Wake Forest University, USA
“Legal Protection for Foreign Investors in Kazakhstan.”
Student: D.Tokpayeva,
Professor: A.Palmiter
Content:
Abstract
Introduction
1.
Methodology
2. Origin: Legislation on Foreign Investments of Kazakhstan
3. Anti-Director Rights Index
3.1 Proxy by mail allowed
3.2 Shares not blocked before meeting
3.3 Cumulative voting or proportion representation
3.4 Oppressed minorities mechanism
3.5 Preemptive rights
3.6 Percentage of share capital to call an extraordinary shareholders’ meeting
4. Creditor rights
4.1 Mandatory dividend
4.2 Restrictions for going into reorganizations
4.3 No automatic stay on secured assets
4.4 Secured creditors first
4.5 Management does not stay
5. Shareholder rights
5.1 “One share-one-vote” right
5.2 Legal reserve
6. Legal enforcement
6.1 Corruption
6.2 Efficiency of judiciary system
6.3 Rule of law
6.4 Risk of expropriation
6.5 Repudiation of contracts by government
7. Accounting standards
8.Ownership
8.1 Structure of ownership
8.2 GDP and GDP per capita
Conclusion
Abstract.
This paper aims to analyze the legal protections in place in Kazakhstan for
foreign investors. The analysis is based on the index described in the article by
Shleifer and Vishny, 1997; La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1997,
1998; Shleifer and Wolfenzon, 2002 (La Porta table). 1 In the La Porta article, the
authors created an index to measure legal protection for investors via the use of
complex statistics. The study, through its metrics, found that countries with a
common-law system have better protections than countries with a civil-law system.
The assessment of investor legal protection in a particular country is based on records
of the following indexes: “Anti-Director Rights Index” (ADRI), creditor rights,
shareholders rights, legal enforcement and ownership.
Kazakhstan has a civil-law system of law. To evaluate shareholders legal
protection in Kazakhstan, we collected all necessary legal data. This legal data was
then converted to index measures using detailed norms of legislation. In cases when
the data is not easily accessible or additional payments are needed, we used other
reasonable information to ensure consistency.
In order to analyze legal protection in Kazakhstan, we plan to discuss all of the
La Porta table’s positions. We will prove that even though Kazakhstan has a civil
system of law; the country has one of the highest scores in ADRI, creditor and
shareholder rights indexes. But because of Kazakhstan’s level of corruption, the score
on the legal enforcement index needs to be improved.
1
La Porta et al. at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Introduction.
Kazakhstan is a post-soviet union country that became independent just 20 years
ago. The country has made impressive progress in the last two decades. The World
Bank included Kazakhstan in the world’s 20 most attractive investment destinations
list and the second most attractive country among Commonwealth of Independent
States (CIS).2 In 2000 the European Union (EU) recognized Kazakhstan’s economic
reforms, and in 2002 the US Department of Commerce granted Kazakhstan the status
of a market economy. In 2010 Kazakhstan was a chairman of the 56-nation
Organization for Security and Cooperation in Europe (OSCE) and held the
international summit in Astana. 3 Today Kazakhstan is a member of the Islamic
Cooperation, the Shanghai Cooperation Organization, the Eurasian Economic
Community and the United Nation (UN) Human Rights Council. In 2015 Kazakhstan
aims to meet all EU standards.
Foreign investment is very important for an economy’s growth, especially for
transitional economies. A main economic goal for a developing country is to create a
good investment climate and this is sometimes very hard to obtain.
The level of investor protection is considered the main factor for examining
foreign investment attractiveness. According to the Doing Business Report,
Kazakhstan ranked 22nd among 189 economies in investor protection.4 It lost 1 notch
from 2012, when the country was ranked 21st. The main issues for this paper are: “
2
Id. at P.1
Capital of Kazakhstan.
4
Here we would like to mention that methodology for “Doing business report” to research level of legal protection in 2013 differs
from previous the La Porta table of 1997,1998 named as ADRI. La Porta et al. presented a new measurement of a legal protection of
minority shareholders. The name of this index is anti-self-dealing index (ASDI).
http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Methodology/Supporting-Papers/DB-MethodologyLaw-and-Economics-of-Self-Dealing.pdf
3
What are the legal protection weaknesses in Kazakhstan? and “What can a country do
to improve in its legal protection for foreign investors?”
In response to these issues, this research paper examines what Kazakhstan’s
level of legal protection is for foreign investors and discusses possible improvements.
The paper consists of the following sections: (i) introduction; (ii) 5the origin legislation
on investments of Kazakhstan; (iii) anti-director rights index; (iv) creditor rights; (v)
shareholder rights; (vi) legal enforcement; (vii) ownership and conclusion.
In the first section of the paper we describe the methodology used to asses the
legal protection of shareholders in Kazakhstan. We used the La Porta table
methodology.
In the second part we discussed sources of legislation on investment. We listed
all sources of legislation on investment in Kazakhstan.
In the third section of the paper we present Anti-director rights index (ADRI).
The index ranges from zero to six. This index is formed by adding one for each of the
following: “(1) the country allows shareholders to mail their proxy vote to thee firm,
(2) shareholders are not required to deposit to deposit their shares prior to the general
shareholder' meeting, (3) cumulative voting or proportional representation of
minorities in the board of directors is allowed, (4) an oppressed minorities mechanism
is in place, (5) the minimum percentage of share capital that entitles a shareholder to
call for extraordinary shareholders' meeting is less than or equal to 10 percent (the
sample median), or (6) shareholders have preemptive rights that can be waived only by
5
La Porta et al. at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
a shareholders' vote.” 6 This section consists of six subsections; each of which
describes a specific category mentioned in the La Porta table.
In the forth section we defined creditor rights. The index ranges from zero to
four. This index is formed by adding one for each of the following: “(1) the country
imposes restrictions, such as creditors’ consent or minimum dividends to file for
reorganization; (2) secured creditors are able to gain possession of their security once
the reorganization petition has been approved (no automatic stay); (3) secured
creditors are ranked first in the distribution of the proceeds that result from the
disposition of the assets of a bankrupt firm; and (4) the debtor does not retain the administration of its property pending the resolution of the reorganization.” 7 This section
consists of four subsections; each of which describes a specific category mentioned in
the La Porta table.
The fifth section defines the shareholder rights. Here, we examine the oneshare-one vote right and legal reserve. Admittedly, shareholders have other important
rights, such as vote by mail, block share for shareholder meeting, the oppressed
mechanism for minorities and preemptive rights. However, we will not discuss them in
this section because these rights will be covered elsewhere. This section consists of
two subsections; each of which describes a specific category mentioned in the La Porta
table.
In the sixth section we will discuss legal enforcement. We used Kazakhstan’s
global indexes to show the situation in the country. Legal enforcement index consist of
the following positions: 1) corruption; 2) efficiency of judiciary system; 3) rule of law;
6
7
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
4) risk of expropriation; 5) contract repudiation by government. Within this discussion
we focus heavily upon the corruption with Kazakhstan, because a substantial negative
factor interfering with the efficiency of judiciary system is a corruption. For this
reason we begin by showing the problems with corruption in the country and its
possible solutions. This section consists of five subsections; each of which describes a
specific category mentioned in the La Porta table.
In the seventh section we discuss the ownership structure. These sections
consists of following subsections: 1) accounting standards; 2) structure of ownership;
3) GDP and GDP per capita. This section consists of three subsections; each of which
describes a specific category mentioned in the La Porta table.
The last section is the conclusion. In this section we conclude with
Kazakhstan’s main problems in legal protection for foreign investors and provide
recommendations to improve it.
1. Methodology.
The authors in the La Porta table use a score equal to the numerical value “one”
in each measurement to define the ADRI, creditor and shareholder rights. It is a tool
for “measure[ing] how strongly the legal system favors minority shareholders against
managers or dominate shareholders in the corporate decision-making process,
including the voting.” 8 The scale in ADRI ranges from zero to six. The scale in
creditor rights ranges from zero to four and shareholder rights has one “one-vote-oneshare right” to score. We accurately looked at Kazakhstan’s coding rules and laws to
convert it to the each measurement of these indexes and awarded a score of “one”
when Kazakhstan met the requirements of the La Porta table.
2. Origin. Law on investment.
The main goal for obtaining a good legal protection for foreign investors is
adequate legislation on investment. Kazakhstan has a type of civil-law system - a
Roman-German legal system. Common law or precedents are not sources of law. The
main source of law is legislation. General legal source for the company law is the Civil
Code of RK (CC of RK) and some specific laws.9
Today Kazakhstan’s laws provides a single national regime for both foreign and
local investors. The same approach exists in developed countries as well; like the
USA, Great Britain, Germany and France. The other three types of regimes for
investments considered in Kazakhstan are: 1) non-discrimination regime; 2) the most
favored conditions regime; and 3) preferences regime. The last regime grants
privileges and preferences for some categories of investors, such as; exemption from
8
La porta et al., supra note 5, at 1127.
There is a dispute now in the country about issue Entrepreneur Code of Kazakhstan. Some of the authors offer to have specific legal
source for doing business, the others think that it will be additional source with norms that are already has written in CC of RK.
9
customs duties; land tax and property levy allowances 10 ; and industrial benefits in
strategically important projects. This type of preference regime is admittedly not
popular in the international investments practice.11 Kazakhstan has also entered into
agreements on investment encouragement with 44 countries such as USA, United
Kingdom of Great Britain and Northern Ireland, Germany, France, Russia,
Netherlands, Turkey, Jordan, Qatar etc. and a multilingual agreement between the
Eurasian Economic Community member states.
Legislation provides some restrictions for foreign investment with respect to the
national security and preservation of the sovereignty. Those sectors are: 1) military
and some extractive industries; 2) railway and air transport; 3) maritime traffic; 4)
agriculture; 5) forestry and fisheries; 6) media; 7) banking and insurance; 8) brokerage
activities in the securities market; 8) land ownership; 9) the use of mineral resources
and other natural resources, including marine exclusion zone; 10) wholly-or-partially
state involved sectors. 12 The same provisions are mentioned in the contract about
promoting investments mutual protection between USA and Kazakhstan. Having laid
out the general economic situation within Kazakhstan, let us now turn to examining
specific metrics of Kazakhstan’s attractiveness for foreign investment.
3. Anti-Director-Rights Index (ADRI).
ADRI ranges from zero to six.13 A country will score a value of “one”
[w]hen (1) the country allows shareholders to mail
their proxy vote to thee firm; (2) shareholders are not
required to deposit to deposit their shares prior to the
10
Under the Tax code Land tax and property levy allowances might be possible in case of investment strategic projects
The investment activities compliance with the lists of priority activities on the level of classes of general classifier of foreign
economic activity or the list of investment strategic projects. The List of priority activities at
http://invest.gov.kz/upload/docs/en/678be9b8bedf18290b20e3e885f8525f.pdf
12
http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf
13
La Porta et al., supra note X, at 1123 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
11
general shareholder' meeting; (3) cumulative voting or
proportional representation of minorities in the board of
directors is allowed; (4) an oppressed minorities
mechanism is in place; (5) the minimum percentage of
share capital that entitles a shareholder to call for
extraordinary shareholders' meeting is less than or equal to
10 percent (the sample median), or (6) shareholders have
preemptive rights that can be waived only by a
shareholders' vote.14
3.1 Proxy by mail allowed.
The first right in the ADRI index is a right of shareholder to mail their proxy
vote, without voting in person or sending his representative to the shareholders
meeting. The score equals one if shareholders have a right to mail their proxy vote.15
Under the JSC Law shareholders have the opportunity to mail their proxy vote.
Article (art.) 49 of the JSC Law provides
[a]n eternal poll may be used in a combination with
the vote of the shareholders who are present at the general
meeting. Voting ballot must be forwarded to the person no
later then 45 days. This ballot should also be published in
mass media. A ballot without a signature of the shareholder
or without the seal of legal entity, when legal entity is a
shareholder, must be recognized as invalid.16
We conclude that shareholders have a right to mail their proxy vote; even the JSC Law
does not explicitly state that shareholders can mail their proxy to their company. In
“proxy by mail allowed” category Kazakhstan’s score equals one, because under the
JSC Law shareholders have the opportunity to mail their proxy vote.
3.2 Shares not blocked before meeting.
The second value in the ADRI index concerns whether or not shares might be
14
La Porta et al., supra note X, at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
16
Law of RK On Joint stock companies” dated May 13, 2003 (with alterations and amendments as of 04.07.2013)
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
15
blocked before meeting. The score equals one if “a company law or commercial code
does not allow firms to require that shareholders deposit their shares prior to a general
shareholders meeting, thus preventing them from selling those shares for a number of
day, and zero otherwise.”17
Under JSC Law there is no requirement to deposit shares prior to general
meeting, and nothing preventing shareholders from selling those sharers for a number
of days. If the shareholder would transfer his rights to the other person after
completion the list, the right to vote transfers to a new shareholder. He also has to have
documents to prove his rights.18 Because under JSC Law no requirement to deposit
shares prior to general meeting, and no prevention shareholders from selling those
sharers for a number of days Kazakhstan’s score for this metric equals one.
3.3 Cumulative voting or proportional representation.
The third right in ADRI is a possibility of cumulative or proportional voting. A
country’s score here
[e]quals one if the company law or commercial code
allows shareholders to cast all their votes for one candidate
standing for election to the board of directors (cumulative
voting) or if the company law or commercial code allows a
mechanism of proportional representation in the board by
which minority interests may name a proportional number
of directors to the board, and zero otherwise.19
Under the JSC Law cumulative voting is allowed. The votes may all be given in
favor of one candidate board member or distributed by him between several
candidates. The majority number of votes shows that candidate is a winner and should
17
La Porta et al., supra note X, at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Law of RK On Joint stock companies”, supra not X, part 2 art.39
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
19
La Porta et al., supra note X, at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
18
be elected to the board of directors”20 No mechanism of proportional representation in
the board is provided. In “cumulative voting or proportional representation” category
Kazakhstan’s score equals one, because under the JSC Law cumulative voting is
allowed.
3.4 Oppressed minorities’ mechanism.
The existence of an oppressed minorities mechanism is a value for ADRI. A
point is given if
[e]quals one if the company law or commercial code
grants minority shareholders either a judicial venue to
challenge the decisions of management or of the assembly
or the right to step out of the company by requiring the
company to purchase their shares when they object to
certain fundamental changes, such as mergers, asset
dispositions, and changes in the articles of incorporation.
The variable equals zero otherwise. Minority shareholders
are defined as those shareholders who own 10 percent of
share capital or less.21
Law defines minority shareholder as a shareholder who holds less than ten per
cent of JSC’s voting shares. 22 Art.27 of the JSC Law provides oppressed minority
mechanism. The JSC Law provides that the company has a duty to buy back shares
within 30 days under the shareholder’s demand if the shareholder did not participate in
a general meeting or voted against transaction. 23 In “oppressed minorities’ metric
Kazakhstan’s score equals one because the JSC Law provides for an oppressed
minority mechanism.
3.5 Preemptive rights.
Law of RK On Joint stock companies”, supra not X, part 2 art.50
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
21
La Porta et al., supra note X, at 1122 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
22
Law of RK On Joint stock companies”, supra not X, part 17 art. 1
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
23
Id. at art. 27
20
The fifth anti-director right is termed “preemptive rights”. It
[E]quals one when the company law or commercial
code grant shareholders the first opportunity to buy new
issues of stock, and this right can be waived only by a
shareholders' vote; equals zero otherwise.24
Under the JSC Law shareholders have the right of preemptive purchase of
company’s securities. The company has a duty within 10 days to purchase securities at
the same price if it plans to allocate them to the ordinary shares or sell shares, which
were purchased back before. This offer should be given on equal terms and in
proportion to the number of the shareholder’s shares. Shareholders have a right to
purchase securities within 30 days. 25 In “preemptive rights” category Kazakhstan’s
score equals one because under the JSC Law shareholders have the right of preemptive
purchase of company’s securities.
3.6 Percentage of share capital to call an extraordinary shareholders meeting.
The index includes “the minimum percentage of ownership of sharer capital that
entitles a shareholder to call for an extraordinary shareholders’ meeting.”26 A point is
granted if that percentage is less than or equal to ten percent.27
Under the JSC Law the extraordinary general meeting may be called upon the
initiative of the board or the major shareholder.28 Law defines the major shareholder
as a shareholder who holds ten and more percent of voting shares in a joint-stock
company.29 Major shareholder might be a group of shareholders who are in aggregate
24
La Porta et al., supra note X, at 1123 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Law of RK On Joint stock companies”, supra not X, part 1 art.16
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
26
La Porta et al., supra note X, at 1123 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
27
Id.
28
Law of RK On Joint stock companies”, supra not X, art.37
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
29
Id. at part 23 art.1
25
hold ten or more then ten per cent of voting shares and acting on the basis of an
agreement.
In “percentage of share capital to call an extraordinary shareholders meeting”
category Kazakhstan’s score equals one because under the JSC Law the extraordinary
general meeting may be called upon the initiative of the board or the major
shareholder.
Anti-director Rights Index of Kazakhstan.
Under ADRI analysis Kazakhstan’s scores equals one in the each of ADRI
categories, therefore, Kazakhstan’s ADRI equals six. This score indicates that
Kazakhstan has a highest level of legal protection in ADRI under the La Porta table,
where the higher score is more protected.
4. Creditor rights.
The index ranges from zero to four. 30 Points are given if
[A]n index aggregating different creditor rights. The
index is formed by adding 1 when (1) the country imposes
restrictions, such as creditors’ consent or minimum
dividends to file for reorganization; (2) secured creditors
are able to gain possession of their security once the
reorganization petition has been approves (no automatic
stay); (3) secured creditors are ranked first in the
distribution of the proceeds that result from the disposition
of the assets of a bankrupt firm; and (4) the debtor does not
retain the administration of its property pending the
resolution of the reorganization.31
4.1 Mandatory dividend.
The first value in the creditor rights index is a mandatory dividend as “the
percentage of net income that the company law or commercial code requires firms to
30
31
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
distribute as dividends among ordinary stockholders.” 32 The score equals one if a
country has such a restriction.33
Under the JSC Law the ordinary share provides a shareholder the right to
receive dividends when the company has the net income. It also provides a shareholder
a right to have the part of company’s capital in case of company’s liquidation.34 In
“mandatory dividend” category Kazakhstan’s score equals one because under the JSC
Law the ordinary share provides a shareholder the right to receive dividends when the
company has the net income.
4.2 Restrictions for going into reorganization.
The first creditor right is the right to impose restrictions for transactions, much
like creditors’ consent to file for reorganization.35 The score equals zero if there are no
such restrictions.36
CC of RK and Law “On Bankruptcy” (Bankruptcy law) provide guarantees the
rights of creditors. The owner a legal entity property who made the decision of
reorganization is obliged to notify in writing the creditors about such reorganization.37
In the case of division or appropriation the creditor has the right to demand a
premature termination of the obligations and the right for a compensation of losses.38
The Law does not provide clearly any creditor right to restrict going into
reorganization. But the Law provides that in the case of division or appropriation a
creditor has the right to demand on premature termination of the obligations or
32
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
34
Law of RK On Joint stock companies”, supra not X, part 1 art.13
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
35
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
36
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
37
CC of RK (General part). part 1 art.48 http://adilet.zan.kz/eng/docs/K940001000_
38
Id. at part 1 art.48 http://adilet.zan.kz/eng/docs/K940001000_
33
compensation of losses. This right might create restrictions for reorganization before
debtor performed all obligations or compensate the loss.
Because in the case of division or appropriation the creditor has the right to
demand a premature termination of the obligations and the right for a compensation of
losses Kazakhstan’s score in “restrictions for going into reorganization” category
equals one.
4.3 No automatic stay on secured assets.
The next creditor right is automatic stay on secured assets. The metric
determines whether “the reorganization procedure impose automatic stay on the assets
of the firm on filing the reorganization petition.” 39 The score equals zero “if such
restriction does exist in the law”.40
Under the legislation of RK there is no requirement for automatic stay on the
assets of the firm on filing the reorganization petition. In “no automatic stay on
secured assets” category Kazakhstan’s score equals one because under the legislation
of RK no requirement for automatic stay on the assets of the firm on filing the
reorganization petition.
4.4 Secured creditors first.
The creditor right index looks to the right of secured creditors to be the first in
case of bankruptcy in order of priorities. “Whether the secured creditors are ranked
first in the distribution of the proceeds that result from the disposition of the assets if a
bankrupt firm.” 41 The score equals zero “if non-secured creditors, such as the
39
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
41
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
40
government and workers are given absolute priority.” 42 Automatic stays prevents
secured creditors from gaining possession of their security.
Under the Bankruptcy law of Kazakhstan the first creditors to be paid shall be
the claims of the citizens to whom the debtor has caused harm to health or life.
Secured creditors are the second in the order of priority in distribution of the
bankrupt's estate. Third, the wages and severances of the employees working under
labor agreements and royalties shall be paid. Fourth, indebtedness on obligatory
payments to the budget and non-budget funds shall be paid. Fifth, the accounts of
other creditors shall be paid.43 We suppose that it is fair if firstly shall be paid persons
to whom the debtor caused the harm. Because government and workers should be paid
after secured creditors in order of priorities we grant one. In “secured creditors first”
category Kazakhstan’s score equals one because under the Bankruptcy law secured
creditors shall be paid before government and workers.
4.5 Management does not stay.
The next measure in creditor rights index is “management does not stay.”
“When the official is appointed by the court, or by the creditors, it is responsible for
the operation of the business during reorganization.” 44 “This variably equals one if the
debtor does not keep the administration of its property pending the resolution of the
reorganization process, equals zero otherwise.”45
The Bankruptcy Law defines official and administration in a process of
reorganization. Official - a leader (deputy leader) of the legal person-debtor or any
42
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Law of the RK On Bankruptcy dated January 21, 1997 № 67-I (with alterations and amendments as of 17.07.2009). part 2-6 art. 75
http://www.invest.gov.kz/upload/docs/185dc82752c973ac18a4b17432e32cd3.pdf
44
La Porta et al., supra note X, at 1124 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
45
Id.
43
other person who is a member of the legal person's executive agency and who
performs the functions of management of the legal person. Administrator - is a person
appointed by the court to manage the insolvent debtor's property and business
activities for the period of the case examination until the beginning of the liquidation
proceedings, and in case of rehabilitation procedure it is used prior to its
commencement. Under the Bankruptcy Law the debtor does not keep the
administration of its property pending the resolution of the reorganization process. 46 In
“management does not stay” category Kazakhstan’s score equals one because under
the Bankruptcy Law the debtor does not keep the administration of its property
pending the resolution of the reorganization process.
Creditor Rights Index of Kazakhstan.
Under creditor rights analysis Kazakhstan’s score equals one in the each of
ADRI categories. Therefore, Kazakhstan’s creditor rights index equals four. This score
indicates that Kazakhstan has a highest level of legal protection in creditor rights
index, where the higher score is more protected.
5.Shareholder Rights.
5.1 One share-one vote. In the La Porta article authors look at the shareholder
“one share-one-vote” right. A point is given if
[t]he company law or commercial code of the
country requires that ordinary shares carry one vote per
share, and zero otherwise. Equivalently, this variable equals
one when the law prohibits the existence of both multiplevoting and nonvoting ordinary shares and does not allow
firms to set a maximum number of votes per shareholder
46
Law of the RK On Bankruptcy, supra note X, chapter 1 art.1
http://www.invest.gov.kz/upload/docs/185dc82752c973ac18a4b17432e32cd3.pdf
irrespective of the number of shares owned, and zero
otherwise.47
Under the JSC Law voting at a general meeting of shareholders shall be carried
out on the principle of ''one share-one vote''.48 Some exceptions are provided for the
following cases: 1) in the specified in the legislative acts cases might be provided
some restrictions of the maximum number of votes on shares granted to one
shareholder; 2) in case of cumulative voting to elect members of the board of
directors; 3) in case if one vote is granted to each shareholder for voting on procedural
issues of conducting the general meeting of shareholders.49
General meeting of shareholders may introduce one “golden share”. The holder
of a ''golden share'' has the right to veto decisions of the board of directors and the
general meeting of shareholders. This right to veto is not a subject to transfer. Golden
share does not participate in the formation of the share capital and receipt of
dividends.50
In “one share-one vote right” category Kazakhstan’s equals one because under
the JSC Law a voting at a general meeting of shareholders shall generally be carried
out on the principle of ''one share-one vote''.
5.2 Legal reserve.
The remedial legal rule is the existence of the legal reserve requirement. It
grants a point if "the minimum percentage of total share capital mandated by corporate
47
Id. at 1122
Law of RK On Joint stock companies”, supra not X, part 1 art.50
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf
49
Id.
50
Law On Joint stock companies, supra note X, at part 5 art.13
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf This norm is not applied for banks and banking
holdings, according to the part 11 article 8 Law “On banks and banking activity in the Republic of Kazakhstan” dated 08.31.1995.
48
law to avoid the dissolution of an existing firm.”51 It gives a zero for countries without
such a restriction.52
Under the JSC Law the minimum percentage of total authorized capital is 50,
000 times the size of the monthly assessment index as establishes by the Budget law of
RK for the relevant financial year. 53 In the “Legal reserve” category Kazakhstan’s
score equals one because under the JSC law Kazakhstan has a provision with
minimum percentage of total authorized capital.
Shareholder rights index of Kazakhstan.
Under shareholder rights analysis Kazakhstan’s score equals one in “one-shareone-vote right” category. Therefore, Kazakhstan’s shareholder rights index equals one.
This score indicates that Kazakhstan has a highest level of legal protection in
shareholder rights index, where the higher score is more protected.
ADRI, Creditor rights and shareholder rights indexes.
Kazakhstan’s ADRI score equals six, creditor rights score equals four and
shareholder rights score equals one. These scores indicate the highest level of legal
protection in ADRI, creditor rights and shareholder rights indexes under the La Porta
table, where the higher score is more protected.
This research shows that even though Kazakhstan represents a civil system of
law, the country has similar levels of legal protection as counties with a common
system of law.
6. Legal enforcement.
51
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
53
Law On Joint stock companies, supra note X, at art.10.
http://www.invest.gov.kz/upload/docs/en/99a05af808e4693faa920b3cfade4387.pdf This rule shall not apply to the company which
carries on the business as an investment privation fund. In 2013 it is approximately $538 586.
52
To evaluate “legal enforcement” the authors of the La Porta table use five of the
following measurements: 1) corruption; 2) efficiency of the judicial system; 3) rule of
law; 4) risk of expropriation and compensation; and 5) contract repudiation by
government.54
Additionally, the La Porta table authors look accounting standards, ownership
structure and GDP along with GDP per capita.55 To define the level of the mentioned
above measurements we looked the Kazakhstan’s global indexes. In cases when we
had a limited access to the information we used other appropriate information with the
country’s records.
6.1 Corruption.
Corruption is the next value for assessment of legal enforcement in the country.
A country’s score is calculated from zero to 10, with lower scores for higher levels of
corruption.56
[L]ower scores indicate that ‘‘high government
officials are likely to demand special payments’’ and
‘‘illegal payments are generally expected throughout lower
levels of government’’ in the form of ‘‘bribes connected
with import and export licenses, exchange controls, tax
assessment, policy protection, or loans.’’ Average of the
months of April and October of the monthly index between
1982 and 1995.57
In 2013 Kazakhstan's rating in the Transparency International’s (TI) Corruption
Perceptions Index is 26 from 100, where the score ranges from 0 - highly corrupt – to
100 – very clean. It places Kazakhstan at 140 out of 177 countries rated - a relatively
54
La Porta et al., supra note X, at 1125 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
56
Id.
57
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
55
weak score. 58 The highest levels of corruption exist in the following areas in this
order: 1) police; 2) judiciary; 3) land registration; 4) customs; 5) licensing and
construction projects.59
The struggle with corruption is a big issue in Kazakhstan, with numerous
governmental bodies regularly addressing the issue. The Kazakhstan Criminal Code
contains special types of punishment for accepting and giving bribes. The President
issued specific anti-corruption decree for 2011-2015. The Supreme Court issued
normative decrees to provide recommendations about struggling with corruption. The
President adopted whistle-blow rules to encourage people to fight against corruption.
The whistleblower protection rules offer payments to the people who report corruption
offenses or otherwise assisting actions of officials.60 In 2008 Kazakhstan adopted the
United Nations Convention against Corruption.
Under the Criminal Code of Kazakhstan the subject of corruption might be a
person, who is authorized: 1) to exercise state functions, or equated to such person; 2)
official persons; 3) a person holding a senior state position.61 Officials, deputies of the
Parliament and of Maslikhats, judges and all civil servants are recognized as persons who
are authorized to exercise state functions. Equated to persons authorized to exercise state
functions are:
“[1]) persons elected to local self-government bodies;
2) citizens who have been registered as candidate
Presidents of the Republic of Kazakhstan, deputies of the
Republic of Kazakhstan Parliament and deputies of maslikhats
as well as members of the elected bodies of local self-
58
Id.
http://www.transparencykz.org/
60
http://adilet.zan.kz/rus/docs/P1200001077
61
art.307 of CC of RK
http://www.legislationline.org/download/action/download/id/1681/file/ca1cfb8a67f8a1c2ffe8de6554a3.htm/preview
59
government in accordance with the procedure established by
the law;
3) employees who permanently or temporarily work at
the bodies of local self-government whose work remuneration
is carried out from the state budget funds of the Republic of
Kazakhstan;
4) persons who perform managerial functions at stateowned organisations and organisations at organisations in
which the share of the state is not less than thirty-five
percent.”62
The next category of persons who might be a subject of corruption crime are
official persons. Officials persons are: 1) persons who permanently, temporarily or in
accordance with a special authorization perform functions of a representative of the
state authorities; 2) persons who perform organizational or administrative and
economic functions at the state bodies, local self-government bodies, as well as at the
Armed Forces of the Republic of Kazakhstan, other troops and military formations of
the Republic of Kazakhstan.63
The last category of persons who might be subject to corruption statutes are
persons holding senior state positions. These persons are: 1) Persons who hold
positions established by the Constitution of the Republic of Kazakhstan, constitutional
laws and other laws of the Republic of Kazakhstan for direct performance of functions
of the state and authorities of state bodies; and 2) persons who hold political offices of
civil servants.
Under the Concept of legal policy 2010 – 2020 Kazakhstan is in the process of
reforming of its key laws.64 These laws are: 1) civil code; 2) criminal code; 3) civil
procedure; 4) criminal procedure; 5) administrative code; 6) law-enforcement law.
62
Id.
Id.
64
http://www.kazakhembus.com/document/concept-of-legal-policy-for-2010-2020
63
Experts evaluate the Corruption Law and work of specific agencies to fight
corruption as primarily curative rather than preventative. 65 The Ministry of Internal
Affairs prepared a draft of the Law on Prevention of Crime. Experts made some
recommendations to improve the draft.66The draft of the Law on the Prevention of
Crime does not provide any specific measures to prevent corruption. Because the level
of corruption in the country is relatively high, we think that it would be useful to have
provisions to prevent corruption in the Law on the Prevention of Crime.
The government needs to elaborate on some specific measures to exclude
conditions for bribery.
The first possible measure to fight corruption is to remove the opportunity of
officials to meet personally with people. The government should prohibit personal
meetings with officials when they make a decision on some person’s case. It is well
known that corruption is a latent crime. Officials have the opportunity to discuss
details of bribery when they have a personal meeting. Personal meetings create an
atmosphere conducive to bribery. A monitored online system of communication
between officials and people would create more transparent decision-making. In
theory that would significantly decrease the opportunities to commit bribery.
The next helpful measure that could be used to fight corruption would be the
establishment of the proportional system of punishment that calculates the harm to the
economic security which a specific person makes when he commits a corruption act.
The study shows that the level of corruption in Kazakhstan is relatively high and this
65
http://www.business-anti-corruption.com/country-profiles/europe-central-asia/kazakhstan/initiatives/public-anti-corruptioninitiatives.aspx
66
file:///Users/Dariga/Downloads/Opinion%20on%20Draft%20Law%20on%20Crime%20Prevention%20KAZ%2013%20OCT%20200
9.pdf
level negatively influences Kazakhstan’s other global indexes. The level of corruption
also negatively influences Kazakhstan’s protecting investor index. At the same time it
impacts Kazakhstan’s attractiveness index and decreases FDI in Kazakhstan. A good
level of FDI creates conditions for a country’s economic security. Finally, the level of
corruption negatively influences Kazakhstan’s economic security. One possible
solution would be to establish a proportional system of punishment that calculates also
the harm to the economic security.
The next possible measure is to establish an online list of corrupt persons.
People should understand that their reputation might be destroyed after a corrupt act.
Corrupt person would not have any chance to build a “good” life in Kazakhstan’s
society if he commits corruption. It would be an additional determent from committing
bribery.
The other possible measure is to improve ethical rules in the country.
Kazakhstan has a number of ethical rules in almost every field. But even though these
rules exist they do not deter from violations, because the law does not provide an
adequate sense of responsibility. A serious atmosphere of responsibility would help to
increase the ethical accountability in the country.
Overall, Kazakhstan needs to improve the professional standards for officials. A
low level of professionalism creates ideal conditions for corruption. After the Soviet
Union collapsed, the country had a very hard time when many specialists went to
Russia. Kazakhstan needed time to raise its own professionals. The President’s
program Bolashak is one of the impressive initiatives of Kazakhstan,67when every year
since 1993; 3000 students study abroad in the best universities of the world. It creates
67
http://www.bolashak.gov.kz/index.php/en/
a new professional generation in Kazakhstan and helps to improve the professional
standards in the country. Kazakhstan is now ready to improve professional standards
for its officials.
Another way in which Kazakhstan could improve would be to create nationwide rating system for citizens, which is a well-known world practice. Ratings show a
level of work or activity in specific field. In 2007 in order to modify the system of
state management in the country, the government started actively working to adopt
criteria of assessment of work of Kazakhstan’s state agencies and ministries. In 2020
Kazakhstan’s President seeks to implement a system of yearly assessment work of
several state bodies. A weakness of the current system of assessment of state bodies is
that they are not based on global rating’s criteria. All such systems of assessment
should be based on global ratings, where Kazakhstan participates as a competitor. If
Kazakhstan develops an adequate level in these ratings, it would help to recognize
Kazakhstan as a trustworthy and reliable global participant.
For example, Kazakhstan plans to become one of the top 30 developed countries
in the world. If Kazakhstan obtained a strong level of protection of foreign investors
from the Doing Business report, that would help to increase Kazakhstan’s FDI. FDI is
a significant part of stable and steady economical growth. It is just another step in
helping Kazakhstan achieve its goal to be one of 30 developed countries in the world.
We think that Kazakhstan’s system of assessment should mostly based on criteria of
global ratings. The implementation of such ratings would also be helpful to improve
work of officials who work in a state bodies to fight corruption, when they would
clearly understand tasks and goals, which they need to achieve working for the
government in this specific field.
Nationwide surveys are another well-known practice to improve efficiency of
official’s work, including those officials who fight with corruption. If a person has a
position where he or she might be subject to corruption proceedings under the
Criminal Law of Kazakhstan, such work should subject to specific supervision. 68
After each official completes work for citizens, they should have a chance to fill out a
survey. In order to fight corruption these surveys should include questions about the
official’s attitude to corruption. These surveys would also have the added benefit of
raising global ratings.
Ethical commissions are another possible way to fight corruption. Ratings and
surveys might be a base to make a decisions by ethical commission. These
commissions should be independent and have a possibility to recommend depriving a
right to work, for example, or to stop the license to work in a legal field.
In order to significantly improve struggle with corruption in 1995 the President
established the Agency for Fighting Economic Crimes and Corruption (financial
police). The agency works under the President’s personal supervision. For the same
reason the President established a specific higher institution – the Academy of
Financial Police. It is the only university in Kazakhstan that prepares specialists
specifically to fight corruption and work in the Agency for Fighting Economic Crimes
and Corruption (financial police). Students obtain the major in law with concentration
on Criminal Law and Criminal Procedure.
68
The list of officials is mentioned above.
However, the financial police’s work was often the subject of critique. We were
not able to compare Kazakhstan’s ratings in corruption before and after 1995 when
Kazakhstan established a specific state Agency to fight corruption, because TI’s data
begin from 1995.
Other ministries and agencies are also responsible for fighting corruption in the
country. They are: the Ministry of Interior Affairs (MIA) and Committee for National
Security (KNB). Some questions of entanglement of competence and jurisdiction
between MIA, KNB and financial police still exist in the country. Disciplinary State
Service Commission under President’s personal supervision is also working to fight
corruption in the country.
Overall, Kazakhstan has put a lot of effort into fighting corruption in the
country, including establishment the specific agencies and higher institution. However,
Kazakhstan’s index in corruption still needs to be significantly improved. We suppose
that a low index to-what extant shows results of work of all mentioned agencies to
fight corruption. We consider that the assessment of work and a salary of officials who
fight corruption should depend on Kazakhstan’s level of corruption in global indexes.
The official’s premiums or additional benefits should be a variable in their salary when
Kazakhstan makes a progress in Global indexes. The same system is possible to apply
in the Academy of financial police, when the scale could be the global educational
ratings of Academy. World companies already use a similar system of payment for
their workers. It would be great if the government would apply their positive
experience to fight corruption in the country.
We also think that mentioned in this paper possible solutions might be helpful to
prevent corruption, which would be a strong base for decreasing level of corruption in
the country.
According to our calculation, Kazakhstan’s score 26 under TI report, where the
score ranges from 0 - highly corrupt – to 100 – very clean, correlates to a score of 2.6
in “corruption” on the La Porta table, which is scaled from 0 to 10, where lower scores
for higher levels of corruption.69 It indicates that Kazakhstan has relatively high level
of corruption.
6.2 Efficiency of judicial system.
The first measure to evaluate legal enforcement in the country is the efficiency
of judicial system.
[A]ssessment of the ‘‘efficiency and integrity of the
legal environment as it affects business, particularly foreign
firms’’ produced by the country risk rating agency Business
International Corp. It ‘‘may be taken to represent investors’
assessments of conditions in the country in question.” 70
Scale from zero to 10; with lower scores, lower efficiency
levels.71
We were not able to find Kazakhstan’s “efficiency of judicial system” score and
correlated the similar under World Justice Project Report Kazakhstan’s score in “civil
justice” category. This score covers cases when an investor seeks to commit resources
abroad. Under World Justice Project Report Kazakhstan’s civil justice’s rank is on 66th
position among 99 countries, where the higher position less efficiency of civil
justice.72 This measure based on data whether 1) people can assess and afford civil
justice; 2) civil justice is free of discrimination; 3) civil justice is free of corruption; 4)
69
Id.
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
71
Id.
72
http://worldjusticeproject.org/sites/default/files/files/wjp_rule_of_law_index_2014_report.pdf
70
civil justice is not subject to unreasonable delay; 5) civil justice is effectively enforced;
5) alternative dispute resolution mechanisms are accessible impartial, and effective. It
indicates that Kazakhstan has low level of civil justice. One of the categories, which
negatively impacts Kazakhstan’s “civil justice” index under World Justice Project
Report, is the level of corruption in the country.
The other is Kazakhstan’s score in “judicial framework and independence”
under Freedom house report remains unchanged at 6.50 from 2012, where 1 is the best
level of judicial framework and independence and 7 is the worst.
73
It proves that
Kazakhstan has very low judicial framework and independence level. The main factor,
which decreases indexes of judiciary system, is the level of corruption in the country.
Kazakhstan is in the process of reforming its court system 74 and still has
corruption problems. The court system of Kazakhstan is often fairly criticized as
unsophisticated and corrupt. Today it is still hard for investors, either foreign or
national, to settle their disputes. The main reasons for this are the slow processes and
the considerable investment of time and resources.
One big step Kazakhstan made in 2004 occurred when it adopted the Law on
International Arbitration. Kazakhstan became a member of the International Center for
the Settlement of Investment Disputes (ICSID) and ratified New York Convention on
the Recognition and Enforcement of Foreign Arbitral Awards. Ratification of the
international conventions allows to make international arbitral decision is enforceable
in Kazakhstan. In 2011 Kazakhstan adopted the Law “On mediation”. Today it is the
73
http://www.freedomhouse.org/report/nations-transit/2013/kazakhstan#.U0R0ua1dV5k
Justice in the RK is exercised only by the court and on behalf of Kazakhstan. The Chairperson and judges of the Supreme Court
of the RK are elected by the Senate at the proposal of the President of the country based on a recommendation of the Highest Judicial
Council. The Chairpersons and judges of local and other courts are appointed by the President of the country at the recommendation
of the Highest Judicial Court. Constitution of RK. Art. 82. http://www.constcouncil.kz/eng/norpb/constrk/#section7
74
alternative option for dispute resolution in the country. The judiciary system in
Kazakhstan is in the process of the reforming.
As we mentioned above Kazakhstan’s judicial efficiency index is relatively low.
The main factor is the level of judiciary corruption. Under Transparency
International’s (TI) Global Corruption Barometer 2013 29% of the surveyed reported
paying a bribe to the judiciary, 63% of respondents who felt that judiciary was corrupt
or extremely corrupt, thus ranking it as the second most corrupt institution in
Kazakhstan after police.75 At the same time corruption cannot be tackled without an
effective judicial system. This mentioned the President N.A.Nazarbayev on VI
Congress of Judges. This congress identified its major task as improvement
mechanisms for credibility, independence and efficiency of judicial system. The
President noticed that, on average, two or three judges are convicted of corruptionrelated crimes each year and criticized “fraudulent behavior in the courts.” 76 If the
efficiency of judicial system were better, the level of corruption in the country would
be lower. When people do not believe that they can settle their disputes fairly in the
court they prefer to decide their problems in a corrupt way. A weak judicial system
increases possibilities for corruption. Because it is a specific chapter “Corruption”
above, we will not discuss the possible solutions for the judiciary corruption in this
chapter. All possible solutions to fight corruption in the country might also be applied
to judiciary corruption.
The improvement of professional standards would help to increase the
efficiency of judiciary system. In Kazakhstan, in order to become a judge, a 25-year
75
76
http://www.transparency.org/gcb2013/country?country=kazakhstan
http://www.inform.kz/eng/article/2607184
person should have a legal education and 2 years of legal experience. 77 We think this
level of requirements is not enough to become a professional, which impacts the
efficiency of judicial system. This problem was mentioned on the IVth congress of
judges of Kazakhstan, where the Chairman of Supreme Court of Kazakhstan
B.Turgarayev contended that 25-year-old person does not recognize seriously the full
responsibility of being a judge.78 We agree that today Kazakhstan needs to increase the
level of age to become a judge. We also think that 2 years of experience is not enough
for a good level of judge’s professionalism. It would be better if the length of
experience would be, at least, 5 years.
Another factor is education. Education is a high priority for Kazakhstan. We
think that professional standards should include specific requirements for education.
Kazakhstan has a high number of universities,79 but the quality of several universities
needs to be improved. Kazakhstan inherited the system of education from the Soviet
Union. First level was a specialist, the graduate level was candidate of specific
sciences and the highest level was doctor of specific sciences. In 2005 the country
started to use the bachelor-master-PhD system of education. These old and new
systems of education worked parallel until 2010, when Kazakhstan entered into the
Bologna process. Today 9 universities of Kazakhstan are on the list of the top
universities of the world.80 But the problems in education still exist. We think only
people who studied full-time in law in the bachelor and master programs in globally
ranked universities in Kazakhstan should be allowed to become a judge. Finally, the
professional requirements to become a judge should include: 1) citizens who reaches
77
see p.3 art.79 of Constitution of RK http://www.constcouncil.kz/eng/norpb/constrk/#section7
http://www.aktobesot.kz/node/206
79
http://www.iimp.kz/default.aspx?article_id=1027
80
http://en.tengrinews.kz/edu/9-Kazakhstan-universities-enter-world-ranking-22766/
78
30 years old; 2) 5 years of legal experience; 3) person shall have a bachelor and master
degree in law in full-time study in the globally-ranked university in Kazakhstan; 4)
person who has passed a qualification examination. This level of professional
standards to become a judge would help to improve the professionalism of judge in
Kazakhstan, which would also increase the efficiency of the judiciary system.
According to our calculation, Kazakhstan’s 66th position among 99 countries in
“civil justice” category, where the higher position less efficiency of civil justice,
correlates to a score of 3.3 in “efficiency of judicial system” category on the La Porta
table, which is scaled from 0 to 10, where the lower scores show lower efficiency
levels. 81 It indicates that Kazakhstan has very low level of efficiency of judiciary
system. The main factor, which decreases efficiency of judiciary system index, is level
of corruption in the country.
6.3 Rule of law.
The next measure to evaluate legal enforcement is a rule of law. A country’s
score here is
[A]ssessment of the law and order tradition in the
country produced by the country risk rating agency
International Country Risk (ICR). Average of the months
of April and October of the monthly index between 1982
and 1995.82 Scale from zero to 10 with lower scores for less
tradition for law and order.83
Under TI report Kazakhstan’s score in “rule of law” category is -0,620, where
the highest values correspond to better governance outcomes. 84 One of category,
81
Id.
La Porta et al., supra note X, at 1126 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
83
Id.
84
http://www.transparency.org/country/#KAZ
82
which negatively impacts Kazakhstan’s “rule of law” index under TI report, is the
level of corruption in the country.
Today Kazakhstan has created all necessary legal frameworks for investment
activity. International experts assess the legislation on investment as the best among
countries with transitional economies.85 The experts from the USA National Academy
of Science noticed that Kazakhstan has large opportunities for science and innovations
to improve competitiveness of economy and enhancement the investment climate.86
However, some experts mentioned that Kazakhstan has a weak rule of law.87 They
fairly think that Kazakhstan has a slow and arbitrary judicial system, underdeveloped
legal framework, and pervasive corruption in private and public sectors. Bank Turan
Alem, Alliance bank and Temirbank are evidentiary examples. They accounted for
more than one-third of system assets and were the subject of shareholders’ and top
management’s fraud.88 Those banks are defaulted in 2009.
International experts notice that the main obstacles that impede investment in
Kazakhstan are: 1) non-stability (tax rates); 2) norm’s complexity or its nonaccordance to the key laws; 3) inefficient governmental control along with the
entanglement of state bodies competency and their rights; 4) non-transparency and
inconsistent or absolute disregard to law implementation rule.89
Non-stability of norms, including tax rates, significantly increases risk for
foreign investment. The experts from the USA National Academy of Science
85
Program Investment Attraction, Special Economic Zone Development and Export Promotion in the RK, supra not X, at p.30
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf
86
Program Investment Attraction, Special Economic Zone Development and Export Promotion in the RK, supra not X, at p.30
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf
87
http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245333605360
88
http://worldjusticeproject.org/sites/default/files/WJP_Index_Report_2012.pdf
89
Program Investment Attraction, Special Economic Zone Development and Export Promotion in the RK, supra not X, at p.26
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf
recommended adopting the norm about stability of legislation in non-raw sector,
because of a number of risk factors in the manufacturing industry.90
The next negative factor is a norm’s complexity and its non-accordance to the
key laws. In some cases bylaws, decrees and rules are not satisfied with the provisions
in key laws. For example, the main idea for SEZ attractiveness is opportunity for
taxation preferences. It is 100% exemption from corporate income tax and land. But
the new Tax code abolished a tax allowance on VAT. Because only owners should pay
the land tax investors have no chances to use tax preferences. Under the Land Code
the land plots are provided only for temporary use for lease. Thus, SEZ member must
pay charges as land users and may not use the tax payments exemptions that are
provided in SEZ Law. The government works on monitoring of the accordance any
norms to key laws. We suppose that this work is also a very important for
Kazakhstan’s attractiveness and legal protection for foreign investment.
The next factor is an inefficient governmental control. Frequently restructuring
ministries and agencies, their variability in competencies and responsibilities along
with their uncertain functions also impede investment in Kazakhstan. Investors
complain about inefficient regulation of the SEZ activity. The reason is result from
different governing authorities. For example, “Astana – New City” is Akimat of
Astana’s authority, SEZ “Morport Aktau” – Akimat of Mangistau region’s authority,
SEZ “Ontustyk” – Akimat of South Kazakhstan region’s authority, SEZ “National
Industrial Petrochemical Technological Park” – Oil and Gas Ministry’s authority and
SEZ “Burabay” – Tourism and Sports Ministry’s authority; SEZ “Information
Technology Park” is in the competence of Industry and New Technologies Ministry.
90
Id. at p.29 http://invest.gov.kz/upload/docs/rus/41e4fa1349e5e653a1a2cc311f86e0e6.pdf
The SEZ Law considers that only Industry and New Technologies Ministry is a single
authorized agency for SEZ regulation. 91 Investors complain that working with
different authorities creates additional difficulties. We suppose that ratings and surveys
about work of ministries and agencies would be helpful to increase the efficiency of
governmental control.
According to our calculation, Kazakhstan’s score in “rule of law” under TI
report, which ranges from about -2,5 to 2,5, where the highest values correspond to
better governance outcomes, correlates to a score of 3.8 in “rule of law” on the La
Porta table, which is scaled from 0 to 10, where the lower scores show lower
efficiency levels.92It indicates that Kazakhstan has relatively weak rule of law. The
main factor, which decreases rule of law index, is level of corruption in the country.
6.4 Expropriation and compensation.
The next value for legal enforcement is “expropriation and compensation.”
[I]CR’s assessment of the risk of ‘‘outright
confiscation’’ or ‘‘forced nationalization.’’ Average of the
months of April and October of the monthly index between
1982 and 1995.93 Scale from zero to 10, with lower scores
for higher risks.94
Under Country Risk Delcredereducroire Report Kazakhstan’s record in “risk of
expropriation and government action” is 4th among 7 possible, where the highest is the
most risky. This assessment is based on the risk of the breach of contract by the
In the end of 2011 Kazakhstan established 3 new SEZ: in Karaganda district “Sary-arka” the development of metallurgy and
metalworking; in Almaty district “Horgos – East Gates” – the development of transport-logistic potential, in Pavlodar district “
Pavlodar” - the development of chemistry and oil chemistry industrial sectors.
92
http://www.transparency.org/country/#KAZ
93
La Porta et al., supra note X, at 1127 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
94
Id.
91
government, the possibility of (dys) functioning of the judiciary system and attitude
towards foreign investors.95
The Investment Law guarantees the rights of investors. The Investment Law
does not provide clear grounds for expropriation. It determines the difference between
nationalization and requisition. The Investment Law provides that in the exceptional
cases a forcible seizure of the investor’s property for public use goals is possible. It
guarantees that the full damages caused to investor will be compensated in case of
nationalization. Investors are also entitled to compensation in case of unlawful actions
(inaction) by officials. A court will determine the value of the property and damages
for compensation. Investment Law does not constitute the fair market price provisions.
Bilateral investment and double tax treaties (BITs) between Kazakhstan and
USA signed on 05.19.1992 also requires compensation in case of expropriation.
Kazakhstan faced several claims from foreign investors on legal expropriation
of property for public purpose. Some of these claims were the subject of a dispute on
the international arbitration level. Kazakhstan paid the whole amount for damages
when arbiter awarded to make such payments.
According to our calculation, Kazakhstan’s score 4 in in “risk of expropriation
and government action” under Country Risk Delcredereducroire Report, which ranges
from 0 to 7, where the highest is the most risky, correlates to a score of 4,3 in
“expropriation and compensation” category on the La Porta table, which is scaled from
0 to 10, where lower scores for higher risks. It indicates that Kazakhstan has relatively
low risk in “expropriation and compensation”.
6.5 Repudiation of contracts by government.
95
http://www.delcredereducroire.be/en/country-risks/rating/#riskofexpropriation
The next rate to evaluate legal enforcement is “repudiation of contracts by
government.” A country obtains point if
[I]CR’s assessment of the ‘‘risk of a modification in
a contract taking the form of a repudiation, postponement,
or scaling down’’ due to ‘‘budget cut- backs, indigenization
pressure, a change in government, or a change in
government economic and social priorities.”96 Average of
the months of April and October of the monthly index
between 1982 and 1995. Scale from zero to 10, with lower
scores for higher risks.97
We were not able to find Kazakhstan’s in “repudiation of contracts by
government” score and correlated the similar Kazakhstan’s score in “political risk for
investors category. Under International Country Risk guide Kazakhstan’s score in
“political risk for investors” is 66,0,98 where the higher numbers show lower risk.99
Investment Law provides a single investment regime for domestic and foreign
investors. It guarantees the stability of the agreements between investors and public
authorities Exceptions might be in case of changes in contracts.
The stability of the agreement in contracts is not guaranteed in following cases:
if a contract is the subject 1) amendments of the legislation; 2) certain provisions of
international treaties; 3) amendments or additions to domestic acts to ensure national
and environmental security, health and morality.100
According to our calculation, Kazakhstan’s score 66,0 under International
Country Risk Guide report in “political risk for investors”, where the higher numbers
show lower risk, correlates
96
101
to a score of 6,6 in “repudiation of contracts by
La Porta et al., supra note X, at 1127 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
Id.
https://www.countrydata.com/media/wysiwyg/Samp_ICRGIssue_1.pdf
99
https://www.prsgroup.com/about-us/our-two-methodologies/icrg
100
http://www.invest.gov.kz/upload/docs/en/1417c1db50a0f856583dbd000f85d7c7.pdf
101
https://www.prsgroup.com/about-us/our-two-methodologies/icrg
97
98
government” category on the La Porta table, which is scaled from 0 to 10, where lower
scores for higher risks. It indicates that Kazakhstan has relatively low risk of
repudiation of contracts by government.
Kazakhstan’s legal enforcement level.
Overall, under the La Porta table Kazakhstan’s scores are:
1) in “corruption” category is 2.6, which is scaled from 0 to 10, where lower scores
for higher levels of corruption.102 It indicates that Kazakhstan has relatively high level of
corruption.
2) in “efficiency of judicial system” category is 3.3, which is scaled from 0 to 10,
where the lower scores show lower efficiency levels.103 It indicates that Kazakhstan has
very low level of efficiency of judiciary system. The main factor, which decreases
efficiency of judiciary system index, is level of corruption in the country.
3) in “rule of law” category is 3.8, which is scaled from 0 to 10,where the lower
scores show lower efficiency levels. It indicates that Kazakhstan has relatively weak rule
of law. The main factor, which decreases rule of law index, is level of corruption in the
country.
4) in “risk of expropriation and government action” category is 4.3, which is scaled
from 0 to 10, where lower scores for higher risks. It indicates that Kazakhstan has
relatively low risk of expropriation and compensation.
5) Kazakhstan’s score in “repudiation of contracts by government” category is 6.6,
which is scaled from 0 to 10, where lower scores for higher risks. It indicates that
Kazakhstan has relatively low risk of repudiation of contracts by government.
102
103
Id.
Id.
This study shows that Kazakhstan has relatively low risk of expropriation and
government action along with repudiation of contracts by government, but high level of
corruption significantly decreases efficiency of judiciary system and rule of law indexes.
In order to improve legal enforcement index the country needs significantly decrease
level of corruption.
7. Accounting standards.
Accountings standards are the next index for legal protection investors. An
assessment of the country by following items
[T]hese items fall into seven categories (general
information, income statements, balance sheets, funds flow
statement, accounting standards, stock data, and special
items).104
Kazakhstan’s national accounting standards are based on International
Accounting Standards. Kazakhstan was the first country in CIS region that made such
changes in Accounting Law. In 1995 Kazakhstan promulgated National accounting
standards and in 2002 adopted a law on audit activities.
Accounting standards in Kazakhstan are regulated by Law on Accounting and
Financial Reporting (Accounting Law). Under the Accounting Law the following
financial statements should be included: 1) a balance sheet; 2) a profit and loss
statement; 3) a statement of changes in equity; 4) a cash flow statement; 5)
supplementary notes.105
The 2005 Law made the amendments to Accounting Law established that JSC are
required to use International Financial Reporting Standards (IFRS) and International
Standards on Auditing (ISA). All other entities, including banks and insurance companies
104
105
La Porta et al., supra note X, at 1127 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
http://online.zakon.kz/Document/?doc_id=30092011
(excluding state-financed entities) are required to use IFRS from January 1, 2006. Before
these amendments all the entities were required to apply Kazakh Accounting Standards
(KSA). Micro-enterprises still may to apply simplified tax-based rules. Small and
medium-sized enterprises (SMEs) should apply Kazakhstan Accounting standards; and
public interest entities (PIEs) 106 and large companies are required to apply IFRS”.
Different requirements to use IFRS or KSA are applied to listed companies on
Kazakhstan Stock Exchange (KASE). The accounting requirements depend on categories
of companies. Category A is the highest KASE listing category. To prepare financial
statements they have to follow IFRS. Companies that are listed on the lower
listing category can choose either IFRS or KSA to use. These different requirements to
use IFRS and KSA create many problems when two different companies work together
and they use different accounting procedures. The reason is that even KSA is based on
IFRS there are some non-accordance of several positions between IFRS and KSA.
Especially, it would create problems if such companies with different categories would
plan their mergers and acquisitions. Experts notice that IFRS better proves authenticity
rather than KAS. Implementation two different standards also create problem of their
inhomogeneity.107 This problem would disappear when all companies would use IFRS,
which are also more authenticable.
International experts notice that in Kazakhstan is a problem with insufficient
number of specialists who know IFRS. 108 Especially, it happens in the Agency of
financial supervision (AFS). This situation decreases the efficiency of AFS’s supervision.
The term ‘public interest entities’ would be defined to include joint stock companies (excluding non-for profit organizations),
financial institutions, companies with state participation and certain extractive industry companies. Such an approach would address
the problem of applying IFRS in organizations for which IFRS was not designed or intended.
107
http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/09/24/000020953_20070924101600/Rendered/PDF/409420
ENGLISH0KZ0rosc1aa11PUBLIC1.pdf p.2.
108
Id.p.3.
106
Experts recommend in order improving AFS’s efficiency a number of planning controls
should depend on a number of IRFS’s specialists.109 To increase the AFS’s efficiency
work the government needs to increase number of trainings and internships for its
specialists.
International experts notice that no difference to obtain the certification between
trained specialists who uses KSA and new specialists.110 The problem with education,
which we mentioned before, might be a reason to have the same exam for new and
trained specialists. The other issue is that even KSA are based on the International
standards, experts notice differences between KSA and IRFS. In this case it is good when
candidates take the same exam.
Transparency of accounting reports is another problem in Kazakhstan.
111
International experts recommend in order increasing the transparency of accounting
report to publish the on web—sites. It would help: 1) to increase the access of investors
to the information of companies; 2) to exclude non-equal access to information; 3) to
increase a public control.112
The access to the information is very important for investors, because it gives them
the opportunity to analyze the situation of the company before they would make a
decision about investment. The exclusion of non-equal access to the information increase
the protection of third parties, like creditors and employees, when they have the same
access to the information as companies, which work as a partners. A public control might
protect the society from possible negative circumstances, which company’s activity
might create.
109
Id.
Id.p.4.
111
Id.p.6-7.
112
Id.
110
All these possible solutions would be helpful to improve the quality of
implementation of accounting standards in the country.
8. Ownership
8.1 Ownership, 10 largest companies.
Structure of ownership as a measurement to evaluate the level of legal
protection is a point of dispute in many articles by scholars.”113 A country is given
points if
[T]he average percentage of common shares owned
by the three largest shareholders in the 10 largest nonfinancial, privately owned domestic firms in a given
country. A firm is considered privately owned if the state is
not a known shareholder in it.114
In 1993 government has established Kazakhstan Stock Exchange (KASE).
According to one expert’s opinion “it is the largest multifunctional and organized
financial market in Central Asia.”115 KASE has five major sectors: a foreign currency
market, a government securities market, shares and corporate bonds market, repo
operations, and a derivatives market. But this source of investments is still
insignificant and undeveloped. KASE existence does not impact the financial markets
and economic situation in the country.
The banking system of Kazakhstan is represented by 38 commercial banks,
where five of them are large banks: KazKommertsbank, Halyk bank, BTA bank, Bank
Center Credit and ATF-UniCredit bank. They were valued at 8.34 trillion tenge
113
The Challenges of Quantifying Investor Protection in a Comparative Context
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=906113; The Real Difference in Corporate Law Between the United States and
Continental Europe: Distribution of Powers http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893941; Some scholars think “the
fundamental legal differences between the US system of corporate governance and the Continental European corporate law system is
the way to distribute powers within a corporation. “The Real Difference in Corporate Law Between the United States and Continental
Europe: Distribution of Powers” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=893941
114
La Porta et al., supra note X, at 1127 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=139134
115
http://www.deloitte.com/assets/DcomKazakhstan/Local%20Assets/Documents/T&L/En/Brochures/Doing%20business%20in%20KZ_2013.pdf
(approximately $55 billion).116 Kazakhstani leading banks obtained reasonably good
ratings from international agencies. But according to international experts’ opinions,
local banks take high margins for credit. For foreign investors it is cheaper to use
retained earnings or borrow from home countries. Kazakhstan banking system is still
has not yet recovered after world banking crisis. The banks in the country has a
governmental support under a Distressed Assets fund117, which has been created in
2008 and under stabilization plan, which has been created in 2012.
No restrictions are provided in Kazakhstan’s Law to engage one’s own business
enterprises by foreign private entities. Some exemptions for foreign investment exist
in the Land Law. Under the Land Code only Kazakhstan citizens and companies may
have a private ownership for land. Short-term and long-term ownership options are
available for lease. Short-term is up to 5 years, long-term is up to 45 years. For
agricultural purposes foreigners may rent a land up to 10 years. However, foreigners
may own agricultural land through Kazakhstani-registered joint venture or a full
subsidiary. Also foreigners may own a land to build industrial and non-industrial
facilities, including dwellings. The following types of private ownership are not
allowed for foreign investment: 1) land used for national defense and national security
purposes; 2) specially-protected natural territories; 3) forests, reservoirs (lakes, rivers,
canals, etc.), glaciers, swamps, etc.; 4) public areas (urban or rural settlements); 5)
main railways and public roads; 6) land reserved for future development and
construction of national parks, railways and public roads, subsoil use and power
facilities, and social infrastructure.
116
117
http://www.state.gov/e/eb/rls/othr/ics/2013/204668.htm
The fund’s equity was around $33.5 million.
In 2013 Kazakhstan’s pension funds experienced turmoil after the Law about
the merging all pension funds into the Single National Pension Fund (SNPF). This
fund stepped out from the KASE membership and lost a right to sell its instruments. In
2013 KASE and National Bank stopped to publish SNPF’s financial reports. Its
activity became totally non-transparent.118
The Initial Public Offering in Kazakhstan started only in 2012, when the
government with KASE launched the “People’s Initial Public Offering (IPO)”. The main
purpose of People’s IPO is to provide the Kazakhstan’s citizens rights to buy shares of
the country’s major enterprises. These companies are: 1) KazTransOil; 2) Kegoc; 3) 3)
Air Astana; 4) KazMorTransFlot; 5) Samruk-Energo; and 6) KazTransGas. Kazakhstan
Temir Zholy, KazTemirTrans, KazAtomProm and KazMunaiGas are planning to be
listed in 2014-2015. These companies are the biggest and the most stable in the country.
Foreigners may purchase National companies’ shares on the secondary market.119
We were not able to find the information about the average percentage of
common shares owned by the three largest shareholders in the 10 largest non-financial,
privately owned domestic firms in the country. The possible reason might be that IPO
in Kazakhstan started only in 2012. In 2015 the government plans the gradual public
listing up to 10 percent of the most stable companies of Kazakhstan. In this case such
structure of ownership in the country would help to improve legal protection index.
8.2 GDP and GDP per capita.
118
119
http://www.kase.kz/files/publications/2014/14_01_31_DN.pdf
A Kazakh issuer cannot sell its shares to foreign citizens and/or foreign companies or stateless persons, if the controlling portion of
its shares is either directly or indirectly owned by the JSC NWF "Samruk-Kazyna", at the time these shares are placed on the stock
exchange in fulfilment of the relevant decree of the Government of Kazakhstan to be adopted. The main idea of the Law, evidently, is
that the main target investors of the proposed People's IPO are citizens of Kazakhstan and local pension funds.
http://www.mondaq.com/x/183634/Securities/Law+On+Peoples+IPO
The last measure in the legal protection is GDP and GDP per capita.
GDP and GDP per capita is the main feature to show the level of development
of countries. Under World Bank data Kazakhstan’s GDP is 203,520 billion 120 and
Kazakhstan’s GDP per capita is 12,116.121
Kazakhstan is a country with increasing oil output. According to EY survey
68% think that the future of Kazakhstan will be driven by oil and gas, mining and
metals, reflecting an overdependence on extractive industries” 122 The government
realizes that for stable and steady growth the country needs the diversification of
economy. In 2010 The President signed Strategic Development Plan 2020. 123 This
plan stated one of the country’s development priorities is diversification of the
economy. Under international experts’ opinion to provide a diversification economy
Kazakhstan needs to establish an adequate level of aggressiveness of state policy in the
diversification of manufacturing and exports. World Bank invested $2,5 mlrd to
support Kazakhstan’s attempts in diversification its economy.124 In order to increase
investment flows in these specific fields the government needs to improve its legal
protection.
In order to attract foreign investment and to increase GDP and GDP per capita
Kazakhstan needs to know: 1) what are the country’s weaknesses in this competition;
2) what do current investors notice as Kazakhstan’s weaknesses; 3) what does
Kazakhstan have to do to improve its investment attractiveness. These questions Ernst
120
http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD. GDP per capita is gross domestic product divided by midyear population.
GDP is the sum of gross value adds by all resident producers in the economy plus any product taxes and minus any subsidiaries not
included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or depletion and
degradation of natural resources. Data are in current US dollars.
122
Id. X http://www.ey.com/Publication/vwLUAssets/EY-Kazakhstan-attractiveness-survey-2013-ENG/$FILE/EY-Kazakhstanattractiveness-survey-2013-ENG.pdf p.23.
123
http://www.akorda.kz/en/category/gos_programmi_razvitiya
124
http://www.zakon.kz/4621180-vb-vydelit-kazakhstanu-25-mlrd..html
121
and Young (EY) Company asked of currently established investors to discuss their
recommendations for Kazakhstan. 125 On the base of this survey EY Company
recommended for Kazakhstan to perform five following potential steps 1) spread the
world; 2) move up the value chain; 3) remove regional disparities; 4) enhance the
business environment; and 5) foster innovation. 126 The development of the social
infrastructure, health care system and business climate are also highly recommended.
Responding to these recommendations the government plans to perform several
global projects to promote country’s investment image.
The first government’s project is a WTO membership. Currently, the WTO is
not keen on Kazakhstan’s participation. They recognize the progress in agriculture, but
mention problems in tariffs adjustments and regulations.127 They are also concerned
about state-owned enterprises regulation, tariff rate quota volumes, discriminatory
Value Added Tax (VAT) preferences and trade-related investment measures.128 WTO
members negatively reacted when Kazakhstan, Russia and Belorussia established their
own Custom Union129 with its own schedule of commitments and its own external
tariffs for participants.
G-Global Internet dialogue platform is another well-known Kazakhstan
initiative.130 Kazakhstan’s President suggested substituting the ineffective G-7 and G20 with the G-Global dialogue platform, also involving all UN countries in the process
to search for anti-crisis solutions. On May, 22-24, 2014, the Astana Economic Forum
125
For more details look at supplement 2 on the page X.
Id.
127
http://www.wto.org/english/news_e/news13_e/acc_kaz_23jul13_e.htm
128
Id.
129
Kazakhstan entered into the Custom Union with Russia and Belorussia. They established a single custom tariff for participating
countries.
130
http://kazembassy.ca/kazakhstan/g-global/
126
will become a realization of G-Global initiative and a platform to elaborate upon a
new UN anti-economic-crisis plan.
The next project is world fair “Exspo-2017 - Future Energy”. In 2017
Kazakhstan has plans to attract a new technologies projects around the world. These
initiatives would be helpful to be recognized as a foreign-investments-friendly country
and to improve Kazakhstan’s GDP.
Foreign investment significantly impacts the country’s GDP growth. In 2013
Kazakhstan attracted $24137 mln. 131 It is 11% of Kazakhstan’s GDP. Under
international experts opinion in order to ensure sustainable economic growth the
volume of investment to GDP should be within 30-40%.132 Today Kazakhstan is the
country with upper-middle-income.133The government aspires by the end of 2015 to
have $ 15,000 GDP per capita and become a country with high-income economy.
International experts have developed a Strengths, Weaknesses, Opportunities, and
Threat (SWOT) analysis of investment attraction for any given country. 134 The
following ten factors show the level of the attractiveness for foreign investors: natural
resources, location, political stability, business climate, investor protection, availability
of transnational corporation, foreign direct investments, economic growth, customs
union markets, industrial and innovative development. Today Kazakhstan has a good
level in most all of those factors. 135 This study shows that Kazakhstan has strong
opportunities to achieve its goal to increase GDP per capita and to become a country
with high-income economy.
131
http://invest.gov.kz/?option=content&section=4&itemid=75
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf at. P.6
http://www.worldbank.org/en/country/kazakhstan/overview
134
To see the details see supplement 3 on page X.
135
Earnest and Young’s 2013 Kazakhstan attractiveness http://www.ey.com/Publication/vwLUAssets/EY-Kazakhstan-attractivenesssurvey-2013-ENG/$FILE/EY-Kazakhstan-attractiveness-survey-2013-ENG.pdf
132
133
International experts assess current Law on investment as law, which has “more
regulative character, rather than stimulative or supportive character.” 136 They notice
that the “whole legal framework on foreign investment is rather controlling than
encouraging or supporting nature.” 137The government needs to lead encouraging or
supporting attitude to foreign investment in order to provide stable Kazakhstan’s GDP
and GDP per capita growth.
From 1993 Kazakhstan attracted $160 bln. 138 It is 80% of Central Asian
investment. Kazakhstan adopted the first Law on investment in 1990, but study show
that these Law did not create adequate conditions to attract investors (see sup.4). This
Law mostly had declarative character, but increased foreign investors’ interests to
Kazakhstan’s economy. Motivation in the 1990 Law on investment was that the
government provided some legal guarantees to foreign investors. The second 1994
Law on Investment established types of legal entities with foreign investment and the
order to settle disputes. The weakness of the second law on investment was that all
norms had a temporal character, without long-term perspective. As we see in the chart
the second Law on investment also did not create adequate condition to invest to the
country (see sup 4). At the same time in 1993-95 Kazakhstan ranked 19th and was
included in the list of 20 top ranking by FDI performance and Index.139 In 1997 the
President adopted third Law “State support of direct investment”. The third law
provided the most favorable conditions for foreign investors in Kazakhstan, despite
interests of the country. As we see in the chart this law also was not helpful to attract a
significant amount of investors (see sup.4). Current 2003 Law on investment provided
136
Id.
Id. P.34
138
http://invest.gov.kz/?option=content&section=4&itemid=75
139
http://www.oecd.org/investment/globalforum/44246319.pdf
137
a single regime for foreign and national investors. As we can see in the chart shows
that the 2003 Law on Investment created a good conditions for foreign investment,
because the biggest growth happened in 2007, 2008 and 2009 (see sup.4).140In 20022004 Kazakhstan significantly improved on 6 notches its level in the FDI performance
and was ranked 13th.141 But in 2006-2008 the country decreased its FDI performance
level on 7 notches and ranked 20th.142; in 2012 it ranked 16th in the “best GDP growth”
category (see sup.5).143
This analysis shows that the country had 4 Laws on Investment. The country
had 4 Laws on Investment. In different years FDI showed different volatility (see
sup.5). This volatility significantly depended on legal protection, which the country
provided in different years. Current Law on investment as law international experts
assess as the Law, which has “more regulative character, rather than stimulative or
supportive character.” 144 They notice that the “whole legal framework on foreign
investment is rather controlling than encouraging or supporting nature.” 145 The
government needs to lead encouraging or supporting attitude to foreign investment in
order to provide stable Kazakhstan’s GDP growth.
This research shows how important legal protection for foreign investors to
improve FDI flows in the country. In order to attract a significant FDI flow the country
needs to improve legal protection for foreign investors. All possible solutions
mentioned by scholars and in this paper would be helpful to improve legal protection
in Kazakhstan to establish its sustainable and steady economic growth.
140
See also http://invest.gov.kz/?option=content&section=4&itemid=75
Id.
Id.
143
http://www.bloomberg.com/visual-data/best-and-worst/best-gdp-growth-countries
144
Id.
145
Id. P.34
141
142
Conclusion.
Under Global Competitiveness Report 2013-2014 Kazakhstan in 2013 took 50th
place among 148 economies as one of the most competitive countries in the world.146
From 1991 Kazakhstan made a big progress to create a good climate for foreign
investment in the country. This progress would not be performed without foreign
investment. The government still works to make significant reforms in the key fields
in the law and economy. In this paper we investigate the legal protection for foreign
investors in Kazakhstan according to the La Porta table. The analysis suggests main
conclusions.
First, Kazakhstan has a highest score in ADRI, creditor and shareholder rights
indexes, where higher numbers is more protected. It indicates that Kazakhstan has a
highest legal protection for foreign investors in ADRI, creditor and shareholder indexes.
This study shows that even Kazakhstan represents a civil system of law, it’s scores in
ADRI, and creditor and shareholder rights indexes are the same high level as in the
countries with a common system of law.
Second, Kazakhstan has relatively low risk of expropriation and government
action along with repudiation of contracts by government, but high level of corruption
significantly decreases efficiency of judiciary system and rule of law indexes. In order
to improve legal enforcement index the country needs significantly decrease level of
corruption. All possible solutions mentioned by scholars and in this paper would be
helpful to improve legal enforcement index in Kazakhstan.
Third, Kazakhstan uses two types of accounting standards: IRFS and KAS.
Their implementation depends on category of legal entities. Kazakhstan’s public
146
http://www.weforum.org/issues/global-competitiveness/index.html%E2%80%9Dtarget=
interest and large entities use IFRS, small and medium companies might use KSA.
Even KSA are based on IRFS, they have certain differences. It creates problems of
authenticity and inhomogeneity. From 2008 Kazakhstan coherently works to
implement IRFS fully. If all legal entities would use the same standards it would
significantly decrease problems with authenticity inhomogeneity.
Fourth, we were not able to find data about structure of ownership in the
country. The possible reason for it might be that only in 2012 Kazakhstan started
people’s IPO program and it’s early to have final data. Only by 2015 Kazakhstan plans
to list up to 10 percent of the Kazakhstan’s biggest and stable companies. In this case
it would improve Kazakhstan’s legal protection index.
Fifth, under World Bank data Kazakhstan’s GDP is 203,520 billion 147 and
Kazakhstan’s GDP per capita is 12,116. 148 From 1993 Kazakhstan attracted $160
bln.149 In 2013 Kazakhstan attracted $24137 mln,150 which is 11% of Kazakhstan’s
GDP. Under international experts opinion in order to ensure sustainable economic
growth the volume of investment to GDP should be within 30-40%.151 This research
shows that volatility of FDI significantly depends on legal protection. The government
aspires by the end of 2015 to have $ 15,000 GDP per capita and become a country
with high-income economy For this purpose the government needs significantly
improve legal protection by decreasing level of corruption in the country. These
measures would encourage improvement FDI flows and provide stable and steady
147
http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD. GDP per capita is gross domestic product divided by midyear population.
GDP is the sum of gross value adds by all resident producers in the economy plus any product taxes and minus any subsidiaries not
included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or depletion and
degradation of natural resources. Data are in current US dollars.
149
http://invest.gov.kz/?option=content&section=4&itemid=75
150
http://invest.gov.kz/?option=content&section=4&itemid=75
151
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf at. P.6
148
economic growth of Kazakhstan.
Supplementary 1.
There is a list of legal sources about foreign investment in Kazakhstan.152
№
152
Document name
Dat
e
of
adoption
Date
of
last change
Dow
nload
State program of
accelerated
industrial1innovative development
of the Republic of
Kazakhstan for 2010-2014
19.0
3.2010
Law
of
the
2Republic of Kazakhstan
On Investments
08.0
1.2003
04.0
7.2013
Dow
nload
(173,35kb)
Program
"Investment
attraction,
Special Economic zones
3development and Export
promotion in the Republic
of Kazakhstan for 20102014"
30.1
0.2010
08.0
6.2012
Dow
nload
(542,80kb)
List
4
activities
08.0
5.2003
06.0
8.2010
of
priority
Dow
-
Classification
of
5activities in
hightechnology production
18.0
6.2012
-
List of Population
Centers of the Republic of
6Kazakhstan with Low
level of Socio-Economic
development
10.0
5.2012
-
List of strategic
7
investment projects
01.0
9.2009
http://www.invest.gov.kz/?option=content&itemid=123
nload
(636,59kb)
Dow
nload
(136,33kb)
Dow
nload
(126,50kb)
Dow
nload
(137,47kb)
Dow
-
nload
(57,96kb)
0
1
2
3
4
5
6
Rules for inclusion
of investment projects into
8
the list of investment
strategic projects
22.0
8.2012
21.1
0.2013
Law
of
the
Republic of Kazakhstan
9On Government Support
for
Industrial
and
Innovative Activities
09.0
1.2012
04.0
7.2013
Law
of
the
1
Republic
of
Kazakhstan On Licensing
11.0
1.2007
21.0
7.2013
Law
of
the
1Republic
of
Kazakhstan On
Special
Economic Zones
21.0
7.2011
04.0
7.2013
Law
of
the
Republic
of
1
Kazakhstan On Currency
regulation and currency
control
13.0
6.2005
24.1
2.2012
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Law
of
the
1Republic
of
Kazakhstan On Joint stock
companies
13.0
5.2003
04.0
7.2013
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Rules
for
acceptance,
registration
1
and
consideration
of
application for provision
of investment preferences
01.0
6.2012
Rules
and
conditions for issuance of
permits
to
foreign
1
employee for employment
and
employers
for
attraction of foreign labor
force
13.0
1.2012
08.0
5.2013
Law
of
1
Republic
Kazakhstan On
17.0
4.1995
21.0
6.2013
the
of
State
-
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registration
of
legal
entities and registration of
branches
and
representative offices
7
8
9
0
Law
of
1Republic
Kazakhstan On
Bankruptcy
the
of
21.0
1.1997
17.0
7.2009
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Law
of
the
Republic
of
1Kazakhstan On Limited
liability companies and
additional
liability
companies
22.0
4.1998
24.1
2.2012
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Law
of
the
1Republic
of
Kazakhstan On
Private
entrepreneurship
31.0
1.2006
04.0
7.2013
On approval of the
2
Visa Issuance Rules in the
Republic of Kazakhstan
14.1
2.2009
07.0
7.2010
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Supplement 2.
1) [S]pread the world: Majority of potential investors lack awareness of
Kazakhstan’s prospects. 38% of respondents established in Kazakhstan see the country
as a leader in energy in 2030. None of the respondents established in Kazakhstan’s
view the country as a leader in R&D and innovation. 35% of respondents believe that
developing the social infrastructure and health care systems will help address regional
disparity. 32% think that a transparent and predictable regulatory environment will
improve Kazakhstan’s investment climate. 27% call for better education and training
in new technologies.
2) Move up value chain: “How do foreign investors already established in
Kazakhstan?”(Respondents provided two possible answers). A leader in the energy
38%; A highly diversified economy 25%; Surpassed by competition from more
dynamic countries 19%; A leader in agri-business 14%; A country with highly
developed technological infrastructure 13%; A leader in exports to international
markets 12%; A leader in manufacturing 11%; A country with one of the best
education systems 8%; A country with one of the highest-value labor markets –none;
One of the world leaders in knowledge-based industries –none; A leader in R&D and
innovation – none; Can't say 14%.
3) Remove regional disparities: “How to develop Kazakhstan's regions. What
do you think are priority measures to address regional disparities and enhance
attractiveness of specific locations?” (Respondents provided two possible answers);
Develop social infrastructure and health care system, improve quality of life 35%;
Invest in infrastructure and urban projects 30%; Adopt a proactive approach to attract
investors with target region-specific campaigns 24%; Direct education and training in
line with prospective economic needs of the region 23%; Host sport and cultural
events to enhance awareness of the region 9%; Can't say 3;
4) Enhance the business environment. Ways to improve the investment climate:
“In your opinion, where should Kazakhstan concentrate its efforts to improve its
investment climate?” (Respondents prioritized up to three measures): Enable
transparent and predictable regulatory environment 32%; Invest in infrastructure and
urban projects 30%.
5) Foster innovation. Proposed actions: “What are the main areas of reform to
make Kazakhstan a leader in innovation?” Improve education and training in new
technologies 27%; Increase incentives for companies in innovative and knowledgebased sectors 24%; Develop entrepreneurship 20%; Develop a culture of innovation
and creativity 18%; Promote vocational learning courses 13%; Develop joint research
programs 13%; Develop infrastructures 1%; Can't say 36%.153
153
Id. p.31
Supplement 3.
SWOT analysis154:
Strengths
1. Favorable business
Weaknesses
1. Lack of a systematic
environment of the country sustained
approach for holding state
by economic and political stability. 2.
investment policy. 2. Instable
High investment attractiveness of the
national legislation and a lack of
country due to rich natural and
mechanisms for law and
mineral resources. 3. Favorable
contractual relationship
geographic position of Kazakhstan in
observance. 3. Poor competitive
proximity to major consumer markets
conditions for investment
of Central and Western Asia, Russia,
attraction (customs and exchange
India and China. 4. Consciousness of
arrangements). 4. Undeveloped
state investment policy priority. 5.
infrastructure for investment
Establishing specialized institutes
attraction (special zones, financial,
and a resource base focused on
bank, information and analytical,
facilitating investment inflow;
consulting, transport infrastructure
etc). 5. Instable system of public
administration related to
investment attraction. 6. Visa
regime.
154
Program Investment Attraction, Special Economic Zone Development and Export Promotion in the RK. P.30
http://invest.gov.kz/upload/docs/en/025ae96dc514529af7ffb99634c90ce0.pdf
Opportunities
Threats
1. Position of a regional leader
1.
Loss
of
for investment attraction volume. 2.
attractiveness
Creating a positive investment image
resulted from raw material base
of the country in the international
depletion. 2. Retained high-risk
capital
economy due to retained primary
markets.
3.
Building
a
of
investment
the
country
systematic and consistent policy for
product
investment attraction. 4. Forming an
economy and investments. 3. Loss
effective
private
of available industrial potential for
investment
development of the country due to
attraction. 5. Ensuring a sustainable
poor investments to capital stock.
and balanced economic growth of the
4.
country through redistribution of
investment image of the country
investments
to
resulted from a lack of a clear-cut
6.
state
state
infrastructure
processing
and
for
from
extractive
economic
sector.
disproportion
Strengthening
policy
a
in
the
negative
and
its
Resources of JSC “Kaznex Invest
implementation
National Export and Investmy”;
attraction. 6. Direct losses from
for
investment
the state budget due to ineffective
usage of funds for investment
attraction.
7.
Corruption
customs post, in tax payment).
(at
Suplement 4.
Value of Kazakhstan’s FDI in 1993-2009, mlrd dollars (under the World Bank’s
data)
30000
25000
20000
15000
Kazakhstn's FDI
10000
5000
0
2009
2010
2011
2012
2013
61