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Astana, Kazakhstan © evgenykz

Investing in Kazakhstan Is Still a Risky Business

Extending economic opportunities to Kazakh companies could end up bankrolling the ruling class.

Kazakhstan and the European Union are celebrating a landmark partnership agreement that was sealed in December 2017, with an “overwhelming majority” of Parliament members voting to pursue the bloc’s first such deal with a Central Asian country. Before popping open the locally-sourced champagne, however, the EU should take a moment and consider this not as an opportunity to lean back, but to push its easterly neighbour harder on human rights, the rule of law and improving the country’s stagnant business environment for the European companies that Kazakh leaders hope to lure to their market.

The Enhanced Partnership and Cooperation Agreement (EPCA) is a charter described as “WTO plus” because it reiterates World Trade Organization provisions (in order to cement them) while taking on other barriers to trade. The EU’s partnership agreements come with a variety of labels; a similar deal with Armenia, for example, is called the Comprehensive & Enhanced Partnership Agreement (CEPA). The choice of adjectives may vary, but all generally seek to upgrade trade ties while simultaneously enhancing political dialogue and holding the partner country accountable to international frameworks. The EPCA with Kazakhstan sticks to these priorities and attempts to respond to civil society concerns by placing strong emphasis on rights issues.

Unfortunately, translating those words into action might be more complicated than the EU thinks. Finnish MEP Liisa Jaakonsaari echoed concerns shared by NGOs and other lawmakers during the debate over final ratification of the EPCA. She declared that “economic interests cannot take precedence over human rights” at the tabling of the bill, but it remains unclear whether even those economic objectives will prove within reach. For one thing, implementing and enforcing the deal’s provisions means facing numerous challenges posed by corruption and the post-Soviet state’s overall business climate.

As is often the case in former communist countries, oligarchs closely aligned to the ageing President Nursultan Nazarbayev control much of Kazakhstan’s wealth. In such a murky environment, extending more economic opportunities to Kazakh companies could just end up bankrolling the ruling class, making investing in Kazakhstan a risky business. While the World Bank’s latest Doing Business index places Kazakhstan 36 in the world — a jump of 16 places compared to two years prior — corruption remains rife. Transparency International rates the country in its lowest quartile, sandwiched between Iran and Russia.

Many of these issues stem from the way the economy is structured. The vast majority of the country’s state-owned firms remain government-controlled, with no progress on promises to privatize behemoths such as the KazMunaiGaz oil and gas firm. Even when outside companies are allowed into the market, they face obstacles to putting down long-term roots in the market.

This holds doubly true for investors in the country’s strategic electricity sector. Astana bluntly told AES Corp, a US company with 20 years of experience operating in Kazakhstan, that its concession of two hydropower plants the American firm had been operating and improving since the 1990s would be terminated. Adding insult to injury, the Kazakh government then decided to ignore the terms of its initial contract with AES, which provided for compensations in case of termination. Instead of the nearly $90 million it is owed, Kazakh officials offered the American company $1 and demanded an immediate transfer of ownership.

A similar fate befell the Dutch company Liman Caspian, which saw its licenses for oil and gas extraction annulled by Kazakhstan’s courts and transferred to a Kazakh company controlled by obscure shareholders. Liman Caspian’s ordeal helps demonstrate the difficulties faced by outside companies in dealing with the Kazakh judiciary and in seeking redress for unfair treatment.

In its defence, the Kazakh government is cognizant of at least some of these problems. Astana has made an effort to privatize state-owned enterprises, attract investors and diversify the economy. Following the 2015 collapse of world oil prices, for instance, the Kazakh government announced a privatization drive that sought to reduce state ownership of the national economy from more than 40% to less than 15% — the standard used by the Organization for Economic Cooperation and Development. Speaking at the Kazakhstan Global Investment Roundtable last month, Prime Minister Bakhytzhan Sagintayev promised the government would be prioritizing transparency, the rule of law and the protection of property in 2018. Those remarks came just days before the European Parliament voted for the EPCA.

The MEPs who overwhelmingly voted for the new partnership agreement need to make sure their deal with Astana turns these talking points into concrete policy results on the ground. A freer, more transparent economy based on good governance as opposed to venal interests will be important to addressing many of their other concerns regarding Kazakhstan. Europe’s voice should be loud, but it does not need to be solitary. With President Nazarbayev visiting Washington this month, now would be a good time for his American interlocutors to drive home the same message.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: evgenykz / Shutterstock.com