Kazakhstan: A wild west for foreign investors
For all Kazakhstan’s insistence that it is committed to attracting outside investment, the government’s history of mistreating foreign firms, selective application of the law, and tolerance for high-level corruption suggests otherwise.In early October, Astana forced the US utilities company AES Corporation – one of the first foreign investors Kazakhstan and the only Western firm active in the country’s electricity sector – to hand over two hydroelectric power plants that it had acquired in a concession deal two decades earlier. For AES’ troubles, the government also offered a compensation package of… $1.
Initially encouraged by signs that the government wanted to diversify the economy and improve the business climate for foreign investors, AES began investing in the country in the late 1990s, and signed a 20-year concession for 2 hydropower plants and four coal powered plants in East Kazakhstan in 1997. The plants, which AES was to take over, were in sorry state: the roofs of the buildings had collapsed, the equipment had not been maintained in years, the employee’s salaries had not been paid and loans were in default. Putting aside potential fears about investing in a developing economy with a weak regulatory framework after receiving guarantees from the government, AES pumped nearly $400 million in the plants to improve their efficiency and ensure they were up and running in time for the winter season.
As the economy started booming along with high oil prices in the early 2000s, however, the government began second-guessing the wisdom of its decision to lease the plants to AES. Soon, it became clear that the authorities intended to take over the assets and annul the concession deal, despite the fact that its previous guarantees that it would respect foreign investment laws already on the books.
In April 2017, as the concession’s expiration date approached, Astana informed AES that it would have to hand over the plants by October 1st, without extending any explanation or opportunity to negotiate. Following numerous unsuccessful attempts to negotiate with authorities over the matter, AES sent the government its calculation for the transfer payment it was due in return for the value it invested in the plants over the concession period.
Using a previously approved contractual formula, AES estimated it was due $87 million and included extensive documentation to support this calculation. For its part, however, the government informed AES that the transfer payment for each plant amounted to $60 million, without providing supporting documentation for the $27 million difference between the two figures. After several rounds of talks in late August, AES adjusted the transfer payment to $77 million. The government then made a final offer on September 25th: $1 for each hydropower plant, arguing that the dividends the assets paid over the years should cover the rest – another misleading claim that seemed to suggest that all the profits made by foreign companies in Kazakhstan should somehow be nationalized by the government.
The troubles didn’t stop there: As it turns out, the government had also set up a defective escrow account that allowed it to disburse the transfer payment to any party – including itself – at any time. Since then, Astana has not returned any funds to AES and has been declining the firm’s attempts to reopen settlement discussions.
Kazakhstan’s treatment of AES – as well as of numerous other foreign companies, from Moldova’s Ascom to America’s CCL Oil – shows that more than 25 years after the fall of the Soviet Union, investors must still be ready to risk seeing legal frameworks ignored, assets seized, and investments nullified if they get on the government’s bad side. Their stories serve as major red flags to others that may have been attracted by the government’s claims that it is open for business. With oil prices continuing to stagnate, if President Nursultan Nazarbayev really wants to prepare the economy for the future, he will have to ensure such tales become a thing of the past.
By EU Reporter