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Soviet legacy affects Kazak investments

By ARIEL COHEN, Special to UPI   |   Aug. 11, 2003 at 3:29 PM   |   Comments

WASHINGTON, Aug. 11 (UPI) -- As Kazakhstan prepares to host a United Nations conference on investment in landlocked countries later this month, its own investment record is decidedly mixed.

Countries with no access to the sea need an extra boost for investment.

"These are countries paying a heavy price for their geographical isolation," said U.N. Under-Secretary-General Anwarul Karim Chowdhury, who will chair the upcoming conference.

Six of Kazakhstan's neighbors, Afghanistan, Mongolia, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, are also suffering from lack of ocean access. But Kazakhstan's geographic constraints are balanced by geological advantages, namely an abundance of oil and gas. As a result, landlocked position has not prevented Kazakhstan's economic growth.

In an Aug. 7 speech, Danial Akhmetov, Kazakhstan's Prime Minister since June 2003, a loyal ally to President Nursultan Nazarbaev, promised to continue systematic reforms. Akhmetov said he encourage competition, to support the development of the industrial sector, and to demonopolize the railways, the telecommunications sector and the electrical power grid.

In 2001, Kazakhstan has reported 13.2 percent in GDP growth, and the government estimates the overall economic growth rate for 2003 at 8.3 percent. With that, experts point out that most of investment flows to the oil and gas sectors while the energy prices are high. If oil prices drop, the rosy picture of double digit GDP growth may come tumbling down, unless the government undertakes serious policy changes.

Impediments to foreign investment remain formidable, especially as far as the rule of law, property rights, and investor protection are concerned. Many foreign companies complained that Kazakhstani government enticed them to invest, only to change rules of the game later. With the exception of the lucrative energy sector, Kazkhastan is not an investor magnet it would like to become. Cronyism and rampant corruption are part of the problem.

Scott Horton, Managing Partner for Emerging Markets at New York-based law firm Patterson Belknap, points out that Kazakhstani courts do not provide reliable dispute resolution venues for investors.

"I have observed many court proceedings, on behalf of clients and while conducting legal research. The (professional) level of Kazakhstani judges, their capacity of legal analysis and the knowledge of laws, their command of facts, are impressive," Horton said. "Unfortunately, their rulings often have nothing to do with either the law or the facts."

Moreover, he adds, local business players in large investment projects have political connections to the president. Political factors are part of the risk, and are often influencing business policy. According to Horton, if political equilibrium changes, projects are endangered, adds. This is beyond what Western companies are willing to tolerate.

Meanwhile, Aigoul Kenjebayeva, a managing partner of the law firm Salan's Almaty office, said that Kazakh courts do not allow enforcement of arbitration awards granted by foreign arbitration tribunals -- a common practice to solve problems arising from international contacts. Many countries around the world have signed the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. And the courts are even more reluctant to recognize awards granted in local arbitration procedures.

Officially, the judges claim that the Kazakh constitution provides for the universal access to courts, therefore, anyone can appeal to a court to dispute the award. In reality, the Kazakh lawyer said, the judges and Prosecutor General's office does not desire to give up lucrative opportunities for bribes

Meanwhile, Energy Minister Vladimir Shkolnik and Finance Minister Erbolat Dossaev, are upbeat about Kazakhstan's investment outlook. "President Nazarbaev authorized industrial development program till 2015, and we want to radically change the Kazakh economy," Dossaev said. "Special tax tools and tax regimes in special sectors which have some real potential, will attract foreign investors."

"To develop high tech industries we need to create conditions which will make Kazakhstan competitive with Silicon Valley in terms of low risks and high profits," Energy Minister Shkolnik said. "State should assume some risk, such as Development Bank, Innovation Fund and Corporation for Export Guarantees."

These are, however, statist prescriptions -- instead of creating a hospitable investment climate and protecting the rights of investors, Shkolnik wants the government to pick winners.

Finance Minister Dossaev blamed the Soviet legacy for Kazakhstan's glacial pace of capital market development - Kazakhstanis do not trust each other and want 100 percent control of assets. They are not comfortable sharing risk and control in privatized properties. Therefore, he says, development of capital markets is lagging behind. Maybe the 33 year old Finance Minister is right in blaming the Soviet legacy.

Evgeny Zhovtis, director of Kazakhstan International Bureau for Human Rights, said "The most difficult task is the reform to introduce real rule of law... That is when the judiciary is independent and will be governed only by the rule of law and when the executive branch of power will not use its political influence to bring about a preferred decision. This is the main challenge ahead.

The second challenge, he said, is overcoming "Soviet mentality" -- how one perceives the relations between the individual and the state. This is a big problem in this country. The people have to free themselves. This could take ten years to achieve or perhaps even two or three generations."

Instead of waiting for the current generation to exit from the scene, Kazakhstani leadership could follow the example of Asian "tigers" it claims to emulate. Job one would be making the court system transparent and professional, eradicating nepotism and corruption. President Nazarabaev, his relatives and friends, plagued by scandals due to prosecutions under Foreign Corrupt Practices Act in New York and for money laundering in Switzerland, could divest from all business ventures. These court proceedings are stemming from seeminly illicit financial dealings with Western companies.

A politically neutral government of technocrats with a mandate to attract investors and treat them uniformly and fairly, could be installed. And, a broad, across-the-board tax holidays for investors, regardless of their nationality and industry, could be introduced.

Finally, the government, working together with the private sector and the World Bank, faces the challenge of closing corporate governance loopholes, which undermine the development of capital markets. Until this happens, Kazakhstani officials will have nothing better to do but blame slow investment pace in the non-energy sector on the "legacy of the Soviet past."


Ariel Cohen, Ph.D., is Research Fellow at the Heritage Foundation in Washington DC. His expertise includes international energy security.

Topics: Ariel Cohen
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