Johanna Popjanevski - The Central Asia-Caucasus Analyst

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12Central Asia-Caucasus Analyst, 12 December2007IMPLICATIONS: It is possible to outline severalphases in Kazakhstani legislation on subsurface use.The first, an initial period of legislativedevelopment, began with the declaration ofsovereignty in 1990 and lasted until 1996. The 1995Petroleum Law and 1996 Subsurface and SubsurfaceUse Law marked the beginning of the second phase,which lasted until 1999. That year saw significantamendments to these two laws, marking the start ofthe third phase, which lasted until the 2005 Law onProduction Sharing Agreements. The third phasealso saw the development of model contracts, a newLaw on Investment in 2003, and amendment of theTax Code coverage of production sharingagreements (PSAs). The 2005 Law on PSAs, whichgives special attention to offshore petroleumdeposits, may be considered to have inaugurated afourth phase of legislation, foreshadowed bychanges in 2004 in theinvestment tax regime andcomplemented in 2006 by anew Environmental Code.Western observers are of theopinion that the consortiumcould proceed to arbitration ifit really wished to do so,although its Westernindustrial leaders haveconsistently maintained thatthey expect this to beunnecessary. On the otherhand, in early October theKazakhstani energy ministerwarned the consortium that itwould face arbitration unlessit agreed to the revised contract. This seemingparadox highlights a significant ambiguity inKazakhstani legislation and legal procedure. TheJanuary 2003 Law on Investment states thatinvestment disputes may be settled by negotiation,in Kazakhstani courts, or through internationalarbitration. However, it does not provide clearmechanisms for access to international arbitrationor choice among venues.Possible judicial instances of review include theInternational Center for the Settlement ofInvestment Disputes, any tribunal applying theUnited Nations Commission on InternationalTrade Law Arbitration rules, the London Court ofInternational Arbitration, and the StockholmChamber of Commerce, as well as the ArbitrationCommission at the Kazakhstan Chamber ofCommerce. Moreover, although Kazakhstan ratifiedthe New York Convention on the Recognition andEnforcement of Foreign Arbitral Awards in 1995,judicial review of international arbitral awards byKazakhstani courts is not unknown. Indeed, theapplication of the December 2004 Law onInternational Arbitration appears to give broadauthority for judicial review of such arbitral awardsin Kazakhstan.CONCLUSIONS: Kazakhstan’s financial andbanking system is the most reformed of any CentralAsian or South Caucasus country. Until veryrecently, the country has had an excellentreputation for relative stability of the businessenvironment. However, Nazarbaev’s decision tosign the amendments passed several months ago iscausing Western observers to wonder whetherKazakhstan intends to go down the same road thatRussia has taken, hardening its dealings withinternational energy companies. His actionsthreaten investor confidence and continuing flowsof foreign direct investment. In the Kashagan case,outright expropriation is unlikely for the simple
Central Asia-Caucasus Analyst, 12 December 2007 13reason that the development is so challenging thatvirtually no other international firms have access toor experience with the necessary technology, andthe few that may are unlikely to step in.The record price of oil today, along withKazakhstan’s relatively favorable past track record,makes it unlikely that Western investors will fleethe country. New ones, however, may tread lightly,wondering whether Kazakhstan is planning aRussian-style “resource nationalism.” Probably theKazakhstani leadership does not itself know theanswer to this question, and will proceed on a caseby case basis. In the past, Western energycompanies have been able win challenges againstfines and penalties within the domestic Kazakhstanijudicial system. The law and the precedent havenow changed, however. A basic divergence of viewhas arisen. Western investors feel that the playingfield has been tilted against them, whileKazakhstani actors feel that it has only been leveled.The fines imposed by the Kazakhstani governmentagainst the operators of the Tengiz oil field forviolating ecological legislation, announced at thetime when the differences over Kashagan becamepublic, reflect such a divergence of opinion. The“sulfur mountains” (extracted from the oil before itis put into a pipeline) have been a bone ofcontention since the mid-1990s. Watching the recentRussian experience has undoubtedly given theKazakhstani leadership more confidence to be boldin such matters. Still, the new amendments do notappear to have been adopted as part of a program ofradical nationalization as seen recently inVenezuela.AUTHOR’S BIO: Dr. Robert M. Cutler isSenior Research Fellow, Institute of European,Russian and Eurasian Studies, CarletonUniversity, Canada.New Silk Road Paper:The August 6 Bombing Incident in Georgia:Implications for the Euro-Atlantic RegionThis 82-page Paper puts together mostrelevant documents – Western, Georgianand Russian – on the incident, and includesa detailed chronology and an analysis ofthe event’s implications.The Paper can be downloaded free atwww.silkroadstudies.org. Hardcopyrequests should be addressed to Alec Forssat aforss@jhu.edu.
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Johanna Popjanevski - The Central Asia-Caucasus Analyst

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