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1) There have been many government shifts since the election. What has been the
most impactful and why does it matter? Do any of them shift how the country does
business with foreign companies? Or do business in the energy arena? Do the shifts inside
the financial police structures change how business is done with foreign companies?
Formation of the government has been completed in Kazakhstan on April 14, 2011. It
should be stressed that the majority of the ministers have preserved their posts, including in those
ministries which are responsible for work with the businesses and investors.
In particular, the talk is about Sauat Mynbayev (Minister of Oil and Gas), Аset Isekeshev
(Vice-Premier, Minister of Industry and New Technologies) and Bolat Zhamishev (Minister of
Finance). Moreover, the Prime Minister Karim Massimov has preserved his post. This is
connected with the fact that the Kazakhstan’s president has not yet taken off responsibility from
him to implement the anti-crisis program. Despite the optimistic statements, there are still many
problems in the republic’s economic sphere. The talk is about high risks in the bank system,
weak support of small and medium-sized businesses, growth of unemployment and conflicts
with investors. Also, Karim Massimov should give an account for the first results of the forced
industrial and innovation program. Besides, Karim Massimov suits the president in terms of
preserving a balance of forces in the elite because he has not yet admitted disputed situations
with other representatives of the elite.
As for the new six ministers, among them it’s needed to mention Каirat Kelimbetov who
was appointed to the post of the Minister of Economic Development and Trade. He held the post
of the chairman of the board of Samruk-Kazyna National Welfare Fund (NWF) since October
2008. It should be stressed that this assignment, on the one hand, is downgrading for Каirat
Kelimbetov, because Samruk-Kazyna NWF supervises the assets which comprise about 70 % of
Kazakhstan’s GDP. Especially as, in Samruk-Kazyna, the weakening of Каirat Kelimbetov’s
positions has been observed already in December of the past year when the president’s middle
son-in-law Timur Kulibayev has acquired the right to supervise all state purchases in the Fund.
On the other hand, Каirat Kelimbetov, who refers to the old opponents of the Prime Minister
Karim Massimov, now is in the structure of the government. Probably, the president has made
this because it was needed to have a balance of forces in the government where, along with
Каirat Kelimbetov, also the first deputy Prime Minister of Kazakhstan Umirzat Shukeyev is a
counterbalance to Karim Massimov.
However, the most interesting is the assignment of the president’s middle son-in-law
Timur Kulibayev to the post of the chairman of the board of Samruk-Kazyna NWF. It speaks
that the Timur Kulibayev and Каrim Massimov’s group preserves its strong positions in the elite.
This assignment means also that the president trusts his son-in-law who for a long time already is
included into the list of one of the possible successors to the presidency. Especially as, for the
last several years, especially after 2007, when the weakening of the group of the president’s
other son-in-law Rakhat Aliyev occurred, the middle son-in-law Timur Kulibayev has actively
gained strength in different spheres. Along with the post of the deputy chairman of the board of
Samruk-Kazyna NWF and supervising positions in KazEnergy Association, Timur Kulibayev
also holds a post of the chairman of Presidium of the National Economic Chamber of
Kazakhstan “Atameken Union” which tries to supervise the entire Kazakhstan business. Besides,
Timur Kulibayev enters the structure of the board of some national companies. Thus, his
economic influence has been seriously increased.
Given that Samruk-Kazyna NWF participates in the development and implementation of
many economic programs in Kazakhstan, from now on, Timur Kulibayev will officially
influence the country’s investment policy. Though, one should not expect serious changes in the
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Kazakhstan’s economic policy because the work on the already adopted economic programs will
continue.
First of all, the talk about the republic’s forced industrial and innovation development
program through 2014 with Karim Massimov and Aset Isekeshev being responsible for its
elaboration and implementation. Moreover, the policy will continue on rendering pressure upon
foreign investors in different directions, as it has been already observed in recent years. In
addition, the competition will proceed between various state structures for the right to supervise
activity of foreign companies, first of all, in the extractive industry.
Thus, despite changes in the government, the main governmental priorities in the
investment sphere will be kept.
The main state priorities in the Kazakhstan’s investment sphere
1. More active attracting of investors to the diversification of the Kazakhstan economy.
2. Active governmental policy on changing the legal and regulatory framework with the
aim to increase a regulating role of the state in the Kazakhstan’s extractive and financial spheres.
3. Increase in the Kazakhstan content in the activity of foreign companies.
4. Toughening of environmental control.
5. Continuation of a policy of increasing a state share in large investment projects, first of
all, in the extractive industry.
6. Search for internal resources to credit the economy.
7. Search for new investors.
8. Establishment of the Uniform Economic Space of Kazakhstan, Russia and Belarus.
2) Should an energy firm wish to end their business inside of the country because of
pressure that has been on them. What are the steps they need to take to leave? What are
the steps to ensure their financial and physical assets can leave with them?
On the one hand, the government will not reduce its pressure upon investors in the oil and
gas sphere. For example, one of the immediate tasks of the government will be a settlement of
disputes connected with the development of the Kashagan field, because the international oil
companies Royal Dutch Shell and Exxon Mobil intend to convince the Ministry of Oil and Gas
of the RК to support the simplified project which will reduce their costs by $18 billion – up to
$50 billion. The Concept of the second phase of the Kashagan project will be submitted by the
consortium for consideration in late 2011. However, in regard to the second phase of Kashagan’s
development, the Ministry of Oil and Gas has already declared that the authorities of Kazakhstan
will not adopt the plan if they count its cost overestimated. So, the Kashagan’s contractors
should submit a configuration of the project’s second phase to the Ministry of Oil and Gas for
assessment of its economic feasibility. At the same time, the government has confirmed that the
start of commercial production at Каshagan is expected to occur in late 2012. Earlier (in late
February), the Minister of Oil and Gas Sauat Mynbayev also linked the implementation of the
second phase with the estimate of expenses. The Minister has emphasized that the position of
Kazakhstan will be rigid. It speaks about the intention of the government to refuse to compensate
the companies’ expenses which were spent on the development of this field.
Also, the disputed situation is kept around Karachaganak Petroleum Operating B.V.
where the government is still in negotiations on acquiring a 10 % interest in the consortium.
Moreover, on March 20, 2011, a new law «On State Property» has entered into force in
Kazakhstan which envisages a possibility of nationalization of the enterprises under a threat to
the national security of the RK. Thus, as nationalization it is understood a compulsory, onerous
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alienation of property belonging to the citizens and non-state legal entities. It will be applied
only in extreme cases, when all other forms of withdrawal or coordination with the proprietors of
property are exhausted. Also, nationalization can be applied in order to provide national security.
A separate law will be adopted on each nationalised company. Though reservation is made that
this process should go not violating the interests of foreign and domestic investors. Under the
law, the payment to the proprietor shall be made within two months, after signing the
nationalization act, and at a full market value. However, there are not excluded the abuses under
the new law, when nationalization can be applied as an instrument of raider capture of the
enterprises, including those with participation of the representatives of the Kazakhstan political
and business elite.
It is needed to stress that Article 45-2, point 1 of the new law «On Subsoil and Subsoil
Use» envisages, that if the actions of the subsoil user under the conduct of subsoil use operations
in regard to the subsoil sites (fields) having strategic significance lead to the essential change in
the economic interests of the Republic of Kazakhstan and make threat to the national security,
the competent body has the right to demand for changes and (or) additions in the contract
conditions aimed to restore the economic interests of the Republic of Kazakhstan. The problem
is that the concepts «economic interests of the RК» and «threat to national security» are very
smooth that allow the state structures to interpret them differently.
By the way, according to the recent data of Ernst & Young, 53 % of the interrogated
foreign investors consider the Kazakhstan’s legal and regulatory framework not rather attractive
in terms of transparency and stability. The research contains the results of analysis of the
republic’s investment attractiveness based on the study of opinions of the representative group in
the structure of 204 investors working in the country and the potential ones. The country’s
investment attractiveness is defined by two factors: trust of investors to Kazakhstan in terms of
doing business and their opinion on the country’s ability to compete in the struggle for gaining
direct foreign investments. Among the negative factors the research participants have mentioned
insufficiently developed infrastructure (19 %), complexity of administrative procedures (16 %),
political factors (8 %) and corruption (7 %).
On the other hand, the Kazakhstan leadership is not interested in the large foreign
extractive companies’ leaving the country, because without their technologies and experience it
will be impossible to develop independently such huge and complex fields as Каshagan, Теngiz
and Karachaganak.
However, the more unstable period for investors can start after the working president’s
leaving politics because he acts as a main guarantor of the signed long-term contracts. Here
again it is needed to give the results of the expert poll which was conducted by Risks Assessment
Group in April 2011 concerning the prospects of the Kazakhstan’s economic system after
Nursultan Nazarbayev’s leaving politics.
Results of the expert poll
(April 2011)
What will be the economic There will be nationalization of the strategic
policy of Kazakhstan in the branches of the Kazakhstan economy.
post-Nazarbayev’s period?
A new repartition of property which will lead to
economic stagnation.
The existing status quo will be kept under which
the economy will be developed within the state
9.1%
59.1%
22.8%
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programs taken under the first president.
A final transformation of Kazakhstan into a raw
materials appendage of Russia, China and other
countries that will fix the republic’s peripheral role
in the world economy.
9.1%
The majority of the Kazakhstan experts consider that after Nursultan Nazarbayev, a new
repartition of property can start that will touch also the energy sector. Thus, the risk of instability
in the sphere of property rights can be increased significantly.
As for concrete steps for possible leaving Kazakhstan, there are two variants: conflict and
non-conflict.
The first variant assumes a public conflict of the investor with the government which
can pass to the phase of long proceedings. But, as practice shows, such variant of leaving
Kazakhstan can be lengthy and bring considerable material and moral costs for the investor. The
government will use all existing resources to discredit the investor, both from the viewpoint of
revealing numerous violations of the environmental, labour and other legislation, and from the
viewpoint of initiating criminal cases against the company’s foreign managers. Moreover, the
investors can face a threat of loss of part of their financial and material assets which can be
arrested for the payment of numerous penalties, or till the end of legal proceedings.
As it has been already mentioned above, Article 60 of the new law «On State Property»
envisages that protection of rights of the owner and other entities of nationalised property, the
rights of whom in regard to the nationalised property have stopped or restricted under
nationalization, is made judicially in accordance with the legislation of the Republic of
Kazakhstan. That is, the possibilities of the investor to appeal to the international arbitration
court in this case are limited.
Besides, Article 71 of the law «On Subsoil and Subsoil Use» envisages that the
guarantees established by the present Article do not cover changes in the legislation of the
Republic of Kazakhstan concerning the provision of defensibility, national security,
environmental security and public health. In the law «On Investments», Article 4 «Guarantee of
the legal protection of the activity of investors in the territory of the Republic» also says that
these guarantees do not cover changes and additions which are introduced in the legislative acts
of the Republic of Kazakhstan with the aim to provide national and environmental security,
public health and morality.
Meantime, being aware of possible new judicial conflicts with the large foreign extractive
companies, the Prime Minister Karim Massimov in 2010 has ordered to create a group of
lawyers at the Ministry of Justice specializing in consideration of judicial claims of Kazakhstan
in foreign countries.
The second (non-conflict) variant assumes the following steps:
1. Search for a buyer of that share of participation in the energy projects in Kazakhstan
which the investor wish to sell; or the conduct of negotiations with the country’s government and
Samruk-Kazyna NWF on compensation of the investor’s share in the projects.
It should be stressed that according to the law on Samruk-Kazyna NWF and to the law
«On Subsoil and Subsoil Use», the state, on behalf of the government of the Republic of
Kazakhstan or under the decision of the government of the Republic of Kazakhstan, NWF, or the
national subsoil use company (KazMunayGas), possess the priority right to the purchase of the
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alienated subsoil use right (its part) and (or) share holding (share participation) in the legal entity
possessing the subsoil use right.
2. Thorough analysis of all weaknesses in their activity in Kazakhstan so that to
neutralize possible claims on the part of the state.
3. More active interaction with the Council of Kazakhstan Association of Oil-Gas and
Energy Sector Organizations formed under KazEnergy which plays the role of an additional
instrument of interaction of investors with the government.
Conclusions:
1. Despite toughening of the investment policy in Kazakhstan, the investment climate in
the country will not change sharply under the working president. The new government will
accomplish the already adopted economic programs, including those connected with the
strengthening of control over the activity of foreign companies.
2. The political and investment risks in Kazakhstan can be sharply increased under the
change in power if the working president will not have time to execute the mechanism for
continuity of power. However, in any case, after Nursultan Nazarbayev’s leaving, the new
repartition of property in Kazakhstan is possible. Under coming of the nationalistically incited
leaders to power, the risk of nationalization of the strategic branches of the economy will sharply
grow.
3. For more successful leaving Kazakhstan, the optimal variant is a non-conflict
mechanism for curtailing business in the country. In this case, there is a possibility of the inflow
of the main financial and material assets without a threat of their arrest or confiscation. The
conflict variant is possible only under a real threat of loss of a significant part of assets in
Kazakhstan under certain actions of the government. Under such scenario, it is needed to use
different instruments of pressure on the Kazakhstan’s state structures, which include not only
protection of interests in the court. Though the precedents with BG Group Plc., which tried to
contest its economic interests in the international arbitration court, but then withdrew its claim
and started negotiations with the government, speaks that the external pressure on the
Kazakhstan’s leadership can cause a return negative effect for the investor.
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