by Noor Kadhim with Marina Goddard 

Introduction

The sudden and dramatic collapse of the USSR at the end of 1991 caused Central Asia’s newly emergent States – over a dozen of them – to grapple with a kind of legal renaissance. Since then, the regional foreign direct investment (FDI) regime in Central Asia has reached a certain level of maturity.  Among the five Central Asian States, namelyKazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan, there is a network of domestic investment laws and regulations, bilateral and multilateral investment agreements (BITs and MITs respectively), which has developed in parallel with the international FDI legal framework. 

This article considers the investment landscape in the three out of the five States: Kazakhstan, Turkmenistan and Uzbekistan, and provides a snapshot of key developments and trends to date in investment arbitration.

Evolving investment regimes to attract investors 

Since obtaining independence in 1991, Kazakhstan, Turkmenistan and Uzbekistan have independently developed their respective investment regimes in an attempt to procure inward investments, keeping in mind their corresponding political climates and national contexts.  With a view to incentivizing FDIs in priority sectors of the economy such as energy, mineral exploitation, agriculture and construction, these three States have adopted national investment legislation to safeguard foreign investments. 

In the early 1990's, the investment legislation of these States was largely homogeneous, as they essentially incorporated Soviet laws into their respective legal systems, with their primary focus being the promotion of investor-friendly policies.[i]

However, when the need to attract FDI became dominant, further revision of the regulatory FDI framework followed. Uzbekistan undertook revision of its entire framework of investment legislation in 1998, whilst adopting new laws providing additional guarantees to foreign investors involved in the priority sectors.[ii] In the same fashion, Kazakhstan's "Law On State Support of Direct Investments" (28 February 1997) [iii] offered additional state guarantees and preferences to investors contributing to priority sectors of the economy, such as industrial infrastructure, and agriculture.

The 2000s marked the beginning of the next stage of development in these States. One key feature was the establishment of a common legal framework for both domestic and foreign investors. This excluded Turkmenistan which, although it updated its investment legislation in 2008, maintained a distinction between domestic and foreign investments.[iv]

Alongside,  all three States  took steps to enhance investor rights was by means of bilateral investment treaties (BITs) and multilateral investment treaties (MITs), such as, the Energy Charter Treaty (ECT) signed in 1994 by all three States, and the Commonwealth of Independent States (CIS) Investor Rights Convention (1997) to which Kazakhstan is party.[v] The relationship with foreign investors was also guided by global regulatory framework, including the following conventions to which all three States became signatories: the Vienna Convention on the Law of Treaties (VCLT, 1969), the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). 

Among the three, Kazakhstan and Uzbekistan have evidently taken the lead in their regulatory endeavours, with Kazakhstan establishing the Astana International Financial Centre in 2018, and Uzbekistan establishing the 'Tashkent International Arbitration Centre' (TIAC) in the same year and also adopting the UNCITRAL Model Law in its reform of arbitration-related legislation in 2021-2022.[vi]

Current BIT Landscape

Kazakhstan has signed 52 BITs (43 in force), Turkmenistan, 30 BITs (24 of which in force), and Uzbekistan, 56 BITs (49 in force).[vii] In line with international standards, the essential elements of these three states' BITs are similar in that they provide certain common substantive protections for foreign investors, inter alia, protection from expropriation (direct and indirect); treatment that is not 'fair and equitable ' (i.e. FET standard); most-favored-nation (MFN) treatment; full protection and security; and umbrella clauses. 

However,  the parties' obligations in many cases will be treaty-specific.[viii] For example, in some cases the definition of 'investment' carries with it additional requirements such as "an effective and continuous link to the [State's] economy",[ix] or the counter-obligation on the investor not to weaken "the requirements of [the State's] national legislation in the field of environment".[x] In others, the definition of 'investor' is restricted, such as in the 2011 Uzbekistan-China BIT, where offshore companies are not included within this definition. Arguably the most restrictive of the three states, Turkmenistan, in its BITs does not for the most part include public entities in the scope of foreign investors,[xi] despite the fact that most inward foreign investment is governed by project-specific presidential decrees, granting privileges not provided by legislation.[xii]

Across the three states, the investor-state dispute settlement provisions (ISDS) in BITs routinely refer to ICSID, with the most common alternative being arbitration under the United Nations Commission on International Trade Law (UNCITRAL) rules.[xiii]

To date, Kazakhstan, Uzbekistan and Turkmenistan have collectively been party to 44 ISDS proceedings as respondent (19, 9 and 16 disputes respectively).[xiv] Despite this significant experience with ISDS, none of the states has unilaterally terminated any of the BITs that it has concluded, in contrast to, for example, Ecuador which previously denounced multiple BITs.[xv] This, at the very least, is indicative of the generally positive attitude of these countries toward ISDS.

Uncertain Soviet BIT Legacy: the case of Kazakhstan

The inherited legacy of Soviet BITs can be understood from the perspective of Kazakhstan, as the largest of the former Soviet Republics in Central Asia and the region's largest energy producer[xvi]. Third party sources[xvii] suggest that investment disputes with this State mainly concern oil, gas, and mining. It has been Respondent in 14 public ICSID cases, and other unpublished arbitrations. 

Notable cases involving Kazakhstan as a respondent state include Worldwide Minerals v. Republic of Kazakhstan[xviii] and Gold Pool Limited Partnership v. Republic of Kazakhstan.[xix] Viewed together, these cases have increased uncertainty as to whether the former Soviet republics are bound by the USSR's investment treaties. Despite the tribunals in both cases applying similar standards when dealing with the question of Kazakhstan succession to the USSR BIT, they reached conflicting decisions. In the former award, the tribunal answered the question of Kazakhstan being a successor entity to the USSR affirmatively,[xx] whilst in the latter case the tribunal unanimously dismissed the case for lack of jurisdiction, holding that Kazakhstan had not succeeded automatically to the relevant BIT executed by USSR.[xxi] The English High Court further complicated matters by setting aside this latter award, holding that Canada and Kazakhstan had impliedly agreed to the succession of Kazakhstan to the Canada-USSR BIT, as a successor state of the USSR.[xxii]

The long-term implications of these conflicting decisions remain to be seen, but what is clear is that a tribunal's decision is not the end of the matter.

Conclusion

Given its position at the intersection of Asia and Europe, and its abundance of natural resources, Central Asia is an important region for international trade and investment. Within this region, Kazakhstan, Uzbekistan and Turkmenistan’s geopolitical positioning has allowed their economies to diversify and expand both eastwards, to China and India, and westwards, to Europe. However, they remain economies in transition. This leads to continuing challenges when it comes to the drafting of international investment agreements, reducing state interference and control, and combatting corruption and transparency. Of the CIS states, Kazakhstan, Uzbekistan and Turkmenistan have demonstrated (with varying degrees) a certain willingness to engage with investors and modernize their investment treaty and legislative frameworks to attract investment. It will be crucial for the global legal community continually to review developments in the region, taken against the backdrop of the perceived shortcomings of the ISDS system as a whole, to better understand the paradigm shifts occurring in this region of diverse cultures and interests. 

The region is still coming to grips with the challenges associated with the changing socio-economic and political landscape, including the more recent tensions between the West (including NATO) and the Russian Federation., and the tensions arising from the changing political dynamics in the Middle East and surrounding regions.  These issues are further exacerbated by the complexities of the current sanction regimes, changes in government, as well as reduced transparency and clarity in the legal system. These are all factors that the current post-Soviet BIT frameworks – and indeed the ISDS system in general – will need to address in due course.

[i]     Diora Ziyaeva and Yevhenii Vasylchenko, 'Investment Legislation of Central Asian States' in Kiran Nasir Gore and others (eds), International Investment Law and Investor-State Disputes in Central Asia: Emerging Issues (Kluwer Law International BV 2023) 79.

[ii]     Law of the Republic of Uzbekistan No. 609-I 'On Foreign Investments' dated 30 April 1998.

[iii] PriceWaterhouse Coopers News Bulletin, ' Law On State Support To Foreign And Domestic Direct Investments, in Mondaq (<https://www.mondaq.com/divorce-family-wills/2012/law-on-state-support-to-foreign-and-domestic-direct-investments> (22 April 1997) Last Accessed on 26 August 2024. 

[iv]    Diora Ziyaeva and Yevhenii Vasylchenko, 'Investment Legislation of Central Asian States' in Kiran Nasir Gore and others (eds), International Investment Law and Investor-State Disputes in Central Asia: Emerging Issues (Kluwer Law International BV 2023) 82.

[v]     Tigran Ter-Martirosyan, 'The history of foreign direct investment in Central Asia' in Kiran Nasir Gore and others (eds), In International Investment Law and Investor-State Disputes in Central Asia: Emerging Issues (Kluwer Law International BV 2023) 54

[vi]     Kabir A.N. Duggal et al, 'International Investment Law and Investor-State Disputes: Introductory Reflections on Central Asian Experience' in Kiran Nasir Gore and others (eds), In International Investment Law and Investor-State Disputes in Central Asia: Emerging Issues (Kluwer Law International BV 2023) 54

[vii]      UNCTAD Investment Policy Hub <https://investmentpolicy.unctad.org/international-investment-agreements/> Last accessed on 26 August 2024

[viii]     Aida Bektasheva, 'BITs in Central Asia: Opportunities and Risks' (The American Review of International Arbitration: Columbia Law School, 10 October 2023) <ВITs in Central Asia: Opportunities and Risks – American Review of International Arbitration (columbia.edu)> Last accessed on 26 August 2024;

[ix]       Such as Uzbekistan's BIT with Portugal (2001)

[x]        Such as Kazkahstan's BIT with Austria (2004)

[xi]       Such as the Turkmenistan–Bahrain BIT (2011)

[xii]      Aida Bektasheva, ВITs in Central Asia: Opportunities and Risks, in (Yue Zhen-Li, ed) The American Review of International Arbitration (Columbia Law School) (23 October 2022).

[xiii]     Ibid.

[xiv]  UNCTAD Investment Policy Hub <https://investmentpolicy.unctad.org/investment-dispute-settlement/> accessed on 26 August 2024

[xv] 'Ecuador denounces it remaining 16 BITs and publishes CAITISA audit report' (Investment Treaty News, 12 June 2017) <https://www.iisd.org/itn/en/2017/06/12/ecuador-denounces-its-remaining-16-bits-and-publishes-caitisa-audit-report/ accessed on 25 August 2024>

[xvi]     IEA (2022), Kazakhstan 2022, IEA, Paris https://www.iea.org/reports/kazakhstan-2022

[xvii]    Jus Mundi, 'Kazakhstan', accessible at: www.jusmundi.com/en/d/profile/state/kz (last accessed on 25/08/2024)

[xviii]   World Wide Minerals v. Republic of Kazakhstan (II), [2020] EWHC 3068, 23 November 2020.

[xix]     Gold Pool JV Limited v. Republic of Kazakhstan, PCA Case No. 2016-23, [2021] EWHC 3422, 15 December 2021

[xx]    Luke Eric Peterson 'In a dramatic holding, UNCITRAL Tribunal finds that Kazakhstan is bound by terms of former USSR BIT with Canada' (Investment Arbitration Reporter, 28 January 2016); <https://www.iareporter.com/articles/in-a-dramatic-holding-uncitral-tribunal-finds-that-kazakhstan-is-bound-by-terms-of-former-ussr-bit-with-canada/> accessed on 26 August 2024; However, the award was set aside for other reasons by the English High Court in its judgment (The Republic of Kazakhstan v World Wide Minerals Ltd & Anor (2020) EWHC 3068 (Comm)), because  it was determined that the State was not given a fair opportunity to respond to the basis on which the arbitral tribunal had awarded damages

[xxi]     Jack Ballantyne, 'Kazakhstan defeats claim under Soviet treaty' (Global Arbitration Review, 3 August 2020)

[xxii]    Gold Pool JV Limited v The Republic of Kazakhstan [2021] EWHC 3422 (Comm), where Andrew Baker J had set aside the award dated 30 July 2022, whereby the tribunal had rejected jurisdiction on the basis of Kazakhstan's non-succession to the USSR BIT. See also: Cosmo Sanderson, 'Court finds Kazakhstan bound by Soviet treaty' (Global Arbitration Review, 4 January 2022), <Court finds Kazakhstan bound by Soviet treaty - Global Arbitration Review> accessed on 26 August 2024