Russia and the CIS THE INTERNATIONAL LAW Quarterly A PUBLICATION OF THE FLORIDA BAR INTERNATIONAL LAW SECTION www.floridabar.org • www.internationallawsection.org Vol. XXX, No. 4 21st Century Litigation in Russia By Eugene Perkunov, Moscow, Russia IN THIS ISSUE: 21st Century Litigation in Russia .................................... 1 International Arbitration in Russia: The Current State of Affairs ........................... 1 Message from the Chair ............... 3 From the Editor ............................. 5 World Roundup............................. 6 Tax Climate in Russia: Global Warming or Still an Ice Age? ... 21 An Overview of Kazakhstan’s Investment Laws and its Investor-State Arbitral Awards ..................................... 25 Doing Business in Russia ........... 34 I. Introduction Russia’s legal system and the role of courts Russia has a so-called “civil” or “continental” legal system, meaning that the main source of law in Russia is legislation adopted by the Russian parliament and executive authorities. The Russian system therefore differs from those countries of the world with a common-law system based on court precedent. Courts and court precedent in Russia play a lesser role in “forming the law,” although that role is increasing. The highest source of Russian law is the 1993 Constitution of the Russian Federation, adopted following the breakdown of the USSR when Section Scene ............................ 40 Russian Parties in English Courts ...................................... 42 Interim Measures in Ukraine....... 48 Exhaustion of Trademark Rights, Parallel Imports and the Customs Union of Russia, Belarus and Kazakhstan .............................. 50 Development of the Beneficial Ownership Concept and a New Tax Exemption for Eurobond Structures in Russia................. 54 Russia’s Accession to the WTO: Consequences for Foreign Investors .................................. 57 Combating Fraud in Russia ........ 61 Vol. XXX, No. 4 Russia became an independent state and successor to the USSR. The Constitution sets out the basic tenets of the state’s organization and powers, including human rights, local government bodies, and the court system. Next in the hierarchy of sources of law are international treaties to which Russia is party, followed by federal laws (statutes) adopted by the Russian Parliament (consisting of the State Duma, or the lower chamber of the Parliament, and the Federation Council, or the upper chamber of the Parliament), and then sub-legislative acts such as presidential decrees and resolutions of the Russian federal government. See “Litigation in Russia,” page 4 International Arbitration in Russia: The Current State of Affairs By Roman Zykov, Helsinki, Finland and Anna Tumpovskiy, Miami, Florida I. Introduction Russian parties have made many headlines for their involvement in some of the largest and most complex commercial disputes in international arbitration history. Ironically perhaps, Russia itself is perceived by many as unfriendly to arbitration. Thus, the trend has been for Russians to arbitrate their disputes abroad. Recent changes in the Russian legal landscape caused by the rise of arbitration as the preferred dispute resolution mechanism among Russian businesses and international businesses dealing with Russia, however, might alter this trend. This article will cover the basics of Russian legal practice The International Law Quarterly See “International Arbitration,” page 13 The ILQ.com An Overview of Kazakhstan’s Investment Laws and its Investor-State Arbitral Awards By leonid shmatenko, Düsseldorf, germany a homogeneous investment policy in all areas; e.g., banking, production of goods, the service sector, and especially the exploration, extraction and reinement of oil and noble metals.12 I. Introduction In recent years, the landlocked former Soviet Republic of Kazakhstan has substantially improved its oil and gas prospects.1 Being a rich supplier of oil and gas serves to attract foreign direct investments, but the prospect of such investments is diminished by the government’s policy of coniscating the property of foreign direct investors to “protect its subsoil sector.” As a result of such expropriation, to date Kazakhstan has faced thirteen known investment arbitrations.2 Five proceedings are still pending,3 one has been discontinued pursuant to Rule 43, para.1 of the ICSID Arbitration Rules,4 three awards are conidential and not available to the public,5 and four awards are publicly available.6 These numbers demonstrate Kazakhstan’s efforts to maintain its economic and political integrity by avoiding transparency in its investment policies. This article will analyze the investment laws of Kazakhstan, as well as give an overview of the awards that are publicly available. Finally, the article will outline the problems that foreign investors face in investment arbitrations against the Republic of Kazakhstan. II. History of Kazakhstani Investment Law The development of Kazakhstani investment law: First Stage The period spanning 1990 to 1994 represents an important stage in the development of the independent Kazakh state. While the process was slow and left many areas unregulated, a series of legislative acts propelled the transition from a centrally planned economy to a market economy.7 Second Stage The second stage began on 27 December 1994. This date marked the introduction of TheILQ.com Fourth Stage a Kazakh Foreign Investment Law8 (“FDI”) and the Civil Code and was the beginning of the formation of an independent area of law that did not previously exist in Kazakhstan. Although the FDI quota remained low in the irst years of the new laws,9 growth eventually occurred.10 The reasons for a low FDI quota were comparable to those of other CIS countries; e.g., an economic crisis, inlation, and an immense increase in public debt. The Kazakh Republic realized it had to take measures to encourage foreign direct investment, leading to the next stage in the evolution of Kazakh Foreign Direct Investment Law. Third Stage On 28 February 1997, the Kazakh government introduced an additional law “On the Support of Foreign Direct Investment”11 that initiated a new period of legislation to attract foreign investors in areas that urgently needed stimulation such as technology and production. To this end, the Republic of Kazakhstan attempted to establish different types of securities, such as tax beneits and legal guarantees. This third stage of development therefore represented the realization of the importance and signiicance of investment law for Kazakhstan, and the introduction of The International Law Quarterly The fourth and most important development stage took place in 2003. On 8 January 2003, the Republic of Kazakhstan introduced a new investment law, the “Law on Investments” (“kzLOI”),13 that made the previous laws obsolete. This regulation led to a boon in foreign direct investments, doubling the investments from US$4.6 billion in 2003 to US$8.3 billion in 2004 and US$18 billion in 2010.14 Today Kazakhstan is party to more than twenty BITs,15 is a signatory to the ICSID-Convention,16 and is party to the ECT.17 Current Situation The “Law on Investments” abolished use of the terms “foreign investment” and “foreign investor” and introduced a common term: “investor.”18 The law also abolished the “most favored nation” treatment, which had been the prevailing approach. This is certainly a positive change as it implies equal treatment for national and foreign investors.19 Article 3 kzLOI, in its newest amendment of February 2012, allows foreigners to invest in every kind of legal object, except where the laws of Kazakhstan limit investments (Article 3, para. 2 kzLOI). As there are numerous limitations in Kazakhstan’s Law on Licenses (“kzLOL”),20 the impact of Article 3 kzLOI could be described as rather insigniicant. Article 11 kzLOL contains twenty-four exceptions, including those in the nuclear energy sector, mass information media, and construction. The limitations have been adjusted over the years, but the most signiicant investment sectors still require a license. continued, page 27 Page 25 KAZAKHsTAn’s inVEsTMEnT lAws, from page 25 Additionally, the Law on Concessions21 (“kzLOC”) plays a major role. Article 4 kzLOC provides that “[c]oncessions might be distributed in every branch of the economy, except for those objects, which are included in the list22 deined by the President of Kazakhstan.” Despite these downsides, the law provides certain guarantees and standards of protection for foreign investors. According to Article 4, para. 1 kzLOI, the state provides full protection of investments under the scope of the Constitution as well as under the scope of international treaties. In the case of violation of these principles, the investor is entitled to damages pursuant to Article 4, para. 2 kzLOI. Although Article 4, para. 3 kzLOI provides a guarantee for the stability of contracts of investors concluded with state entities, it somewhat inconsistently includes a broad exception; namely, under Article 4, para. 3, nos. 1 and 2 kzLOI the guarantee is excluded if Kazakh and/or international legislation is amended to ensure national security, ecological security, public health or morality. Hence, under Article 4, para. 3, nos. 1 and 2 kzLOI, the Kazakh legislature has carte blanche to amend laws and thus undermine investments. At the same time, the Law on Investments eliminates the “grandfather clause”23guarantee against adverse changes in legislation.24 Article 5 kzLOI guarantees the possibility of income, and Article 8 kzLOI provides a guarantee for investors against nationalization and expropriation. Although it refers to exceptional circumstances (para. 1) and promises reimbursement of the market value (paras. 2 and 3), it is unclear when such exceptional circumstances occur and how they might be defined. Regarding dispute resolution, the kzLOI sets forth in Article 9 that the parties shall resolve disputes by negotiations (para. 1). They also may derogate from national courts and resolve their dispute by means of international arbitration. Chapter 3 provides for state support for investments made in Kazakhstan. Investors may receive, inter alia, tax holidays according to Article 13 kzLOI, natural subventions through state in-kind grants according to Article 18 kzLOI, and other beneits (Articles TheILQ.com 18-1 and 18-2 kzLOI). The requirements for these beneits are set forth in Articles 19 to 22 kzLOI, and these also provide for termination of such contracts. Chapter 4, Article 23, para. 1 kzLOI provides a kind of a “stability clause” stating that “[b]eneits given on the basis of the investment contracts with the authorized bodies concluded earlier than this Law has come into force shall maintain the effect up to the cut-off date stated in such investment projects.” Strategic objects Similar to the Russian Federation,25 Kazakhstan pursues a certain line of protectionism with regard to some sectors. The introduction of a new Article 193-1 into the Civil Code of Kazakhstan26 limited various possibilities to buy or own a “strategic” object. According to the legal deinition of Article 193-1, para. 1 of the Civil Code, a strategic object is a property having social and economic importance for the stable development of the Kazakh society, the ownership and (or) use and (or) disposing of which may impact the state of the national security of the Republic of Kazakhstan.27Article 193-1, para. 2 of the Civil Code of Kazakhstan contains a non-exhaustive list of “strategic objects.”28Additionally, Article 193-1, para. 3 of the Civil Code of Kazakhstan provides for further limitations in the chemical industry, the transport business, electricity production and military branches. For instance, the deinition of Article 193-1, para. 1 of the Civil Code of Kazakhstan is once again a blanket clause for the government to issue legislative acts (even using its power retroactively) allowing the acquisition of “strategic objects” in its discretion. Every object can be declared to be a “strategic object,” without the opportunity for court review. Additionally, the state has an option right, thus making any investments in the “strategic sector” subject to jeopardy.29 Taking a closer look at the regulations provided in Article 193-1, para. 1 of the Civil Code of Kazakhstan regarding “strategic objects,” one can see several problems. First, it is not clear how a public law regulation can make its way into the Civil The International Law Quarterly Code. Second, as mentioned above, this regulation leads to legal uncertainty as it authorizes the state to coniscate private property related to “strategic objects” without deining “strategic object.”30 Special Economic Zones Today, Kazakhstan has nine Special Economic Zones (“SEZ”).31 The concept of SEZ is common in Eastern European countries.32 According to Article 3 of the Law Concerning SEZ,33 the aim of the law is to foster fast development of highly productive and competitive industries, promote investments and transfer of new technologies, and create employment opportunities. The law itself covers a wide range of issues relating to the establishment and operation of SEZs (chapters 3 and 4 of the law).34 The law distinguishes between prioritized and adjuvant activities. Only companies that engage in prioritized activities may become real SEZ participants, obtaining beneits from their status. Companies engaged merely in adjuvant activities—i.e., not serving the purposes of the SEZ—do not receive the same favorable conditions as prioritized companies.35 Articles 9 to 14 of the law set forth the requirements that applicants have to meet to become a prioritized company. The administration of the SEZ is centralized, thus diminishing bureaucracy. In addition, SEZ participants may be permitted to bypass the search for employees on the national job market and may directly employ foreigners.36 Energy and Subsoil Sector The old Kazakh “Law on Subsoil and Subsoil Use”37 experienced several modifications in recent years. With Kazakhstan being one of the most important oil countries of the former Soviet Union, it is clear that this law plays a major role in investments made to the energy and subsoil sectors. Introduced in 2007, Article 45-2 permitted Kazakhstan unilaterally to cancel subsoil use contracts in order to “restore the economic interests of the Republic of Kazakhstan,” presupposing that mining in areas of strategic importance leads to a subcontinued, next page Page 27 KAZAKHsTAn’s inVEsTMEnT lAws, from previous page stantial change in the country’s economic interests that endangers national security. The “Law on Subsoil and Subsoil Use,” however, was replaced by a new “Law on Subsoil and Subsoil Use”38 in 2010, the aim of which is the consolidation of the relevant laws and the “greatest possible protection of the interests of the nation as the owner of the subsoil.” Although a company that has prospected an oil or gas reservoir will still be privileged as a contractor when the reservoir in question is to be exploited, there is no proviso for contracts that cover both prospection and exploitation of subsoil minerals.39 Exceptionally, such comprehensive contracts may be concluded by decision of the Kazakh government if the reservoir in question is of strategic importance or the geologic conditions are uncommon.40 Other peculiarities Kazakh law, as is the case with Ukrainian and Russian law, has several peculiarities regarding investments in certain branches. For example, under Article 74, para. 4 of the Law “On the Use of Air and Air Trafic,”41 only up to 49% of the nominal capital of a joint-stock company may be possessed by foreign natural or juridical persons. Under Article 24, para. 6 no. 3 of the Law “On the National Security of the Republic of Kazakhstan”42 and Article 5 para. 2 of the Law “On Mass Information,”43 a foreign natural or juridical person is not permitted to own directly or indirectly more than 20% of a legal entity in the mass media sector. But this brief list represents only a small percentage of peculiarities in Kazakh investment law, so it is advisable to check the relevant laws before making investments in the Kazakh economy. Notwithstanding, these regulations are less severe than in the Russian Federation where, for example, the Law “On Mass Media”44 provides in its Article 7 that foreign citizens are not allowed to possess any mass-media companies. III. Analysis of Investor-State Arbitral Awards The following section will discuss the four publicly available awards: CCL v. The Republic of Kazakhstan; AIG CapiPage 28 tal Partners and CJSC Tema Real Estate Company v. The Republic of Kazakhstan; Rumeli Telekom A.S. v. The Republic of Kazakhstan; and Caratube International Oil Company LLP v. The Republic of Kazakhstan. As a complete analysis would exceed the length of this article, only certain issues will be addressed. CCL v. The Republic of Kazakhstan The government of Kazakhstan had 87.9% of shares in a Kazakh company that owned an oil refinery. Before being restructured into an open joint-stock company under the laws of Kazakhstan, the reinery was a state enterprise from 1978 to 1994.45 In 1997, CCL (claimant) and Kazakhstan (respondent) entered into several concession agreements regulating the claimant’s right to possess and use respondent’s shares.46 Before the concession agreement was signed, a inancial analysis made the parties aware of an outstanding debt of the Kazakh Company and pending court proceedings.47 The concession agreement included an arbitration clause referring all disputes in connection with “foreign investment” to the Arbitration Institute of the Stockholm Chamber of Commerce. All other disputes were subject to national courts.48 On behalf of claimant, the operation of the reinery was transferred by a lease agreement to a new “Kazakh Company.” Another company, “Company X,” acquired by court actions the right to attach and take over ownership of the reinery’s assets to satisfy its claims against the Kazakh Company. Additionally the General Prosecutor of Kazakhstan obtained a decision from the Kazakh courts that terminated the lease agreement. The Ministry of Finance of Kazakhstan consequently issued an order to terminate the agreement.49 Following these actions, claimant submitted a request for arbitration. The irst issue addressed by the tribunal was the deinition of the term “foreign investor” under Kazakh law. After evaluation of the complex shareholding structure, the tribunal found that under the clear wording of the kzLOI 1994, the claimant qualiied as a foreign investor thereby affording the The International Law Quarterly tribunal jurisdiction to decide the dispute. The court’s reasoning was also underlined by the wording of the BIT.50 Another issue in the case was the deinition of the term “national of another country.” The tribunal addressed Article I, para. 1, Article I, para. 2, and Article VI, para. 8 of the U.S.-Kazakhstan BIT and held that “when reasonable doubt has been raised as to the actual ownership of and control over the company seeking protection,”51 the burden of proof regarding nationality shifts to the claimant.52 The court found that the claimant had not met this burden.53 Nevertheless, the tribunal held that it had jurisdiction over the case according to the kzLOI.54 On the merits the claimant argued that several measures undertaken by Kazakhstan amounted to expropriation and thus violated Article 7 kzLOI 1994 and Article VIII of the U.S.-Kazakhstan BIT.55 Among these measures were mandatory deliveries of oil products to the state-owned agricultural companies, the court proceedings, the court proceedings initiated by the General Prosecutor and the subsequent re-transfer of the management to the respondent.56 AIG Capital Partners Inc. and CJSC Tema Real Estate Company v. The Republic of Kazakhstan57 Between 1999 and 2000, AIG Capital Partners Inc. and a Kazakh company initiated a joint venture, CJSC Tema Real Estate Company, for the development and construction of a residential housing complex in Almaty, Kazakhstan. Subsequently, the claimants purchased property, signed construction contracts and began work. Sometime later, the government of Kazakhstan sought to cancel the project because the property was required for a national arboretum.58 In March 2000, the Almaty Oblast demanded, by resolution of the municipal government, transfer of the property without compensation to the City of Almaty. Ignoring the resolution, claimants tried to resume the construction. The city authorities and the police, however, expelled the claimants from the site. In February 2001, the property was inally coniscated by the City of Almaty.59 TheILQ.com KAZAKHsTAn’s inVEsTMEnT lAws, from previous page Claimants had to face several hurdles— jurisdictionally and substantively—in the arbitration proceedings. The first issue was whether their investments qualiied as “investments” under the U.S.-Kazakhstan BIT. By “investment,” the BIT means “every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party.” Kazakhstan, however, pleaded that the BIT jurisdiction had been purposely limited to “genuine U.S. Investors.”60 Additionally, it claimed that the relationship between AIG and the joint venture did not qualify AIG and CJSC as claimants under the BIT. The tribunal held, however, that investments originating from U.S. companies and routed through a chain of other companies, whether U.S. or not, are considered to be “indirectly U.S.-controlled” and therefore protected by the BIT. According to the tribunal’s view, the fact that Kazakh citizens owned a part of the company did not preclude its jurisdiction, as the chain of control extended to U.S.-based corporations where the investments originated.61 TheILQ.com As to the expropriation issue, the tribunal held that the claimants’ investment was expropriated in the sense of Article III, para. 1, U.S.-Kazakhstan BIT, through the methods mentioned above. Thus, the tribunal awarded US$9,951,709 plus interest to claimants.62 The real issues arose when claimants tried to enforce the award in Kazakhstan. Kazakhstan’s authorities invoked the state’s absolute immunity and denied enforcement, a position supported by Kazakh legal scholars.63 Following this, the claimants applied for enforcement against Kazakhstan and the Kazakh National Bank and the national funds at the Supreme Court of the United Kingdom. Their reasoning was that the United Kingdom was party to the ICSID Convention and, thus, the award should be enforceable against it. Particularly, claimants wished to obtain “a inal third-party debt and charging orders against cash and securities that are held in London by the third parties . . . , pursuant to a Global Custody Agreement dated 24 December 2001 with the National Bank of Kazakhstan.”64 The International Law Quarterly Invoking sections 13, para. 2 b, and 14, and para. 4 of the State Immunity Act, the Kazakh National Bank moved to discharge both orders, arguing that the property of the National Bank should be subject to state immunity. Kazakhstan and the third party did not maintain a contractual relationship; thus, the claimant’s orders were discharged. Kazakhstan, therefore, and not the National Bank of Kazakhstan was the judgment debtor. The third parties held cash accounts in London in the name of the National Bank, not Kazakhstan. These cash accounts represented the property of the National Bank under Section 14, para. 4 of the Immunity Act, thus making all assets immune from enforcement in the UK. This result did not change even though Kazakhstan enjoyed the beneits of the cash accounts. The court held that: [t]he property of a state’s central bank enjoys immunity from enforcement in the UK. This includes any asset in which the central bank has some kind of property interest. Restrictions on the right of a party to enforce a judgment against the property of a central bank continued, next page Page 29 KAZAKHsTAn’s inVEsTMEnT lAws, from previous page imposed by the State Immunity Act were legitimate and proportionate. The assets were not intended for use for commercial purposes [under Section 13, para. 4 of the Immunity Act].65 Such a view is also relected in Article 429 of Kazakhstan’s Civil Procedure Code,66 which states that “[a]n agreement of the state to derogate its juridical immunity does not imply its immunity from enforcement proceedings.” The view is shared by legal scholars.67 Rumeli Telekom A.S. v. The Republic of Kazakhstan The dispute arose out of investments made by the claimants Rumeli Telekom A.S. and Telsim Mobil TelekomunikasyonHizmetleri A.S.,68 both incorporated under Turkish laws in the mid-1990’s. Rumeli joined with a local Kazakh in a joint venture called KaR-Tel. The aim of this joint venture was to bid for a GSM mobile telecommunications license in Kazakhstan. When the license was obtained, the joint venture received several perks including a ive-year tax holiday. The dispute itself, however, involved the termination of an investment contract that had subsequently led to the redemption of the investor’s shares in a telecommunications enterprise.69 Regarding the jurisdictional objections, respondent claimed that the kzLOI 1994 was not applicable since new legislation had entered into force. The cornerstone of this dispute was the applicability of Article 6, para. 1 kzLOI 1994, including the “grandfather clause.”70 The tribunal agreed with the claimants and conirmed its jurisdiction by the application of the kzLOI1994 (that shall be applicable until 31 June 2009). Additionally, the tribunal found that Article 6, para. 1 kzLOI, as well the principles of good faith, estoppel and venire contra factum proprium led to the same result.71 Another issue was Kazakhstan’s attempt to have the tribunal “pierce the corporate veil,”72 referring to the cases TokiosTokeles73and Barcelona Traction.74 According to Kazakhstan, the true claimant was the “Turkish Savings Deposit Funds” Page 30 (“TSDIF”), an agency of the Turkish State, which, as a state entity, does not have permission to initiate proceedings at the ICSID. The situation regarding ownership was, indeed, very complicated. When the Uzan family owned Imar Bankin Turkey and encountered several problems, the Turkish Parliament decided to enact various laws empowering the TSDIF to take over control of several companies that the Uzan family had previously controlled either directly or indirectly. Additionally, the laws allowed the TSDIF to take over the management of these companies. As Rumeli and Telsim belonged to the Uzan companies, the TSDIF was entitled to appoint managers. The tribunal, however, declined to examine whether public entities could be subsumed under the term “investor” found in the ICSID Convention. Instead, the tribunal made a formal analysis of claimants’ status and held that they were permitted to initiate the arbitration. Although the tribunal made reference to TSDIF’s manager appointments, it stated that they were not at odds with the claimants’ corporate existence.75 On the merits, the tribunal found several violations. The irst violation mentioned by the tribunal was the contract termination on the grounds of an alleged failure to ile reports. In this regard, the investment committee violated an obligation to suspend a contract initially and notify the investor of the reasons for such suspension.76 The second violation of the standards of protection was the Ministry of Industry and Trade’s appointment of a Working Group whose task was to examine whether the investor had fulilled its investment obligations. Since the Working Group simply conirmed the contract termination and did not allow the investor an opportunity to present its case, the tribunal held that, due to transparency issues and due process, the decision violated the standard of “fair and equitable treatment” of the most favored nation (“MFN”) clause in the U.S-Kazakhstan BIT and customary international law.77 As to expropriation, claimants alleged that several actions by respondent constituted expropriation78 under Article III of the Turkey-Kazakhstan BIT and the kzLOI. The International Law Quarterly Respondent, however, denied that it had expropriated claimants’ investments.79 The tribunal evaluated the circumstances and found that: this was a case of “creeping” expropriation, instigated by the decision of the Investment Committee which was then collusively and improperly communicated to Telcom Invest and its shareholders before Claimants were made aware of it, and which proceeded via a series of court decisions, culminating in the inal decision of the Presidium of the Supreme Court.80 Thus, the tribunal awarded the claimants US$125 million plus interest for violating the “fair and equitable treatment duty imposed by the MFN clause contained in Article II, para. 1 of the Turkey-Kazakhstan BIT and for the expropriation of the claimants’ investments without following the requirements set forth in Article III, para. 1 of the Turkey-Kazakhstan BIT.81 Caratube International Oil Company LLP v. The Republic of Kazakhstan In this case 82 the investment dispute arose out of the authorities’ termination of a contract for exploration and exploitation of the Caratube oil ields. Allegedly, the claimant—Devinicci Salah Hourani, a U.S. citizen who owns 92% of the Caratube International Oil Company—breached the contractual obligations in 2008.83 According to the claimant, the contract with Kazakhstan violated the U.S.-Kazakhstan BIT. Particularly, Caratube claimed that it suffered discrimination and unlawful expropriation. Additionally, the Kazakh authorities threatened Mr. Devinicci Hourani, his family and his employees.84 Respondents alleged that the tribunal lacked jurisdiction over the case because the claimant was not a national of another contracting state for the purposes of Article 25, para. 1 of the ICSID Convention.85 Claimant, however, contended that because he was a U.S. national, the tribunal had jurisdiction over the case by virtue of Article VIII of the BIT and Article 25, para. 2 b of the ICSID Convention After evaluating a rather complex TheILQ.com KAZAKHsTAn’s inVEsTMEnT lAws, from previous page shareholding structure and numerous sales and purchases of Caratube’s shares, the tribunal held that it had no jurisdiction, as the claimant did not qualify as an “investor.” Contrary to earlier decisions, the tribunal stated merely that there should be only some economic link between the investor and his investment.86 Referring to the preamble of the U.S.-Kazakhstan BIT, the tribunal held that owning shares of the company for the company does not constitute an investment. The investor has to prove how much it contributed to the company, and claimant failed to prove these jurisdictional requirements.87 The tribunal therefore denied jurisdiction. As a result of the unsuccessful claim, the tribunal ordered Caratube to pay Kazakhstan US$3.2 million as compensation for arbitration costs. On 5 October 2012, however, Caratube filed for Annulment Proceedings at the ICSID. process of expropriation is non-transparent and happens in increments that can be, if needed, accompanied by harassment and violence. Finally, Kazakhstan’s approach to state immunity is more than problematic. Even when an investor obtains a favorable award, its enforcement is far from certain. In summary, investments in Kazakhstan carry the possibility of big economic beneits but with attendant high risks. IV. Conclusion Endnotes: By setting forth protected areas and by providing certain beneits to investors, the Kazakh investment laws, on the one hand, afford a minimum level of legal certainty. The drawbacks might be found in broad formulations of exceptions to the protections, the lack of a systematic approach, and the confusion of public and civil law that give the government wide discretion to make expropriations without providing restitution to the investor.88 Further, the removal of the “grandfather clause” underlines Kazakhstan’s more restrictive approach to foreign investments. On the other hand, the investor-state arbitration practice demonstrates how investors can seek to arbitrate against Kazakhstan to receive restitution for expropriated investments. Complex shareholding structures, involving the inclusion of Kazakh citizens, can make the determination of “foreign investors” dificult. This can be seen in AIG Capital Partners Inc. and CJSC Tema Real Estate Company v. The Republic of Kazakhstan, Rumeli Telekom A.S. v. The Republic of Kazakhstan and Caratube International Oil Company LLP v. The Republic of Kazakhstan. Sometimes the 1 Wakeman-Linn, J., et al., Oil Funds in Transition Economies: Azerbaijan and Kazakhstan, in Fiscal Policy Formulation and imPlementation in oil Producing countries 340 (Davis, J.M., Ossowski, R., and Fedilino, A., eds. IMF 2003). TheILQ.com Leonid Shmatenko studied law at the Heinrich-Heine-University of Duesseldorf, Germany, focusing on international law and arbitration. Currently, he is a junior research L. Shmatenko fellow, teaching assistant and doctoral candidate at the Heinrich-Heine-University. 2 Biedermann Int’l, Inc. v. The Republic of Kazakhstan and The Ass’n for Social and Economic Development of Western Kazakhstan “Intercaspian” (SCC Case No. 97/1996); CCL v. The Republic of Kazakhstan (SCC Case 122/2001); Caratube Int’l Oil Co. v. The Republic of Kazakhstan (ICSID Case No. ARB/08/12); KT Asia Investment Group BV v. The Republic of Kazakhstan (ICSID Case No. ARB/09/8); AES Corp. and Tau Power BV v. Republic of Kazakhstan (ICSID Case No. ARB/10/16); Türkiye Petrolleri Anonim Ortaklığı v. Republic of Kazakhstan (ICSID Case No. ARB/11/2); Enrho St Ltd. V. Republic of Kazakhstan (ICSID Case No. ARB/02/11); AIG Capital Partners, Inc. and CJSC Tema Real Estate Co. v. The Republic of Kazakhstan (ICSID Case No. ARB/01/6); Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v. The Republic of Kazakhstan (ICSID Case No. ARB/05/16); Liman Caspian Oil BV and NCL Dutch Investment BV v. The Republic of Kazakhstan (ICSID Case No. ARB/07/14); Ruby Roz Agricol and Kaseem Omar v. The Republic of Kazakhstan, UNCITRAL; World Wide Minerals v. The Republic of Kazakhstan, UNCITRAL; Ascom S.A. v. The Republic of Kazakhstan (SCC Case No. N/A). 3 Ascom (SCC Case No. N/A); Ruby Roz Agricol UNCITRAL; KT Asia Investment Group (ICSID The International Law Quarterly Case No. ARB/09/8); AES Corp. (ICSID Case No. ARB/10/16); Türkiye Petrolleri Anonim Ortaklığı (ICSID Case No. ARB/11/2). 4 Enrho St Ltd. (ICSID Case No. ARB/02/11). 5 Biedermann Int’l, Inc. (SCC Case No. 97/1996); World Wide Minerals, UNCITRAL; Liman Caspian Oil (ICSID Case No. ARB/07/14). 6 CCL (SCC Case 122/2001); Caratube Int’l Oil Co. (ICSID Case No. ARB/08/12); AIG Capital Partners (ICSID Case No. ARB/01/6); Rumeli Telekom (ICSID Case No .ARB/05/16). 7 S. P. Moroz, Lectures on Investment Law at KOU (2008). 8 Zako Respubliki Kazahstan ot 27.12.1994 “Ob innostranyhinvesticiyah” [Law of the Republic of Kazakhstan of 27 December 1994 “On Foreign Investments”]. 9 Cf. U.N. Econ.& Social Comm’n for Asia & the Paciic, Investment Climate in Kazakhstan, Country Report 4 (2003) (prepared by K. Umurzakov). 10 Id. at 4. 11 Zakon Respubliki Kazahstan ot 28.2.1997 No. 75-1 “O gosudarstvnnojpoddrezhkepryamyhinvesticij” [Law of the Republic of Kazakhstan of 28 January 1997 “On the State Support of Foreign Direct Investments”]. 12 Moroz, supra note 7. 13 Zakon Respubliki Kazahstan ot 8.1.2003 “Ob investiciyah” [Law of the Republic of Kazakhstan of 8 January 2003 “Law on Investments”] <http:// webcl3top.rz.uni-kiel.de/investmentlaw/pmwiki/ uploads/Site/inkv.pdf>. 14 Cf. oficial data of the Payments Balance of the National Bank of RK at + <http://www.invest.gov.kz/?option=content&sect ion=4&itemid=75>. 15 Cf. the overview of the University of Kiel: <http://www.uni-kiel.de/investmentlaw/?page_ id=165>. 16 See the oficial list of signatories at <http:// icsid.worldbank.org/ICSID/FrontServlet?request Type=ICSIDDocRH&actionVal=ShowDocumen t&language=English>. 17 See details about signing and ratification at <http://www.encharter.org/index. php?id=312&L=0#c951>. 18 Cf. A. Nukusheva, The concept of foreign investor under the legislation of Kazakhstan, in legal asPects oF investment contracts, 105 (A. Trunk and A. Aliyev eds. 2009). 19 Nukusheva, supra note 18 at 106. 20 Zakon Respubliki Kazakhstan ot 11.01.2007 No 214-III “O Licenziyah”posostoyaniyuna 10.07.2012 [Law of the Republic of Kazakhstan of 11 January 2007 No 214-III “On Licenses” as amended on 10 July 2012], <http://www.zakon. continued, next page Page 31 KAZAKHsTAn’s inVEsTMEnT lAws, from previous page kz/141150-zakon-respubliki-kazakhstan-ot-11. html>. 21 Zakon Respubliki Kazakhstan “O Koncessiyah” ot 07.07.2006 No 167-III posostoyaniyuna 12.01.2012 [Law of the Republic of Kazakhstan “On Concessions” of 7 July 2006 No 167-III as amended on 12 January 2012]<http://www. zakon.kz/159131-zakon-respubliki-kazakhstanot-7-ijulja.html>. 22 Ukaz Prezidenta Respubliki Kazakhstan ot 5 marta 2007 goda N 294 “O perecheneob’yektov, ne podlezhashihperedache v koncessiyu [Decree of the President of Kazakhstan of 5 March 2007 No 294 “On a list of objects, which are not subject to concessions,” 7 SAPP Respubliki Kazahkstan 80 (2007). <http://www.e.gov.kz/wps/wcm/connect/ fa7625804f02e47ba6dbbf384bda0235/ U070294_20070305.htm?MOD=AJPERES&use DefaultText=0&useDefaultDesc=0>. 23 For an overview of the “grandfather clause,” see M. Suleymenov, “Grandfather clause” v. “adaptation clause”: new developments in the legislation of Kazakhstan, in legal asPects oF investment contracts 219 (A. Trunk & A. Aliyev eds. 2009). 24 Baker & mckenzie, doing Business zakhstan 8 (2012). in ka- 25 For an overview of the Russian Law on “Strategic Sectors,” see T. Gati, Russia’s New Law on Foreign Investment in Strategic Sectors and Page 32 the Role of State Corporations in the Russian Economy, <http://www.akingump.com/iles/upload/Foreign_Investment%20in%20Russian%20 Strategic%20Sectors%20-%20by%20Toby%20 T.%20Gati.pdf>; W. E. Pomeranz, Russian Protectionism and the Strategic Sectors Law, 25:2 am. univ. int’l law review 213 (2010). 26 Grazhdanksiy Kodeks Respubliki Kazakhstan ot 27.12.1994 No 269-XII posostoyaniyuna 22.06.2012 [Civil Code of the Republic of Kazakhstan of 27 December 1994 No 269-XII as amended on 22 June 2012]<http://www.zakon.kz/211680grazhdanskijj-kodeks-respubliki.html>. 27 Amended translation as provided in S. Akhmetova, Review of the draft Law “On alteration of Amendments and Supplements in the Law “On Subsoil and Subsoil Use” [sic], <http://www. gratanet.com/en/publications/197>. 28 These are, inter alia, trunk railway networks, oil and gas pipelines, the national electricity network, telecom services, mail services, international airports, sea ports with an international importance, the air trafic control system, navigation marks regulating and providing safety of navigation, nuclear facilities, space facilities, water facilities, public highways, and shares in legal entities having ownership in the aforementioned sectors. See also oecd investment Policy reviews: kazakhstan 2012, 51 et seq. (2012). 29 Cf. Akhmetova, supra note 27; L. Chanturia, Sachenrecht in den Staaten des Kaukasus und The International Law Quarterly Zentralasiens, at 14, < http://www.cac-civillaw. org/beitraege/sachenr-chanturia.de.rtf>. 30 Such a view is also taken by S. Akhmetova, supra note 27. 31 See overview at Kazkhinvest of the Ministry of Industry and New Technologies of the Republic of Kazakhstan,<http://www.invest.gov.kz/?option=c ontent&section=3&itemid=105>. 32 Federal’nyi Zakon “Ob Osobyh Ekonomicheskih Zonah v Rossiyskoy Federacii” N 116-FZ ot 8 iyulya 2005 goda [Federal Law “On Special Economic Zones in the Russian Federation” No 116-FZ from 8 July 2005]<http://base.consultant.ru/cons/ cgi/online.cgi?req=doc;base=LAW;n=123058>. 33 Z a k o n R e s p u b l i k i K a z a k h s t a n “ O special’nyhekonimicheskihzonah” v Respublike Kazakhstan No. 469-IV ot 21.07.2011 s izmeneniyamiot 12.01.2012 [Law of the Republic of Kazakhstan “On Special Economic Zones” No 469-IV of 21 July 2011 with amendments as of 12 January 2012]<http://online.zakon.kz/ Document/?doc_id=31038117&search=469-IV>. 34 D. Marenkov, Investitionsrecht in Kasachstan, < http://www.gtai.de/GTAI/Navigation/DE/ Trade/Recht-Zoll/wirtschafts-und-steuerrecht, did=600586.html>. 35 Id. 36 Id. 37 Z a k o n R e s p u b l i k i K a z a k h s t a n “ O nedrahinedrapol’zovanii” ot 27.01.1996 No 2828 TheILQ.com KAZAKHsTAn’s inVEsTMEnT lAws, from previous page s izmeneniyamiidopolneniyamiposostoyaniyu 24.10.2007 [Law of the Republic of Kazakhstan “On Subsoil and Subsoil Use” from 27 January 1996 No 2828 with amendments and additions as of 24 October 2007]<https://dfo.kz/ru/dfo-info/ LawBase/Files/ZRK2828.htm>. 38 English Version of the Law of the Republic of Kazakhstan from 24 June 2010 No 291-IV “On Subsoil and Subsoil Use,” <http://www.kazembassy.org.uk/img/003%20Law%20of%20Subsoil%20 and%20Subsoil%20Use(1).doc>. For an overview of the Law, see A. Mokrousov and A. Neovius, Kazakhstan’s new Subsoil Law, <http://www.lexology.com/library/detail.aspx?g=65ba8a24-c54847ee-b36b-fe9d1246bf45>; N. B. Abdreyeva, New subsoil law overhauls contracting environment, <http://www.internationallawofice.com/newsletters/Detail.aspx?g=76839325-2f0f-410d-b78a40bdc58a7aee> (free access after registration). 39 Marenkov, supra note 34. 40 Id. 41 Zakon Respubliki Kazakhstan ot 15.07.2010 s izmeneniyamiidopolneniyamiposostoyaniyuna 10.07.2012 No 339-IV “Ob ispol’zovaniivo zdushnogoprostranstva Respubliki Kazakhstan ideyatel’nostiaviacii” [Law of the Republic of Kazakhstan “On the use of air space and aviation business” of 15 July 2010 with amendments and additions as of 10 July 2012 No 229-IV], <http:// online.zakon.kz/Document/?doc_id=30789893>. 42 Zakon Respubliki Kazakhstan ot 6 yanvarya 2012 goda No 527-IV “O nacional’noybezopasnosti Respubliki Kazakhstan” [Law of the Republic of Kazakhstan of 6 January 2012 No 527IV “On national security of the Republic of Kazakhstan”],<http://www.mod.gov.kz/mod-ru/ index.php?option=com_content&view=article&i d=263&Itemid=209&lang=ru>. 43 Zakon Respubliki Kazakhstan ot 23.07.1999 No 451-I “O sredstavahmassovoyinformacii” [Law of the Republic of Kazakhstan of 23 July 1999 No 451-I “On Mass Media”],<http://www.pavlodar. com/zakon/?dok=00084>. 52 Id. 78 Id. ¶¶ 688–690. 53 Id. 79 Id. ¶¶ 695–697. 54 Id. at 151. 80 Id. at ¶ 708. 55 Id. at 169. 56 Id. 57 AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Republic of Kazakhstan, Award of 7 October 2003, (ICSID Case No. ARB/01/6), 11 ICSID Reports 3 (2007). 58 Id. at 4. 59 Id. 60 Id. at 38. 87 Id. at ¶¶ 468 – 469. 88 See also R. Kreindler, Avoiding Disputes in the Context of Subsoil Exploitation Agreements, 2012: 6 yurist, <http://journal.zakon.kz/4501299predotvrashhenie-sporov-v-kontekste.html>. 64 AIG Capital Partners and Anr v. Kazakhstan and Anr, Decision of 20 Oct. 2005, [2005] arB. l. r. 3. 65 Id. at 4. 66 Grazhdanskiyprocessual’nyikodeksRespubliki Kazakhstan ot 13.07.1999 No 411-I s izmeneniyamiidopolneniyamiposostoyaniyu 10.07.2012 [Civil Procedure Code of the Republic of Kazakhstan from 13 July 1999 No 411-I with amendments and additions as of 10 July 2012]<http://online. zakon.kz/Document/?doc_id=1013921>. 67 With further references: M. K. Suleimenov, supra note 51. See also R. Hausmann, Investment Contracts with Foreign Investors, in legal asPects oF investment contracts1 (10), (A. Trunk & A. Aliyev eds. 2009). The Florida Bar Annual Convention Mobile App 69 For a complete overview of over the facts, see id., ¶ 100 et seq. 70 Id. ¶ 308. 74 Barcelona Traction, Light and Power Co. (New Application: 1962) (Belgium v. Spain) Second Phase, Judgment of 5 Feb. 1970,<http://www.icjcij.org/docket/iles/50/5387.pdf>. TheILQ.com 2013 Annual Florida Bar Convention 68 Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, Award of 29 July 2008, (ICSID Case No.ARB/05/16). 46 Id. 51 CCL v. The Republic of Kazakhstan (SCC Case 122/2001), 2005:1 stockholm int’l arB. rev. 123, 124 (2005). 85 Id. at ¶ 310. 62 Id. at 3 and 117, note 2. 73 TokiosTokelės v. Ukraine, Award of 26 July 2007, (ICSID Case No. ARB/02/18). 50 Id. at 144 et seq. 84 Id. at ¶ 2. 63 M.K. Suleimenov, State Immunity: absolute or limited?,<http://www.zakon.kz/engine/print. php?page=1&newsid=208826>. 45 CCL v. The Republic of Kazakhstan (SCC Case 122/2001), 2005:1 stockholm int’l arB. rev. 123, 124 (2005). 49 Id. at 125. 83 Id. at ¶ 383. 86 Id. at ¶ 355. 71 Id. ¶ 333 et seq. 48 Id. 82 Caratube Int’l Oil Co. v The Republic of Kazakhstan, Award of 5 June 2012, (ICSID Case No ARB/08/12). 61 Id. at 48 et seq. 44 Zakon Rosiyskoy Federcii “O sredstavahmassovoyinformacii” ot 27.12.1991 N 2124-1 [Law of the Russian Federation “On Mass Media” of 27 December 1991 N 2124-1],<http://www. consultant.ru/popular/smi/42_2.html#p122>. 47 Id. 81 Id. at Award ¶¶ 1– 4. 72 For an extensive overview of the doctrine of “piercing the corporate veil” in international arbitration, see L. Shmatenko, “Piercing the Corporate Veil” is relative, 4 young arB. rev. 25 (2012). 75 Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, supra note 68, ¶ 310 et seq. 76 Id. Download the new Florida Bar convention app to serve as your mobile guide to the whole conference. Download a Free Scanner at http://GetScanLife.com June 26 – 29 Bocz Raton Resort * Club Details: www.floridabar.org 77 Id. ¶ 609 et seq. The International Law Quarterly Page 33 The Florida Bar 651 East Jefferson street Tallahassee, Fl 32399-2300 FIRST CLASS U.S. POSTAGE PAID TALLAHASSEE, FL Permit No. 43 Section Calendar Mark your calendars for these important dates. For more information, visit www.internationllawsection.org. Section Schedule at 2013 Annual Florida Bar Convention Boca Raton Resort & Club, Boca Raton, FL FRIDAY, JUNE 28, 2013: 12:15 p.m. – 1:45 p.m. ILS Luncheon 2:00 p.m. – 3:00 p.m ILS 2013-2014 Committee Meetings 3:15 p.m. – 6:00 p.m. ILS Executive Council Meeting To register for the Annual Florida Bar Convention, or for more details, visit www.floridabar.org. Page 72 The International Law Quarterly TheILQ.com