Since adoption of Foreign Investment Law in 1994 with the view to lure foreign moneys into the country, Kazakhstan legislation concerning foreign investment has undergone head-spinning changes. In light of current tendencies in the resource-rich countries for "re-visiting" the terms of contracts with major foreign investors (to be fair, some of those contracts were negotiated by CIS states in the desperate nineties disproportionately in the investors' favour), it may be the time now to look back at what protection has been afforded to (or rather taken away from) foreign investors under Kazakhstan law.

Foreign Investment Legislation

In what may be perceived as a first herald of coming changes, in January 2003 the Foreign Investment Law dated 27 December 1994 ("FIL") and the Law on State Support of Direct Investment dated 28 February 1997 ("LSID") were repealed to give place to the "Law on Investment" ("LI"). LI abolished the very concept of formerly quite privileged "foreign investors", which had benefited from the statutory rights to protection against legislative changes and to international arbitration with the host state in case of dispute. Foreign investors now only have contractual and treaty rights to arbitration with Kazakhstan under respective BITs and, in case of investment in the energy sector, under the Energy Charter Treaty.

In addition, instead of the FIL's standard "public interest, no discrimination" test applicable to expropriation, LI uses a narrower approach allowing "forcible taking of investor's property (nationalization, requisition) for state needs in exceptional circumstances prescribed by legislative acts of the Republic of Kazakhstan" (hence, arguably, Kazakhstan has authorized itself to expropriate on the basis of legal acts that it may issue on demand). Instead of a prompt, adequate and effective compensa­tion of damages caused by expropriation, nationalization should be followed by a narrower compensation of damages caused by the state's "adoption of nationaliza­tion acts", and requisition of property should be followed by compensation of the property's market value determined pursuant to Kazakhstan law. The retrospective review of the abolished LSID is also of interest. LSID guaranteed to direct investors that no state monopolies would be formed that would be in control of sale of resources or products of the investor in Kazakhstan. This provision was not reiterated in the LI, and what we see in Kazakhstan today are state-owned monopolies in all major sectors of economy (telecom, oil and gas, electric power), often with at least a de facto power to influence pricing for products and services of the investors.

Arbitration Law and Practice

Looking back, there was a time when Kazakhstan courts had difficulty even recognizing that arbitral awards should be enforced. This followed the decree of the Constitutional Council (now obsolete) in February 2002 to the effect that only courts may constitutionally carry out justice in Kazakhstan and, accordingly, awards issued by domestic arbitral tribunals may be reconsidered by Kazakhstan courts. In a big step forward, in December 2004 Kazakhstan adopted the Law on Inter­national Commercial Arbitration and the Law on Domestic Arbitration, which clearly established that both foreign and domestic arbitral awards must be enforced and should not be reconsidered by courts (except on grounds set forth by the 1958 New York Convention and restated in these laws).

Based on our research of available information on court practice in Kazakhstan, on the one hand, the courts understand and accept this principle now. On the other hand, the courts still often appear willing to refuse to recognize and enforce an award on rather formalistic grounds.

One of the most recent cases in the published case database! for example, is the ruling of the Republic of Kazakhstan's Supreme Court No.3a-43-06 of 12 January 2006 upholding the decision of a lower court to refuse to issue a writ of execution of a foreign award. In this case, the lower court concluded and the Supreme Court agreed that foreign arbitral award could not be enforced because one of the parties to the dispute received its rights under the contract pursuant to an assignment agreement and the assignment agreement did not contain a special language to the effect that the arbitral clause will apply to disputes between the assignee and the other party of the contract. The Supreme Court noted, "an arbitration agreement is an autonomous term of any contract which should be agreed to by the parties in case of a novation."

Pre-emptive Rights of the State

The balance of powers has been further re-allocated in favour of the state by changes to legislation on subsoil use and adoption of legislation on strategic objects. Starting from December 2004, in addition to existing requirement to receive permission from relevant ministry for transfer of mining rights to third parties, Kazakhstan has limited the rights of the mining sector investors to sell their investment to third parties by introducing the "pre-emptive right of the state" to buy subsoil use rights or a stake in a company which holds subsoil use rights whenever they are put up for sale by their owner. Any sale of subsoil use rights to a third party without a waiver of its pre-emptive right by the state would be a basis for revocation of subsoil use rights of the mining company.

In August 2007, an amendment to Civil Code complemented the state's pre-emptive right in the mining sector with the state's pre-emptive right to buy Kazakhstan's "strategic objects" and a requirement to obtain permission from the Government for any sale or pledge of strategic objects. The list of strategic objects was approved on 30 June 2008 and primarily includes state- and privately-owned important infrastructural objects such as airports, nuclear power objects and transport or pipeline infrastructure. Pursuant to new provisions of the Civil Code, any sale or pledge of strategic objects without a Government permission and, in case of sale, also a waiver by the Government of its pre-emptive right would be invalid.

State's Unilateral Termination Right

In October 2007, in what was perceived largely as a means of pressure by Kazakhstan in its difficult re-negotiations with major oil companies over Kashagan production sharing agreement, Kazakhstan famously amended Subsoil Law's Article 45-2 to allow itself to unilaterally change and terminate mining contracts relating to deposits "of strategic importance" in the event the subsoil users/investors under such contracts substantially change the economic interests of Kazakhstan and create a threat to Kazakhstan's national security. To our knowledge, to date the Republic has not exercised its unilateral amendment and termination right under this contract, but it did manage to get a larger participatory stake in Kashagan consortium for its national oil company.

Proposed Tax Changes

The Government and the Parliament are now in discussions of the new draft Tax Code, which increases the tax burden of the mining sector from 49% to 62%. The proposed changes include annulment of the current Tax Code's provision that protects all mining contracts concluded before 1 January 2004 from changes in tax legislation and abolition of "production sharing agreement" format for subsoil use contracts (except for those concluded before the new Tax Code). The investors who came to Kazakhstan in the nineties based on lucrative deals, the extended foreign investor protection regime and a guarantee of contract and applicable law stability are finding themselves in an increasingly different and perhaps self-righteous environment. When national security interests weigh in, it seems, the pacta sunt servanda principle looses its urgency.