Disputes can be resolved by negotiation or by dispute settlement methods agreed by the parties.32 If the parties fail to settle the dispute by negotiation or the mechanisms agreed upon by the parties, the dispute shall be settled in accordance with any applicable international treaties and the applicable laws of Kazakhstan.33
The domestic courts
There are conflicting reports on the quality of Kazakhstan’s courts although there is evidence of improvement. According to the World Bank’s Doing Business report, contract enforcement and dispute settlement in domestic courts is an area where Kazakhstan has improved substantially over the last years – it now stands 9 in the ranking of 189 economies surveyed (World Bank, 2016: 85).34 The World Bank’s Enterprise Survey results from 2013 showed that only 10% of foreign-owned firms saw the court system as a major constraint and business obstacle. However, other indicators suggest that investors often remain concerned about the reliability of domestic courts and the rule of law. According to EBRD information from 2014, the bank’s Judicial Decisions Assessment found that the quality of commercial judgement was uneven and that “courts are believed to show particular deference to the government and entities in which the state has a substantial interest” (EBRD, 2014: 4). Discussions with stakeholders in Kazakhstan appear to corroborate these findings. Discussions with stakeholders also suggest that problems are largely limited to the lower level courts and that appellate courts and the Supreme Court have both better quality proceedings and higher levels of independence. The functioning of the lower courts is an area where Doing Business report observed improvements.
A new Code of Civil Procedure, which entered into force on 1 January 2016, is one pillar of recent reform efforts. It introduces important changes to the judicial landscape and the functioning of the court system. In line with the 100 steps set out by the President to ensure the rule of law, the Code establishes a “stream-lined” three-tier court system. The system now consists of trials courts at the level of first instance, appellate courts (the courts of Astana and Almaty have an appellate function), and the Supreme Court.
Pursuant to art. 82 of the Constitution, judges are appointed by the President of Kazakhstan. The President also plays a key role in the appointment of the members of the Supreme Judicial Council itself (GRATA International, 2016b). The Kazakh authorities have emphasised that a new law on the Supreme Judicial Council, which entered into force on 1 January 2016, modified the functioning and role of this institution, giving it a more important role in the appointment and promotion processes of judges.
Kazakhstan is also seeking to improve the quality of its judicial personnel. The Law of Judicial System introduces new criteria for the appointment of judges: the required work experience is increased from 2 years to 5 years (for those already working in the judicial system) and 10 years for practicing lawyers. For judges at the Supreme Court, 20 years of work experience are required, at least 10 of which as judges and 5 as judges at a regional court. The performance of the judges is generally reviewed every five years by a Court Jury. An Academy of Justice has been established to foster capacity-building and training activities (GRATA International, 2016a).
The special regime for Investment Disputes provided for in the EC (see above) is further specified in the Code of Civil Procedure. A dedicated panel of judges at the Court of Astana will hear Investment Disputes. The Court, however, is only competent if the parties have not agreed to settle the dispute through other mechanisms.35 Disputes involving “major investors”, defined in the EC as those with a minimum amount of investment, will be heard by a dedicated division of the Supreme Court, unless agreed otherwise by the parties (Baker & McKenzie, 2015).36 While there can be value in offering dedicated venues for certain disputes, Kazakhstan might wish to consider whether jurisdiction should be defined by classes of disputes rather than classes of investors.
Alternative dispute resolution mechanisms
The additional alternative dispute resolution mechanisms in the CPC, further specified in the Law on Mediation from 2011 (No. 401-IV), and the Law on Arbitration from April 2016 (No. 488-V SAM, “Arbitration Law”), are reportedly intended to reduce the case load of the Kazakh courts.37
Commercial arbitration
The legal framework for arbitration has changed considerably since the last Review, most recently with the Arbitration Law which entered into force in April 2016. The new law consolidates the Arbitration Tribunal Law and the International Arbitration Law from 2004, applicable to domestic and international arbitration respectively.
The Law defines which disputes can be brought to arbitration and lays out the formalities that the parties have to follow in their arbitration agreements.38 Moreover, it contains provisions on the composition of the arbitral tribunals and requirements to be met by the arbitrators.39
The Arbitration Law provides for arbitration between private parties. It also allows for arbitration between private parties and state entities (such as governmental authorities, states enterprises, and legal entities where the state owns more than 50% of the voting shares). In this case, arbitration is subject to approval by the relevant government agency or authority.40 The effectiveness of this type of provision in national law should not be over-estimated. Arbitrators in international commercial arbitration cases have frequently refused to allow governments to invoke this type of provision to block arbitration if a government official has signed a contract providing for arbitration (Born, 2014: 727-733).
For disputing parties it is important to know that decisions and awards of arbitral tribunals will be enforced. The Arbitration Law notably provides that when an international treaty establishes rules other than those found in the laws of Kazakhstan, the rules of the treaty shall apply. Kazakhstan is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also called New York Convention), the leading international treaty applicable to commercial arbitration. The New York Convention addresses the recognition and enforcement of foreign arbitral awards (i.e., those made in a country other than Kazakhstan) and for certain awards made in Kazakhstan.41 The national courts of contracting parties to the New York Convention must generally recognise arbitration awards rendered in other contracting parties, subject to narrow exceptions, and enforce the awards in accordance with their rules of procedure. Since Kazakhstan is a contracting party to the New York Convention, investors that have prevailed in arbitral proceedings against Kazakhstan know the conditions under which the awards will be recognised and enforced in Kazakhstan. The New York Convention also facilitates the recognition and enforcement of Kazakh awards in third countries that are party to it.
The Arbitration Law further provides for the establishment of a Chamber of Arbitration. While the primary purpose of the Chamber is to strengthen arbitration as a dispute resolution mechanism under the laws of Kazakhstan, it also has logistical support functions for arbitral proceedings.42 High-profile recent arbitration cases reported on in the press suggest that arbitration is of practical relevance, not only for disputes among businesses, but also for the government in its dealings with businesses operating in Kazakhstan (CNBC, 2016).
Mediation
Despite the adoption in 2011 of a Mediation Law (28 January 2011 No. 401-IV), mediation does not appear to be often used in Kazakhstan. The 2016 reforms of the Entrepreneurial and Procedural Codes seek to further promote mediation as an alternative dispute settlement mechanism. Court-assisted mediation proceedings, in which judges can be requested by the parties to assist them in their mediation efforts, are actively promoted. The judges’ role is then to review and approve a mediation agreement (CIS Arbitration, 2016). As reported above, one of the rationales behind these mediation mechanisms is to reduce the case load of the courts.
The Astana International Financial Centre and its proposed autonomous court system
Building on the model of the Dubai International Financial Centre,43 the Kazakh authorities are seeking to establish the Astana International Financial Centre (AIFC). On 7 December 2015, President Nazarbayev signed the constitutional law “On the Astana International Financial Centre” (AIFC law) (The Astana Times, 2015). The declared objective is to attract investments to Kazakhstan by creating an attractive environment for financial services; develop the Kazakh securities market and ensure its integration with the international capital markets; develop a market of insurance services, banking services and Islamic finance; develop financial and professional services based on the best international practices; and acquire international recognition as a financial centre.44
The AIFC will reportedly have its own autonomous court system that will use English for court proceedings, apply English law and be staffed by foreign judges. It will have jurisdiction to settle disputes involving AIFC members. This will require major amendments to the Constitution and core legislation such as the Tax Code and the CPC (Dentons, 2015).
International investment agreements
Kazakhstan has a network of international investment agreements (referred to as investment treaties or IIAs).45 Investment treaties typically protect existing covered investments against expropriation without compensation and against discrimination, and give covered investors access to investor-state dispute settlement mechanisms (ISDS) to enforce those provisions (see Box 3.2 for common features of IIAs). Kazakhstan started signing investment treaties in 1992, right after the country gained independence. In addition to 47 bilateral investment treaties, 44 of which are in force, Kazakhstan is also a party to regional and multilateral agreements. These include the Energy Charter Treaty (1994), the Eurasian Investment Agreement (2008), and the Treaty on Eurasian Economic Union (2014). The investment chapter of the Eurasian Economic Union-Viet Nam free trade agreement only applies between the Russian Federation and Viet Nam.
IIAs, entered into between two or more countries, typically offer covered foreign investors substantive and procedural protection. They provide additional protection to covered foreign investors beyond that provided in national legal frameworks to all investors and/or to foreign investors specifically.
Substantive protections generally include protection against expropriation without compensation and against discrimination by, for example, guaranteeing that covered foreign investors will be treated no less favourably than investors from the host state (national treatment, or NT) or third states (most-favoured nation treatment, or MFN). Particularly important for policy considerations are guarantees of fair and equitable treatment (FET) or FET in accordance with the international minimum standard of treatment of aliens under customary international law (MST). The FET provision is subject to widely varying interoperations and has been the one most frequently invoked by foreign investors in recent years. Additional clauses in IIAs can facilitate the transfer of profits, or limit or exclude certain performance requirements, such as local content rules.
IIAs can also reduce barriers to investment. They can include commitments to open sectors to more foreign investment (market access).They can also give prospective covered foreign investors certain rights, typically by extending the NT and MFN standards to those seeking to make investments.
IIAs usually provide for procedural venues to enforce the host state’s obligations under the substantive standards. Today, most IIAs give investors the right to bring claims themselves against the host state before international arbitration tribunals for an alleged breach of the IIA – the so-called investor-state dispute settlement mechanism (ISDS) (Pohl et al., 2012; Gaukrodger and Gordon, 2012). The number of ISDS claims under IIAs has risen significantly in recent years to over 600 known claims currently (UNCTAD, 2015). Precise numbers of the cases are difficult to establish because of the confidentiality of certain proceedings.
The sections below give an overview of selected provisions in Kazakh IIAs on the basis of a sample of publicly available treaties.46 Kazakhstan’s legal and institutional framework for settling disputes between the state and foreign investors is also presented. While the review of the substantive and procedural provisions in Kazakhstan’s investment treaties shows that the language of key treaty provisions has evolved in recent treaties, this is not the case for the majority of Kazakhstan’s existing treaties.
The ongoing preparation of a new model investment treaty by Kazakh authorities could serve as an opportunity to ensure that recent practices are reflected in Kazakhstan’s future agreements. In this context, Kazakhstan should also review the consistency of its existing treaties with recent approaches in international treaty policy and its investment policy. Table 3.3 below provides information on the temporal validity of Kazakhstan’s investment treaties in this regard. Dates for renewal or termination of treaties should inform Kazakhstan’s timetable to address its treaties with its existing treaty partners.
Degree of specification of investment protection provisions in Kazakhstan’s investment treaties
International practice shows that investment protection standards in older IIAs have often been relatively vague. This gives investment arbitrators broad discretion to interpret and thereby determine the scope of protection they provide. Many provisions in Kazakhstan’s existing IIAs, in particular older treaties, lack specific language to indicate government intent as to their scope and meaning.
Direct and indirect expropriation
Kazakh IIAs require host states not to expropriate unless the measures are taken in the public interest, on a non-discriminatory basis and under due process of law, with prompt, adequate and effective compensation. The relevant provisions typically address the determination and modalities of payment of compensation as well. Kazakh treaties distinguish and cover both direct and indirect expropriation.47 Direct expropriation generally refers to an actual taking of legal title to property or a physical seizure of property by a government. As a result, the host state is enriched by, and the investor is deprived of, the value of the expropriated property.
Indirect expropriation is a more complex and sensitive issue. Regulatory action or other behaviour by a government can sometimes have a dramatic impact on an investment, without involving a formal transfer of title or outright seizure. At the same time, provisions on indirect expropriation can affect the host state’s policy space because regulatory action can give rise to claims for compensation. Because most policy issues relating to expropriation arise with regard to indirect expropriation, this section focuses on Kazakhstan’s policy in that area.
Unlike the national law, discussed above, most Kazakh IIAs explicitly cover indirect expropriation, but none of the treaties clarifies the circumstances under which regulatory measures do not amount to expropriation and where therefore no compensation has to be paid. This gives arbitrators discretion to draw the line between indirect expropriations that entitle the covered investor to compensation, and legitimate regulation that may have a significant economic impact on the investor without obligating the government to pay compensation. Under treaties that refer only generally to indirect expropriation, ISDS tribunals have used varying approaches to determining whether an indirect expropriation has occurred (UNCTAD, 2012).
In order to address this challenge, a growing number of countries have started to include specifications on indirect expropriation. These frequently aim to ensure that non-discriminatory measures, designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, cannot constitute an expropriation.48 Including a similar specification in its treaties would allow Kazakhstan to foster the balance between the government’s right to regulate and investor protection, and also help increase the predictability of the legal framework for expropriation for both investors and the government.
Fair and equitable treatment and the international minimum standard of treatment of aliens
Fair and equitable treatment (FET) is another standard at the centre of investment treaty claims and treaty policy. Since 1997, investors worldwide have invoked the standard in 341 claims and tribunals have found a breach in 129 of the cases.49 Kazakh IIAs typically grant FET to covered investors. These treaties often merely state that foreign investors shall be accorded FET without providing further specification. Provisions providing generally for FET have been considered or applied by tribunals in a broad range of claims and there have been widely different interpretations by some arbitral tribunals. Some interpretations of FET are seen as having a significant impact on the right to regulate.
Internationally, there is a growing trend to define FET provisions in treaties to give more direction to arbitrators by clarifying the original intent of the contracting parties. Two approaches to defining FET are outlined in Box 3.3 below. Efforts to include more specific language on FET do not appear to be reflected in recent Kazakh treaties.50
Two important approaches to further specifying the scope of fair and equitable treatment have emerged:
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Express limitation to the minimum standard of treatment under customary international law (MST): This approach has been used in a number of major recent treaties in Asia and the Americas. A FET provision limited to MST has been repeatedly interpreted under NAFTA. It has been interpreted more narrowly than FET provisions under other treaties. NAFTA governments have also had much greater success than other governments in defending FET claims (UNCTAD, 2012: 61). In addition to the limitation of FET to MST, the Trans-Pacific Partnership agreement (TPP), which is a largely built on US practice, specifies that the mere fact that government action is not consistent with an investor’s expectation does not constitute a breach of FET (Art. 9.6(4). Art. 9.6(3) and (5) contain further specifications).
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Defined lists of elements of FET: The EU’s proposal for the Transatlantic Trade and Investment Partnership (TTIP), the EU-Viet Nam FTA and the CETA agreement made public in 2016, contain a defined list of elements of the FET provision. This approach lists the elements that can constitute a breach of the standard, namely denial of justice, fundamental breach of due process, targeted discrimination on manifestly wrongful grounds, and abusive treatment of investors. While it is a closed list, this approach is broader than some interpretations of MST. Arbitration tribunals cannot add new elements. Only the Parties may agree to add further elements to the list. The article also provides that the tribunal “may take into account” (or “will take into account”, in EU-Viet Nam FTA) specific representations that created legitimate expectations. Other defined list approaches are also used. For example, the ASEAN-China Investment Agreement (2009) limits the application of its FET provision to cases of denial of justice (Art. 7).
Both options are more specific than the broad language of treaties that only refer to “fair and equitable” treatment. This does not mean, however, that issues of interpretation may not arise. The content of the minimum standard of treatment, for example, is subject to debate as are a number of elements in the defined EU lists.
Given the centrality of FET to many investor claims and the uncertainty of its meaning, clarification of government intent could improve predictability for both governments and investors. Kazakhstan might wish to reflect the more specific language found in recent international treaty practice in its own policy.
Most-favoured nation treatment
Most of the investment treaties entered into by Kazakhstan reviewed for this report contain most-favoured nation (MFN) treatment provisions which guarantee that covered investors will not be treated less favourably than those of third states. Similarly to the other investment treaty provisions reviewed above, the Kazakh IIAs typically use general language to accord MFN treatment to foreign investors. The meaning of general wording in an MFN clause has been subject to different interpretations. The ensuing uncertainty creates costs for governments, some of which have responded by providing more specific language on the scope of the MFN provision.
With respect to investment protection granted to nationals of third states in investment treaties, one important element is the question of whether the MFN provision only applies to substantive protection provisions – such as the indirect expropriation or FET provisions discussed above – or also to procedural aspects, and notably the ISDS mechanism (Dolzer and Schreuer, 2012). On this particular question, some countries provide more specific language, and some specifically provide that the MFN clause does not apply to ISDS available to investors under IIAs.51 While such specifications appear lacking in Kazakhstan’s investment treaties, the treaty with Japan does not specifically exclude access to ISDS from the scope of MFN, but provides that MFN applies to access to the courts of justice and administrative tribunals and agencies.52
Other recent international agreements provide further specifications that Kazakhstan might wish to consider: CETA provides that MFN substantive obligations in other investment treaties do not constitute treatment in themselves; only measures adopted and maintained at the domestic level constitute treatment covered by the MFN provision.53 Some contracting parties to the TPP have specified that the MFN provision does not cover investment treaties already in force.54 This may also help to ensure that efforts to specify investment treaty language in new treaties are not circumvented by covered investors by invoking potentially more favourable provisions included in older treaties.
Balancing the right the regulate and investor protection through exceptions clauses
Investment treaty provisions, such as the expropriation and FET provisions discussed above, affect the balance between investor protection and the right to regulate: their design, and application by tribunals, determines which government measures may be successfully challenged by investors. There is a growing recognition that some versions of FET and indirect expropriation provisions reduce the governments’ policy space.
To seek to protect certain types of regulation from challenge, Kazakhstan’s treaty with Japan provides for general exceptions clauses, apparently inspired from international trade law.55 Exceptions clauses are increasingly used as a tool to help achieve an adequate balance between investor protection and governments’ right to regulate. The rationale for these clauses is to ensure that the host state will not be prevented from implementing measures that pursue specific regulatory goals providing certain requirements are satisfied. Unlike clarifications limited to a particular treaty provision, like for indirect expropriation addressed above, these provisions can protect measures that satisfy their criteria from challenge under the treaty as a whole. This type of clause, however, appears to be the exception in the Kazakh treaties.
In the treaty with Japan, the general exceptions clause is complemented by a more targeted provision relating to the financial services sector.56
A growing number of investment treaties internationally make investment protection conditional on compliance with host state law. Investment treaties, among them some Kazakh treaties, use different ways to ensure that only investments that do not violate host state law are covered and protected. These include making legality a condition for application of the treaties or by defining covered investments as those made “in accordance with” host state law.57 Several arbitration tribunals have interpreted such provisions as only applying to the time of the making of the investment but not to violations of host state law after the investment has been made. Such requirements encourage investors to be more mindful of their obligations under host state law.
Other provisions seek to influence the actions of governments themselves. In the Japan-Kazakhstan IIA, for example, both countries recognise that it is inappropriate to encourage investment by investors of the other contracting party by relaxing environmental, health, or safety measures or by lowering labour standards.58 Practice suggests that contracting parties have rarely sought to enforce this type of commitment, which is typically subject to state-to-state dispute settlement mechanisms.59 The absence of a venue for other stakeholders to enforce those provisions, such labour organisations for labour standards, for example, is seen as a weakness by some civil society organisations.60
Both the “in accordance with the law” clause and the commitment not to lower standards seek to ensure the quality of investments that are encouraged and protected by the contracting countries under the treaty.
Specifications of treaty language reflect policy choices
More specific language in investment protection provisions would lead to increased predictability and thereby benefit both investors and governments. The specifications reflect policy choices and also play a crucial role in the quest for balance between investor protection and governments’ right to regulate. In some cases, the specifications may affect the degree of protection for covered foreign investors. Policy-makers need to carefully consider the costs and benefits of these choices, and their potential impact on foreign investors and domestic investors, as well as on the host state’s legitimate regulatory interests and its exposure to investment claims.
IIAs have come under increasing scrutiny by a variety of stakeholders, including civil society and academia, but also by contracting parties to IIAs themselves. Critics argue that international investment agreements unduly restrict governments’ “right to regulate” and that arbitral proceedings are subject to important flaws. In this process, a number of core assumptions have been challenged. Econometric studies, for example, have failed to demonstrate conclusively that IIAs actually lead to increased FDI flows – a policy goal commonly associated with the investment protection regime (Sauvant and Sachs, 2009). Furthermore, while it has been contended that IIAs advance the international rule of law and good governance in host states by providing mechanisms to hold governments accountable, critics argue that opaque legal proceedings and potential conflicts of interest of arbitrators are contrary to rule of law standards (Van Harten, 2008). Moreover, the availability of international investment arbitration to investors has been seen by some as an instrument that could circumvent, and thereby weaken domestic legal and governance institutions instead of strengthening them (Ginsburg, 2005).
Many governments are engaged in review of their investment treaty policy and the field has been marked by significant reforms in recent years. Several economies, including India and South Africa, have proposed different approaches to substantive and procedural provisions in investment treaties. Other economies, such as the European Union, have proposed new approaches to ISDS specifically (see below). At the same time, a number of countries continue to conclude investment treaties that do not reflect the recent approaches.
Reconsidering policy rationales for different levels of treatment for different types of investors
Treatment of domestic and foreign investors
In general, Kazakhstan should seek to guarantee a sound investment climate for both domestic and foreign investors. Parts of Kazakhstan’s legal framework applicable to investment protection, such as the Entrepreneurial Code from 2016 (as well as the former Investment Law), apply to both domestic and foreign investors. At the same time, the country’s legal framework for investment also contains many provisions, such as those found in IIAs, that cover only some foreign investors. Kazakhstan should consider whether distortions to efficient investment decisions may occur because of more favourable regulatory conditions for certain investors based on nationality. At the same time, many governments see the value or the need to provide certain extra incentives and guarantees to attract foreign investment in a competitive market for that investment. The balance between these interests is a delicate one and may evolve over time.
Increasing complexity of investment obligations towards foreign investors
Different levels of investment protection and liberalisation in Kazakhstan’s various investment treaties also raise policy issues. When countries enter into bilateral and multilateral investment agreements, this may lead to layering of different investment provisions covering the same country relations. The impact of treaty reforms can be negated because covered investors can circumvent them by choosing to bring a claim based on a more favourable treaty. Even though Kazakhstan already has an investment treaty in force with Viet Nam, there is no risk of multi-layering in this specific case: the Eurasian Economic Union-Viet Nam FTA, to which Kazakhstan is a party, provides that the investment provisions only apply between the Russian Federation and Viet Nam.61 Issues of layering may arise, however, with respect to the EU‐Kazakhstan EPCA and future investment provisions.62 In line with the recent EU-Viet Nam FTA it can be expected, however, that any investment chapter would provide for the termination of effects of existing bilateral agreements between EU member states and Kazakhstan, ensuring that no multiple layers of investment protection exist.63
Dispute settlement under investment treaties
Starting in the 1990s, mechanisms for covered investors to bring claims directly against host governments – ISDS mechanisms – for alleged violations of treaty obligations have become a frequent feature of investment treaties. OECD research shows that around 96% of the global IIA stock provides access to ISDS (Pohl et al., 2012). It appears that all of the bilateral investment treaties to which Kazakhstan is a party – all signed in the 1990s or later – contain ISDS provisions. While it is difficult to establish a precise number and status of investment claims due to the confidentiality of certain ISDS proceedings (see Box 3.7), there have reportedly been 15 claims against the Kazakh government and four claims by Kazakh investors against the countries where they invested.64
ISDS has become controversial in a number of jurisdictions, including those that Kazakhstan has treaties with. Some of these jurisdictions are reviewing their ISDS policies and proposing new approaches, which Kazakhstan might wish to consider adopting as well.
Arbitral proceedings and recent reforms
ISDS provisions in existing treaties almost always provide for investor-state arbitration (ISA). ISA generally involves ad hoc arbitration tribunals selected for each case in an approach derived from international commercial arbitration (Gaukrodger and Gordon, 2012). Both the parties and arbitration institutions can be involved in the selection process. The emphasis is on finality and there are no appeals; arbitrators’ decisions are subject only to very limited review.
Proponents of ISA contend that it provides a forum to settle disputes that is independent from both the host state and the investor. The importance of the parties being able to choose arbitrators has been emphasised as a core attraction of arbitration for parties because it arguably ensures that the tribunal is both unbiased and expert in international investment law (Mourre, 2010). However, ISA has been increasingly challenged in recent years. Issues raised in the debate include among other things the characteristics of a pool of investment arbitrators dominated by private lawyers, concerns about inconsistent outcomes, and alleged conflicts of interest and economic incentives among arbitrators and arbitration institutions (Gaukrodger and Gordon, 2012: 43, 58). The European Union has recently rejected ISA and developed a new approach to dispute settlement under investment treaties. It proposes to set up a permanent court and an appellate tribunal to resolve investor-state disputes (the Investment Court System [ICS]). This approach has been included in the EU-Canada CETA and the EU-Viet Nam FTA (see Box 3.6). EU Member States are parties to almost half of the approximately 3000 existing investment treaties, including over 10 with Kazakhstan, and the ICS approach has been supported in public statements by a number of EU Member states.65
Competence over foreign direct investment was transferred from EU Member states to the EU in the 2009 Lisbon treaty. The EU development of the ICS provisions as part of its investment treaty policy follows the outcome of a 2014-15 EU public consultation on the investment provisions in the Transatlantic Trade and Investment Partnership (TTIP), extended public debates about ISDS, and input from the European Parliament and national Parliaments in Europe. The European Commission has explained the ICS as a response to “a fundamental and widespread lack of trust by the public in the fairness and impartiality of the old ISDS model” of ad hoc investment arbitration and a way to help “enshrine government’s right to regulate”.66
The ICS continues to allow for claims against governments by individual covered foreign investors, but seeks to address legitimacy issues associated with such claims in investment arbitration by “introducing the same elements that lead citizens to trust their domestic courts”. These include judges publicly appointed in advance by governments, removal of certain perceived economic incentives and conflicts of interest among adjudicators and appointing authorities, transparency of dispute settlement, and elimination of foreign investor input into the selection of judges in individual cases. The ICS also contains innovative provisions to help investors by accelerating the treatment of claims and facilitating access to dispute settlement for SMEs. Aspects of the system that have attracted interest and commentary include its approach to the enforcement of awards, the selection of judges and appellate members, and the functioning in light of the expected flow of cases.
The EU has proposed negotiations towards a permanent multilateral International Investment Court and appellate tribunal. Canada and Viet Nam have expressed support for such work in their treaties with the EU. Questions remain about how individual treaty versions of the ICS could evolve into or be superseded by a multilateral ICS that would apply to many treaties.
ISA mechanisms in investment treaties are typically subject to only low levels of regulation (Pohl et al., 2012: 39; Gaukrodger and Gordon, 2012). Some issues are addressed by the arbitration rules, but as rules designed for commercial disputes between private parties, they may need adjustment in light of the nature of investment claims. Other issues remain unregulated if the treaties refrain from doing so. For example, in the absence of treaty provisions, ISDS is often non-transparent (see Box 3.7 on the issue of transparency).
The lack of transparency of arbitral proceedings features high on the list of concerns regarding the IIA regime. Investor-state proceedings usually involve issues of public interest: it is at stake when the investor challenges regulatory measures ostensibly or actually taken in the public interest, or when the host state, i.e. the taxpayer, has to pay compensation. Transparency of arbitral proceedings is an important means to shed light on these questions and how they are dealt with. In general, the argument in favour of confidentiality is less convincing than in private proceedings, between two companies, for example.
Beyond regulations in IIAs, regulations on transparency are sometimes provided by arbitration rules. More important consequences on the transparency of arbitral proceedings are to be expected from the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, which came into effect in 2014. Under the Rules, basic information about the dispute has to be made public through UNCITRAL’s Transparency Registry; written submissions by the disputing parties, non-disputing parties and third parties have to be made publicly available; the oral hearings are open to the public and transcripts of those hearings have to be made publicly available; finally, all orders, decisions and awards are made publicly available. The requirements are subject to certain requirements regarding confidential and protected information.
In principle, the Rules apply to any UNCITRAL arbitration under an IIA that was concluded on or after 1 April 2014. (This is not the case when contracting parties to the IIA exclude the application of the Rules; or when the IIA allows excluding the application and both disputing parties agree to do so). For IIAs concluded before that date, the Rules only apply if the disputing parties agree to the application, or the contracting parties provide for their application on or after 1 April 2014. By signing and ratifying the UN Convention on Transparency in Treaty-Based Investor-State Arbitration, open for signature since 17 March 2015, a country makes the Rules applicable to its IIAs concluded before 1 April 2014.
The available data suggest that Kazakh IIAs also provide only a low level of regulation of ISA.67 For example, few Kazakh agreements specify any time limits for claims against the government.68 Covered investors can also frequently influence the choice of appointing authority for arbitrators through their power to choose between different arbitration rules for their claim. Kazakhstan has made efforts in several treaties to curtail investor influence by giving the International Court of Justice (ICJ) a central role in the appointment process.69 The language of the provisions, however, does not appear to clearly specify in which cases the ICJ acts as the appointing authority. Many other recent treaties eliminate this power for investors completely by providing for a single appointing authority regardless of the arbitration rules selected.70 Kazakh treaties also typically do not expressly address the issue of shareholder claims for reflective loss which have greatly expanded the scope for investor claims (see Box 3.8). The treatment of many issues is in effect borrowed from commercial arbitration practice and may not be adapted to the investor-state dispute context.
Many ISDS claims today are by foreign shareholders for reflective loss. (Shareholders’ reflective loss is incurred as a result of injury to “their” company, typically a loss in value of the shares; it is generally contrasted with direct injury to shareholder rights, such as interference with shareholder voting rights.) Kazakh IIAs generally do not expressly address the issue of claims by shareholders’ reflective loss. Advanced systems of corporate law generally prohibit individual shareholder claims for reflective loss. Only the directly-injured company can recover the loss.
In ISDS claims brought under typical bilateral investment treaties that – like the Kazakh treaties – do not expressly address the issue of reflective loss, arbitrators have consistently permitted shareholders to claim for reflective loss. Outcomes thus differ under advanced systems of corporate law and typical bilateral investment treaties (Gaukrodger, 2013: 32-51).
Analysis and discussion of reflective loss at the OECD have demonstrated that the availability of reflective loss claims raises a broad range of policy issues for governments.71 These include the risk of multiple claims and inconsistent decisions arising out of a single injury, exposure to double recovery, the impact on predictability, hindering settlement, facilitating treaty shopping by investors, and upsetting the hierarchy of claims against corporate assets under corporate law so that a claimant gets better treatment than under normal legal principles.72 To date, no strong arguments have been identified to explain the different approach taken in investment treaties as opposed to advanced corporate law. It is widely recognised by governments that the issue merits further attention.73 Under NAFTA-style agreements, some governments like the United States have consistently opposed the availability of such claims and the applicable law is subject to some uncertainty. TPP generally follows the NAFTA approach in this area. Kazakhstan could consider addressing the issue of reflective loss expressly, for example through clarifications to treaty language.
Enforcement of awards
The international community has developed specific institutions and rules to enforce arbitration awards. As noted above in the section on commercial arbitration, Kazakhstan has adhered to the New York Convention (see above). It is also a contracting state to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) which has over 150 state parties.
The ICSID Convention addresses both the arbitral proceedings and the enforcement of awards rendered under these proceedings. The recognition and enforcement of ICSID awards is governed by the ICSID Convention itself rather than the New York Convention. The ICSID regime is thus more self‐contained in this respect. In particular, ICSID awards cannot be reviewed by national courts of the country in which their enforcement is sought. In contrast, the New York Convention permits national courts to refuse the enforcement of awards for, inter alia, reasons of public policy.
ISDS claims under Kazakhstan’s investment treaties
Out of the 15 investor claims against Kazakhstan, 4 were decided in favour of the state, 4 in favour of the investor (with damages ranging from USD 6 to 497 million), one case was settled (it is unknown whether a settlement payment was made), and 5 cases are still pending. Table 3.1 provides an overview of the cases brought against Kazakhstan and Table 3.2 an overview of the claims by Kazakh investors abroad. These cases suggest that ISDS mechanisms are actively, and successfully, invoked to challenge government conduct in Kazakhstan and therefore play an important role for the country’s legal framework for investment. Moreover, it is important to bear in mind that even when treaties are not formally invoked in arbitral proceedings, they can be used by covered investors in their dealings with the government: any settlement negotiation, for example, will take place against the background of the investor’s right to invoke the treaty protection before an arbitral tribunal, thereby potentially strengthening its bargaining leverage.
Decisions about review and possible renegotiation of existing investment treaties should take account of their temporal validity
The analysis of the investment treaties suggests that Kazakhstan might wish to consider reviewing its existing agreements to ensure that they well-reflect government intent and emerging sound practices in recent treaty policy.
Review and renegotiation of investment treaties takes time. It may be more easily conducted without the time pressure of either an imminent tacit renewal for an extended period or its denunciation with the attendant publicity. Kazakhstan should accordingly monitor the temporal validity of its treaties in order to allow it sufficient time to approach treaty partners where appropriate. Kazakhstan’s treaties have varying duration and different mechanisms for renewal and termination. Bilateral investment treaties generally contain, in the final provisions, the definition of an initial validity period; at the end of this period, treaties are often extended tacitly either for an indefinite period or for another fixed term. Denunciation is possible at certain points in time, but requires advance notice. Most treaties define an additional period during which the treaty has effect for existing investments following termination (Pohl, 2013).
Table 3.3 shows for each of Kazakhstan’s treaties the dates of signature and entry into force and key characteristics of their temporal validity (fixed term validity or open-ended validity; indefinite extension or renewal for fixed terms). Treaties that renew for fixed terms require more monitoring, as they limit the possibilities to update or unilaterally end the agreement. For all treaties, Table 3.3 also shows additional information such as the approximate date when the current period to give notice of denunciation ends (i.e. the last notice date before tacit renewal) and the approximate first date when the treaty could cease to be in force.74
The temporal validity of Kazakhstan’s treaties can also inform discussions on possible joint interpretations of treaty provisions with treaty partners. Joint interpretations can be issued at any time and can be a simpler and faster device than renegotiation to address some aspects of treaty policy providing that the existing treaty text allows sufficient scope to achieve the jointly-desired interpretation. This may often be the case in older treaties with vague provisions. Discussions and exchanges of views with treaty partners about proposed joint interpretations in advance of treaty renewal dates can also help inform future negotiations and decisions about treaties.
Policy recommendations
Adequate levels of investment protection and effective mechanisms to enforce investor rights and government obligations are an important pillar for an attractive investment climate in Kazakhstan. Efforts to achieve an attractive investment climate need to balance investor protection and the government’s right to regulate. Over the last years, Kazakhstan has continued to work on improving the policy and legal framework for the balancing of investor protection and the power to regulate. At the same time, continuing legitimate concerns by investors and other stakeholders need to be taken seriously. The Kazakh authorities might wish to consider the following recommendations to further improve the country’s policy framework for investment.
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Bear in mind that regulatory change imposes costs. The analysis of Kazakhstan’s legal framework reveals that the rules applicable to investors have changed considerably over the last years. While reforms are necessary and valuable in many areas, it is important to consider that repeated changes can cause uncertainties and compliance costs.
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Consider policy rationale for offering different levels of protection to different groups of investors. While there can be value or the need to provide certain extra incentives to attract specific investors, e.g. foreign investors or investors in certain sectors and projects, Kazakhstan should seek to guarantee a sound investment climate for all investors and consider whether distortions to efficient investment decisions may occur.
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Continue efforts to improve functioning of the court system. Recent improvements in indexes and surveys suggest that Kazakhstan is on the right way towards enhancing the quality of its court system. These efforts should be further strengthened.
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Ensure that timely preparation of new rules and regulations does not come at expense of their consistency and clarity.
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Focus on establishing a regulatory environment which enhances investor confidence. Stability assurances should be used carefully because they directly constrain the government’s future ability to regulate. They should be seen as a useful tool to increase investor confidence until an improved overall legal framework ensures adequate predictability and protection.
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Specify treaty language to ensure that treaties accurately reflect government intent. Treaty provisions in the vast majority of Kazakhstan’s treaties are relatively broad, leaving arbitrators a lot of leeway in determining the actual scope of protection they provide. The absence of clear government intent for many of these provisions may pose significant challenges for the government in the quest for balance between investor protection and its own power to regulate.
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Review existing investment treaties. Kazakhstan has stated that it is currently reviewing its investment treaty policy. As part of this initiative, the authorities should seek to ensure improved treaty design is also reflected in Kazakhstan’s network of existing treaties.
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Manage liability risks under investment treaties actively. The authorities should seek to ensure that different government agencies and officials are aware of treaty policy and the obligations it entails. Efforts to improve the management of risks could include training programs for government officials and the creation of dispute prevention and management mechanisms.
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Pohl, J., K. Mashigo and A. Nohen (2012), “Dispute Settlement Provisions in International Investment Agreements: A Large Sample Survey”, OECD Working Papers on International Investment, 2012/02, OECD Publishing, Paris, dx.doi.org/10.1787/5k8xb71nf628-en.
Pohl, J. (2013), “Temporal Validity of International Investment Agreements: A Large Sample Survey of Treaty Provisions”, OECD Working Papers on International Investment, No. 2013/04, OECD Publishing, dx.doi.org/10.1787/5k3tsjsl5fvh-en.
The Astana Times (2015), “President Signs Law on Astana International Financial Centre”, 8 December 2015 astanatimes.com/2015/12/president-signs-law-on-astana-international-financial-centre/.
UNCTAD (2012a), Expropriation, Series on Issues in International Investment Agreements II, unctad.org/en/Docs/unctaddiaeia2011d7_en.pdf.
UNCTAD (2012b), Fair and Equitable Treatment, Series on Issues in International Investment Agreements II, unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf.
United States (2015), National Trade Estimate Report on Foreign Trade Barriers, ustr.gov/sites/default/files/2015%20NTE%20Combined.pdf.
US Department of State (2015), Bureau of Economic and Business Affairs, “2015 Investment Climate Statement – Kazakhstan”, May 2015, www.state.gov/e/eb/rls/othr/ics/2015/241613.htm.
World Bank (2015), Investor-State Conflict Management: A Preliminary Sketch, E15 Initiative, November 2015, e15initiative.org/wp-content/uploads/2015/09/E15-Investment-World-Bank-Group-FINAL.pdf.
World Bank (2016), Doing Business, Kazakhstan, Washington, DC, www.doingbusiness.org/data/exploreeconomies/~/media/giawb/doing%20business/documents/profiles/country/KAZ.pdf?ver=3.
Notes
← 1. Article 6(2), Constitution.
← 2. Article 14, Constitution.
← 3. The analysis of the Entrepreneurial Code and other laws and regulations has been developed on the basis of unofficial English translations of the text. The terms used in the analysis might therefore not necessarily reflect the actual meaning of the official text or government intent more broadly.
← 4. See for example article 7, Entrepreneurial Code, on the inviolability of property.
← 5. Article 279(1), Entrepreneurial Code. According to information provided by the Kazakh authorities, the compensation paid in case of nationalisation shall include the loss of expected gains, whereas the payment in case of requisition only corresponds to the fair market value, to be determined pursuant to the provisions of the Law on Evaluation Activity from 30 November 2000.
← 6. Under article 253, Civil Code, requisition is defined as: “In cases of natural calamities, accidents, epizootic epidemics, and under any other circumstances which have an extraordinary nature, property may be requisitioned in the interests of the society upon the resolution of the state bodies from an owner in accordance with the procedure and on the conditions established by legislative acts, with the payment to him of the value of the property (requisition).”
← 7. Article 279(2)-(4), Entrepreneurial Code.
← 8. According to information provided by the Kazakh authorities, “conditions similar to expropriation through […] governmentmeasures [are] impossible”, suggesting that indirect expropriation may be covered by the expropriation provisions as well.
← 9. Similar provisions are also included in article 9(5), Civil Code, applicable to citizens and legal entities generally.
← 10. Article 276(1)-(2), Entrepreneurial Code. Investors must be accorded “full and unconditional” protection of the rights and interests provided by the Constitution, the Code and other normative legal Article 274, Entrepreneurial Code: “Major investors” are defined as those investing not less than two million times the monthly calculation index, which was set at 2 121 (two thousand one hundred twenty-one) tenge on 1 January 2016.
← 11. Articles 283 and 289, Entrepreneurial Code, in particular acts, and international treaties ratified by Kazakhstan.
← 12. See Articles 283 and 289, Entrepreneurial Code, in particular.
← 13. According to information provided by the Kazakh authorities, the different categories exist to support development of priority economic sectors, such as food processing, chemicals, and manufacturing.
← 14. See OECD Policy Framework for Investment, 2015: 26.
← 15. See website of the World Intellectual Property Organisation for the full list of agreements: www.wipo.int/wipolex/en/profile.jsp?code=KZ.
← 16. These include the Law No. 456 of26 July 1999 on Trademarks, Service Marks and Appellations of Origin (as amended up to Law of the Republic of Kazakhstan No. 378-V of 31 October 2015) (2016); the law on Patents of the Republic of Kazakhstan No. 427-I of 16 July 1999 (as amended up to Law of the Republic of Kazakhstan No. 378-V of 31 October 2015) (2016); the law of the Republic of Kazakhstan No. 422-I of 13 July 1999, on the Protection of Selection Achievements (as amended up to Law of the Republic of Kazakhstan No. 378-V of 31 October 2015) (2016); the Law of the Republic of Kazakhstan No. 6-I of 10 June 1996, on Copyright and Related Rights (as amended up to Law of the Republic of Kazakhstan No. 419-V of 24 November 2015) (2016); the Law of the Republic of Kazakhstan No. 300-V of 7 April 2015, on Amendments and Addenda to Some Legislative Acts of Kazakhstan on the Issues of Legal Regulation of Intellectual Property (2015); and the Law No. 217-II of 29 June 2001, on Legal Protection of Layout Design of Integrated Microcircuits (as amended up to Law of the Republic of Kazakhstan No. 382-V of 31 October 2015) (2015).
← 17. These areas are addressed in more detail in OECD (2016a), Boosting Kazakhstan’s National Intellectual Property System for Development and Innovation.
← 18. See web-site of the Prime Minister of Kazakhstan: “Kazakhstan investment climate needs clear and transparent rules”, 12 March 2014, https://primeminister.kz/news/show/21/investitsionnyj-klimat-rk-nuzhny-chetkie-i-prozrachnye-pravila-igry-/12-03-2014?lang=en.
← 19. Peru for example offers a legal stability agreement to local and foreigners who have invested more than USD 10 million in the mining or hydrocarbon sectors, or USD 5 million in any other financial activities. The legal stability agreement only offers “Stability of non-discrimination rights, Tax Income Regime applicable to investors, free disposal of currencies and rights to make remittances of gains, profit and royalties, applicable to foreign capitals”. The validity of the Agreement is 10 years, unless the underlying concession contract has a longer validity period. See the Peruvian investment promotion agency’s website. Similarly, Guinea’s amended mining code from 2013 provides that stabilisation commitments regarding the tax regime are limited to 15 years and specifically excludes certain aspects of the tax regime that cannot be stabilised at all. While the code thus sets general rules for stabilisation, the mining concessions will contain more specific provisions (see article 182 of the Mining Code Guinea (2013)).
← 20. According to information provided by the Kazakh authorities, stability shall ensure the “inalterability of terms and conditions of the contract”.
← 21. Defined in article 279, Tax Code.
← 22. Article 276(3), Entrepreneurial Code.
← 23. See for example AEQUITAS Law Firm, Briefing, 28 December 2015: http://aequitas. kz/upload/files/Information%20Memorandum_Entrepreneurial%20Code%20of%20 the%20Republic%20of%20Kazakhstan.pdf.
← 24. The definition of “national security” under article 4 of the National Security Law from 2012 lists “environmental security” as of it its components.
← 25. Article 289, Entrepreneurial Code.
← 26. Article 284, Entrepreneurial Code.
← 27. See Article 9, draft Code “On Subsurface and Subsurface Use” from February 2016.
← 28. See for example the agreement signed between Kazakhstan and Japan (Article 7, see Table 3.3).
← 29. See Section VI, draft Code “On Subsurface and Subsurface Use” from February 2016.
← 30. The OECD Conference on Investment Treaties discussed the search for improved balance through new institutions or improved rules for dispute settlement including the new Investment Court System developed by the European Union. A summary is available here: www.oecd.org/daf/inv/investment-policy/OECD-investment-treaties-2016-summary.pdf.
← 31. Article 301, Entrepreneurial Code. The CPC is available at: http://adilet.zan.kz/kaz/docs/K1500000377.
← 32. Article 303, with further details inarticles 302-305, Entrepreneurial Code
← 33. Article 296(1) and (2), Entrepreneurial Code.
← 34. Article 296(3), Entrepreneurial Code.
← 35. Doing Business measures the time and cost for resolving a standardised commercial dispute through a local first-instance court. It also evaluates whether a series of good practices that promote quality and efficiency in the court system has been adopted (World Bank, 2016: 84). It is worth noting that changes in investment climate captured by World Bank’s Doing Business do not necessarily reflect the quality, transparency, and predictability of investment-related policies, laws and regulations, nor the consistency in their implementation. The reforms focused primarily on improving such rankings may hence miss the mark in terms of improving factors that truly matter for investors.
← 36. See article 296, Entrepreneurial Code.
← 37. Article 274, Entrepreneurial Code: “Major investors” are defined as those investing not less than two million times the monthly calculation index, which was set at 2121 tenge (around EUR 11 million) on 1 January 2016 (Ernst & Young, 2016).
← 38. For additional reports, see CIS Arbitration Forum, “New ADR Regulations enacted in Kazakhstan”, 26 January 2016, www.cisarbitration.com/2016/01/26/new-adr-regulations-enacted-in-kazakhstan/.
← 39. Chapter 1, Arbitration Law.
← 40. Chapter 3, Arbitration Law.
← 41. Article 8, Arbitration Law.
← 42. Article I(1), New York Convention.
← 43. Articles 11 and 12, Arbitration Law.
← 44. See the DIFC’s website for further information: www.difc.ae/about.
← 45. AIFC law, Article 2.
← 46. The term IIA covers both stand-alone treaties and investment chapters in broader free trade agreements.
← 47. The review analysed selected treaties, located on different databases (OECD, UNCTAD).
← 48. See article III, United States-Kazakhstan IIA (1992) or more recently article 12, Japan-Kazakhstan IIA (2014).
← 49. See Trans-Pacific Partnership agreement, signed in February 2016; or the investment chapter proposal of the European Union, presented in 2015, and recent practice in ASEAN.
← 50. The numbers are based on the UNCTAD ISDS database (available at: investment policyhub.unctad.org/ISDS/), which refers to 668 cases. Data on alleged breaches is available for 425 of them.
← 51. See article 8.31, Eurasian Economic Union-Viet Nam FTA, andthe specification in paragraph 2; the investment chapter, which contains more specific language, only applies between the Russian Federation and Viet Nam, see article 8.2(1).
← 52. See recent ASEAN-practice, TPP, or the EU-approach.
← 53. Article 6, Japan-Kazakhstan IIA (2014).
← 54. Article 8.7(4), CETA (2016).
← 55. See for example US Schedule to Annex II list of non-conforming sectors, p. II-US-11 (excluding from MFN any “bilateral or multilateral international agreement in force or signed prior to the date of entry into force”).
← 56. Article 18, Japan-Kazakhstan IIA (2014): “Notwithstanding any other provisions in this Agreement other than the provisions of Article 13 of this Agreement, each Contracting Party may take any measure: (a) which it considers necessary for the protection of its essential security interests; i) taken in time of war, or armed conflict, or other emergency in that Contracting Party or in international relations; or ii) relating to the implementation of national policies or international agreements respecting the non-proliferation of weapons; or (b) in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security. 2. In cases where a Contracting Party takes any measure, pursuant to paragraph 1above, that does not conform with the obligations of the provisions of this Agreement other than the provisions of Article 13 of this Agreement, that Contracting Party shall not use such measure as a means of avoiding its obligations.”
← 57. Article 20, Japan-Kazakhstan IIA (2014).
← 58. See e.g. article 1(1), Egypt-Kazakhstan IIA (1993).
← 59. Article 24, Japan-Kazakhstan IIA (2014). Similar clauses have emerged more broadly in more recent treaty practice: see articles 4 and 5, Austria-Kazakhstan IIA (2010).
← 60. United States Government Accountability Office (2009), “Four Free Trade Agreements GAO Have Reviewed Have Resulted in Commercial Benefits, but Challenges on Labor and Environment Remain”, available at: www.gao.gov/assets/300/292204.pdf. In 2014, the US has brought a claim against Guatemala for an alleged breach of obligations regarding labour rights under CAFTA-DR.
← 61. See Human Rights Watch, Q&A: The Trans-Pacific Partnership, 12 January 2016, available at: www.hrw.org/news/2016/01/12/qa-trans-pacific-partnership.
← 62. See article 8.2(1).
← 63. Article 57 of the EPCA provides that the Parties shall review the legal framework for investment and consider the inclusion of investment protection provisions.
← 64. See investment chapter, article 20, EU-Viet Nam FTA.
← 65. 15 according to UNCTAD plus one in 2016 according to IAReporter.
← 66. See for example statements by the German Ministry of the Economy (www.bmwi. de/DE/Themen/Aussenwirtschaft/investitionsschutz.html) and the French government (www.diplomatie.gouv.fr/en/french-foreign-policy/economic-diplomacy-foreign-trade/events/article/expectations-of-france-and-germany-regarding-the-transatlantic-trade-and).
← 67. Malmström, C. (16 September 2015), “Proposing an Investment Court System”, https://ec.europa.eu/commission/2014-2019/malmstrom/blog/proposing-investment-court-system_en.
← 68. Assessment based on the OECD investment treaty data base and the analysis of selected treaties.
← 69. Article 17(9), Japan-Kazakhstan IIA (2014).
← 70. See for example article 13, Austria-Kazakhstan IIA (2010), which allows the investor to choose between different fora, including ICSID, ICC, and arbitration under the UNCITRAL Rules. The treaty does not provide for a single appointing authority but specifies that, in the absence of any relevant arrangement, either party may invite the President of the International Court of Justice to make the necessary appointments. Similar provisions are also found in other Kazakh IIAs, e.g. with Finlandor the Netherlands.
← 71. See for example article 9.22(3), TPP.
← 72. Cf. Eilís Ferran, Summary of FOI Roundtable 19, pp. 18-19. In addition to shareholders, creditors can also suffer reflective loss and may be able to file claims for such loss under some treaties. Summary available at: www.oecd.org/investment/investment-policy/19thFOIroundtableSummary.pdf.
← 73. Summary of FOI Roundtable 19, pp. 18-19.
← 74. Summary of FOI Roundtable 19, pp. 18-19.