In the prior post I looked at the significant progress Kazakhstan has made in improving its economic attractiveness and the recognition that it received from the U.S. government for its reform. But I also noted its low rank of 126 on Transparency International’s Corruption Perceptions Index.
What does a low CPI rank mean in practice?
A recent U.S. State Department report describes some potential risks of doing business in Kazakhstan.
According to State’s Kazakhstan Investment Climate Statement 2015, “corruption and bureaucracy remain challenges for foreign investors working in Kazakhstan. … Inconsistent implementation of … laws and regulations at all levels of government, combined with a tendency for courts to favor the government, create significant obstacles to investors.”
The Investment Climate Statement is pretty damning and is not for the naively optimistic or the faint-hearted.
The document continues:
Foreign investors have complained about the irregular application of laws and regulations, and interpret such behavior as efforts to extract bribes. In the past, investors have reported harassment by the [country’s anti-corruption authorities] via unannounced audits, inspections, and other methods. … At times, authorities have used criminal charges in civil disputes as a pressure tactic against businesses.
Many foreign companies say they must vigilantly defend their investments from a steady stream of decrees and legislative changes, most of which do not exempt or ‘grandfather in’ existing investments. In some instances, the government uses bureaucratic stalling tactics to induce companies to ‘voluntarily’ give up contractual concessions in exchange for services (i.e. licenses, permits, VAT refunds) which they would ordinarily expect to receive. Foreign investors also complain about arbitrary tax inspections, as well as problems in finalizing contracts, delays and irregular practices in licenses, and land fees.
Kazakhstan makes policy-level efforts to improve the investment climate by introducing amendments to existing legislation and alleviating requirements for visas and work permits to expatriates … execution of these changes by local governments are uneven and foreign investors complain about the government’s tendency to challenge contractual rights, to introduce preferences for domestic companies, and to create mechanisms for government intervention in foreign companies’ operations, particularly in procurement decisions. … Together with vague and contradictory legal provisions that are often arbitrarily enforced, these negative tendencies feed the perception that Kazakhstan’s investment environment is subpar.
Not all foreign investors will suffer from the problems described in the report. But the State Department clearly cautions that “American firms seeking to invest in Kazakhstan should conduct thorough due diligence and retain legal counsel prior to any investment.”
Perhaps that is why foreign investment in Kazakhstan (and other emerging markets generally) primarily tends to be made by large companies, who have sufficient financial resources they can invest (and where necessary overinvest) in lawyers, accountants, and other local country specialists to meet the barrage of the ever-changing regulations and defend the foreign investor’s rights against overzealous or corrupt local officials.
In the next post, I’ll provide more perspective on the apparent conflicts between Kazakhstan’s attempts at reform and corruption still being a problem.
Alex Nisengolts is a Chicago attorney focusing on cross-border M&A, electronic discovery, and investments and operations in Kazakhstan. He first traveled to Kazakhstan in 1994 as a legal advisor on a USAID-sponsored legal reform project and has been involved in Kazakh matters for the past two decades, for U.S. and Kazakh law firms and as a manager and senior manager for a Big Four international accounting firm. He can be reached here.