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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 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 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
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 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.
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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