The protection of investments in the Kyrgyz Republic: Possible legal mechanisms to minimize risks

Aicholpon Jorupbekova

The latest political changes and civil unrest in the South of the Kyrgyz Republic has once again shattered investors’ confidence in investing in the Kyrgyz Republic. Many people who planned on investing money in the Kyrgyz Republic have at best, suspended their activities until parliamentary elections in October. Others have questioned whether Kyrgyz legislation provides enough guarantees to protect their investments in the Kyrgyz Republic.

This article describes the main guarantees provided to foreign investors by the existing legislation of the Kyrgyz Republic and suggests several legal mechanisms which might assist in strengthening the protection of your investments in the Kyrgyz Republic.

The Main Investment Guarantees of the Kyrgyz Republic

The Kyrgyz Republic has adopted a number of laws and regulations on the protection and promotion of investments. One of the main legal acts is the Law of the Kyrgyz Republic No. 66 “On Investments in the Kyrgyz Republic” adopted on March 27, 2003. Law No. 66 guarantees foreign investors the same protections and treatment as domestic nationals and companies. Foreign investors are free to choose where to invest, use foreign currency and granted the right to repatriate invested funds and proceeds.

In addition to Law No. 66, the Interim Government of the Kyrgyz Republic has also adopted Decree No. 23 “On the Protection of Investments,” dated April 26, 2010. The decree which was adopted as a result of the harm caused to the investment climate by recent political and civil instabilities and further acknowledges the importance of foreign investment to the Kyrgyz economy and reaffirms the government’s commitment to protecting foreign investors by upholding the rule of law.

On May 18, 2010, the Ministry of Economic Regulations adopted Order No. 113 which provided a road map with specific measures aimed at restoring and improving the investment climate of the Kyrgyz Republic. The road map addressed several issues including activities for the protection of investments, the possibility of granting tax breaks in some business sectors, and establishing a regular dialogue between state authorities and business communities.

In addition to the recent measures taken by the Government of the Kyrgyz Republic, a number of legal mechanisms can also be used by investors to further strengthen protections of investments in the Kyrgyz Republic.

Minimizing Risks Related to the Nationalization of Investments Through the Application of Bilateral Investment Protection Treaties

Due to the recent wave of nationalizations of property allegedly owned by the family and political allies of former president Bakiev which took place from April to June 2010 and information on corporate raids, many investors are reassessing the risk of nationalization of their property. During this process, it is important for them to note the advantages offered by the existing bilateral investment protection treaties of the Kyrgyz Republic.

The Constitution the Kyrgyz Republic grants the state the right to nationalize private property. The process is governed in accordance with the Civil Code and requires parliament to adopt a special law for each nationalization of property, which must stipulate the compensation amount.

Both the Constitution and the Civil code do not require the presence of an overriding public interests as the basis for nationalization and does not provide more specific rules on how and when the compensation shall be paid to the owner of the nationalized property. Pursuant to Kyrgyz legislation, if an investor does not agree with the terms of the compensation stipulated under the special law, it has a right to challenge the law in Kyrgyz courts. As many can imagine a challenging a decision of the Kyrgyz government in the Kyrgyz courts can be very difficult.

Additional protections against the nationalization of foreign investments and right to receive fair market value and prompt compensation are often addressed in bilateral investment promotion and protection treaties between the Kyrgyz Republic and other countries.

The Kyrgyz Republic is a party to bilateral investment promotion and protection treaties, with more than 30 countries, including the United States, Germany, Switzerland, Kazakhstan, Russia, China, India, South Korea and the United Kingdom. If nationals or companies of countries having bilateral investment promotion and protection treaties with the Kyrgyz Republic invest in the Kyrgyz Republic, their investments are afforded specific additional guarantees based on their countries respective bilateral treaty with the Kyrgyz Republic.

For example, pursuant to the treaty between the Government of the Kyrgyz Republic and the Government of the United Kingdom of Great Britain and Northern Ireland, the investments of UK companies in the Kyrgyz Republic can only be nationalized when there is a specific public purpose. If this situation arises, UK investors are guaranteed prompt and adequate compensation. The compensation must amount to the genuine value of the nationalized investment and include interest at normal commercial rate, until fully paid. Payments must be paid without delay and be transferable.

As opposed to Kyrgyz law which requires an agreement between an investors and the government, in order to apply for international arbitration, most bilateral investment treaties allow investors to go directly to arbitration if the investor believes that his or her rights, under a bilateral treaty, have been violated by the Kyrgyz Republic. Having a right to apply directly for international arbitration, as opposed to being subject to the rulings of Kyrgyz courts, provides better chances of receiving a fair judgment.

Minimizing Risks Related to the Increased Fluctuation of Kyrgyz Legislation Due to Political Instability and the Lack of an Independent Kyrgyz Judiciary

In addition to risks relating to the nationalization of property, foreign investors are also concerned by broad fluctuation in Kyrgyz legislation as legislation is regularly amended and modified. Instability in the legislative regime can result in unsatisfactory decisions due to changes from old legislation by the new government. Investors are also concerned with having to litigate in Kyrgyz courts if investors’ rights are violated as a number of studies suggest that the system is plagued by corruption and politically dependent, making it incredibly difficult to predict the fate of investments.

Kyrgyz legislation offers a number of options to investors which can minimize risks related to instability in the legal regime and corruption in the judiciary system. Under the Civil code, foreign investors entering into various agreements (investment agreements, loan agreements, share sale and purchase agreements, services agreements) with Kyrgyz counterparts have a right to agree on the application of the laws of any foreign country. For example, parties involved in an investment agreement may decide that English law should govern the agreement because the foreign investor is more familiar with this body of law and believes that it is more favorable and predictable. While a practical tool, for investors to choose which law should govern is subject to certain exceptions, such as dealings with land or other immovable property located in the Kyrgyz Republic can be only governed by the Kyrgyz legislation.

Kyrgyz law also grants foreign investor the right to seek protections in foreign courts and arbitration proceedings, thus giving them the ability to choose preferable enforcement jurisdictions. Even when there is no specific agreement to arbitrate, if the rights of a foreign investor from a country with whom the Kyrgyz Republic has entered into a bilateral investment protection treaty were violated, the company may invoke the protections of that treaty, which are likely to involve some kind of permissive arbitration proceedings.

The Kyrgyz Republic is a party to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under these treaty obligations, the Kyrgyz Republic must recognize foreign arbitral awards and enforce them in the Kyrgyz Republic.

Conclusion

Though the Kyrgyz Republic has experienced some political instability in recent months resulting in a lack of confidence from foreign investors, many protections available to potential foreign investors may be being overlooked. These protections afforded through existing legislation and bilateral protection treaties may offer investors increased security and the ability to bypass inconsistencies in the national legislation regime by providing a number of tools which can help to eliminate or minimize some of the risks of investing in the current political climate.

(Published in journal “Investment Now”,
2010, Volume 2 (19))