Caspian Crossroads Magazine

The Republic of Kazakstan ranks third world wide and first in comparison with other CIS nations in terms of mineral development, according to a recent supplement in The Mining Journal. This ranking reflects an analysis of political stability, currency stability, levels of governmental corruption and personal and asset security. The most important factor considered, however, is the legislative framework of the country, which is certainly one of the most important factors considered by international investors when determining the viability of a project in an emerging market country. 

This article will briefly discuss several new laws that have contributed to Kazakstan's legislative foundation. Of course, a detailed analysis of each of these laws is beyond the scope of this article, but we can provide a summary of key elements that should have a positive effect on business activity. 

INITIAL STEPS TOWARD THE CREATION OF A LEGISLATIVE FRAMEWORK 

Kazakstan recognized the importance to business of the legislative framework early in its  independence, and, since separating from the Soviet Union, the Republic has been continuously upgrading its legislative and regulatory framework. Many new laws were passed by the  Parliament during Kazakstan's infancy. In the absence of a Parliament, Kazak President Nursultan Nazarbaev has subsequently continued to revise and improve national laws through the issuance of presidential decrees that have the force of law. Now that the new constitution has been confirmed, Parliament will once again return to the task of fine tuning the legislative mechanism and confirming the President's decrees. One of the primary goals in recent adjustments of the laws and recent decrees is preserving and expanding Kazakstan's attractiveness to foreign investors. For the past two years our firm has been representing Kazakstan in the development of its natural resource base, and during this time we have witnessed the progress that Kazakstan has made in strengthening its legislative framework. One measure of this progress is the continuing evolution of the documents that Kazakstan uses in its negotiations with foreign investors. In the past, these documents contained many provisions that were designed to supplement, amend, or completely supersede existing legislation. Recently however, such provisions have become less and less prevalent as the legislation of Kazakstan has become both increasingly comprehensive and more attuned to the sensitivities of foreign investors. 

THE LAW ON FOREIGN INVESTMENT 

The cornerstone of Kazakstan's legislative efforts to attract Foreign investors is the Law on Foreign Investment ("Foreign Investment Law") which was passed on December 27, 1994. The Foreign Investment Law sets forth, among other things, types of state guarantees available to Foreign investors and the procedure for settlement of disputes in enterprises with Foreign investments. 

The Foreign Investment Law provides 12 governmental guarantees that are for the benefit of Foreign investors. Among the most important of these guarantees are: (i) a guarantee against adverse changes in legislation and political situations; (ii) a guarantee against expropriations; (iii) a guarantee against the illegal actions of state bodies and officials; and (iv) guarantees of compensation and reimbursements for certain losses of foreign investors. While the guarantees provided under the Foreign Investment Law may not be perfect-for instance certain governmental payments would be made in Tenge, whereas the foreign investor might prefer dollars the fact that the Republic recognizes that it can encourage foreign investors with special protections in the form of government guarantees is, in itself, a significant symbol of Kazakstan's investor-friendly climate. 

Another foreign investor incentive is the Foreign Investment Law's exemption from certain customs duties. Specifically, the law provides that no customs duties are payable for assets which are imported into the Republic, either for contribution into the charter fund of an enterprise with foreign Investment, or for the internal use of the foreign enterprise. These protected assets can also include the personal assets of the expatriate employees of the foreign enterprise. Exemption from customs duties continues for these same assets if they are exported from Kazakstan. 

OIL LAW 

In 1992, the Republic began formulating an Oil Law to replace the traditional law of the Soviet Union. Many parties provided input on the proposed law, including various Kazak cabinet ministries, international oil companies, and multi-national lending agencies such as the World Bank and the European Bank for Reconstruction and Development. Finally, after three years of discussion, a decree which has the force of law of the President of the Republic concerning Petroleum was issued on June 28, 1995 (the "Oil Law"). 

One advantage of the Oil Law is that it sets forth the preferred method for the awarding of petroleum exploration and production rights through a competitive tender process. This process is designed to enable Kazakstan to receive the most favorable terms possible, but the tender process also has the effect of providing a "level playing field" where all interested foreign investors will be judged upon their merits instead of their connections. The transparency of this process allays internal and external concerns that accompany a major con tract award in any country. 

The Oil Law also allows for private ownership of petroleum once it has been lifted to the surface. In the past, all petroleum was government property, even after it had been lifted. The ability to own the petroleum is, of course, a necessary component for the attraction of foreign equity and international finance. Ownership rights were previously granted on a case by case basis in the contracts between investors and the Republic, and then these rights were confirmed by transaction-specific presidential decrees. The Oil Law now provides that the ownership of lifted petroleum will be as set forth in the applicable contract, thus eliminating the time-consuming and potentially controversial presidential decree requirement. 

Though the Oil Law is a comprehensive law, it also allows for a great deal of contractual flexibility. For instance, three specific types of contractual relationships are authorized by the Oil Law: production sharing, service contracts, and joint ventures. Although the joint venture contract is the preferred contracting model, the type of contract which will be used by a foreign investor is subject to negotiation. 

THE TAX CODE 

A country's tax structure is typically a central factor in a company's decision to locate there. It is not unusual for countries new to dealing with Foreign Investment to discover that their effective tax rate is in excess of 100 percent. It is less common for companies to create individual tax deals-with some deals being more favorable than others. Kazakstan has brought certainty and impartiality to its tax regime through tile recently enacted "Edict which has the force of Law of the President of the Republic of Kazakstan Concerning Taxes and other Compulsory Payments to the Budget", dated April 24, 1995 and effective July 1, 1995. 

Under the Tax Law, there is a 30 percent tax rate on the taxable income of business entities. Taxable income is easily determined under the Tax Law because the law provides a comprehensive listing of what is considered "income" and what deductions are available. Previously, deductible items and the definition of income was separately negotiated in each contract between the government and the Foreign investor. Now the only remaining negotiable section of the Tax Law is Chapter 21 that deals specifically with "Special-purpose" payments for underground resources. These special purpose payments are the various signing, discovery and production bonuses, royalties. and excess profits taxes. 

THE GOLD LAW 

Another significant recent law is the "Decree of the President of the Republic of Kazakstan With the Force of Law "On State Administration of the Relationships Connected with Precious Minerals and Gemstones." adopted July 20.1995. Like the Oil Law the Gold Law benefited from the input of international advisors, including several gold mining companies.  Perhaps the key aspect of the Gold Law is that it has loosened the restrictive requirement that all gold produced in Kazakstan be sold to the National Bank and not exported. Now, pursuant to the Gold Law, a foreign investor or enterprise with Foreign participation may export gold if it has entered into a contract with the Republic. Before the new Gold Law was enacted, a presidential decree was required to confirm any export rights granted by contract. That barrier to successfully completing a transaction no longer exists. 

CONCLUSION 

A fundamental requirement for any country seeking to attract foreign capital is that, in addition to simply offering investors the potential solid returns on their investments, the country must also offer a stable environment in which to conduct business. Kazakstan is working hard to provide investors with such a stable environment. One of the foundations for this environment is the legislative framework that has been assembled by Kazakstan in the past four years, and which has been fine-tuned during the past year. 

References: 

1. The new constitution, which was approved on August 30, 1995, provides that all land. underground and natural resources belong to the Republic. The government of the Republic is authorized to seek the development of these resources by granting licenses and entering into contracts with Foreign investors. 
2.  The Tenge is the national currency of Kazakstan.