Crossroads Asia

Kyrgyzstan: Caught in a Web of International Investment Agreements

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Crossroads Asia

Kyrgyzstan: Caught in a Web of International Investment Agreements

Corruption has not only limited FDI into Kyrgyzstan, but forced the country to accept unfavorable treaty terms.

Kyrgyzstan: Caught in a Web of International Investment Agreements
Credit: Wikimedia Commons/ Director-nsk

The Kyrgyz Republic’s independence from the Soviet Union in 1991 created tangible opportunities for the economic growth and prosperity of this Central Asian nation. Yet after 25 years of sovereignty, Kyrgyzstan remains one of the weakest and the least economically developed states in this politically unstable region. There are multiple factors that have left the Central Asian country at the bottom of the list of failed economies in Eurasia.

The Kyrgyz Republic currently has 34 bilateral investment treaties (BITs), of which nine have been signed, but are not in force. One – with South Korea – has been terminated. Twelve of these BITs are with EU member states; Kyrgyzstan is also a party to the EC-Kyrgyzstan Cooperation Agreement, which was signed in 1995 and later updated in the 2000s after accession of the new member states to the EU.

Despite the proclaimed benefits of these BITs and investment agreements, Kyrgyzstan hasn’t been able to attract sizable foreign direct investment into the country’s ailing economy nor to make positive steps to improve the social and economic status of the country. Kyrgyzstan’s GDP in 2015 was $6.5 billion for a nation of six million.  The latest investment policy review by the UN Conference on Trade and Development indicated that “policy instability, internal conflicts and the international economic and financial crises have slowed down progress.” Critical challenges to the country’s socioeconomic development include “high indebtedness, rising unemployment and increasing trade imbalances.”

World Bank data on FDI net inflows to Kyrgyzstan shows a slow increase starting in the mid 2000s, from more than $175 million in 2004 to $1.1 billion in 2015. From 2003-2007, average FDI inflows were recorded at less than $100 million per year. However, from 2005 on, Kyrgyzstan has received a significant amount of FDI thanks to the “surge in global prices for commodities [gold] that raised the profile of Kyrgyzstan’s mining potential,” according to UNCTAD.

Deeply entrenched corruption in Kyrgyzstan, one of the biggest concerns for the development of the country, remains a challenge after 25 years of independence. According to the United Nations Development Program (UNDP), the estimated damage from corruption in Kyrgyzstan reaches $700 million, annually. Transparency International’s Corruption Perceptions Index 2015, Kyrgyzstan ranked 123rd out of 168 countries, in a clump of similarly corrupt post-Soviet countries like Russia, Kazakhstan, Ukraine, and Azerbaijan.

A joint study on the business climate in the Kyrgyz Republic, which was conducted by the World Bank and EBRD in 2013, concluded that corruption was the second-worst obstacle to doing business in the country, out of 16 systemic issues. 20 percent foreign investors in the country admit to paying unofficial payments, according to the International Finance Corporation (IFC) research project “Improvement of the Investment Climate” undertaken in Kyrgyzstan. “Not all investors confess to making unofficial payments. Most often, they prefer not to disclose this information. But even 20 percent is an alarming figure. It shows that the legislation in Kyrgyzstan is poorly implemented into life,” said an IFC representative.

Kyrgyzstan’s inability to develop and to diversify its poorly performing economy during a transition period has produced a devastating effect on the country’s socioeconomic development. An estimated 500,000 citizens of Kyrgyzstan (out of a total population of roughly 6 million) travel abroad for work due to a lack of employment at home. However, the real number of migrants who work outside the country is much higher and may reach up to 1 million, according to experts. Migrant remittances to Kyrgyzstan are equal to 30 percent of the country’s GDP and the latest reports indicated that the inflow of remittances in 2016 was $1.78 billion. The World Bank estimates the poverty level in the Central Asian nation at 30 percent, based on the country’s official sources. Meanwhile, an IMF report shows “about 80 percent of the population [in Kyrgyzstan] lives below $5 a day.”

Under such conditions, the country’s mining industry is seen by the Kyrgyz governments as the only reliable source of income for the state budget and domestic growth, despite widespread corruption in the state and systemic issues of governance. One of the major contributors to Kyrgyzstan’s GDP has been and still is the Kumtor gold mine project, which is operated and managed by the Canadian mining company Centerra Gold. 361.6 tons of gold were extracted between 1992 and 2011 in the Kyrgyzstan; more than 90 percent (335 tons) came from the Kumtor mine. On average, the Kumtor open pit project produces between 15 and 20 tons of gold per year. At times, Kumtor accounts for over 40 percent of the country’s industrial output, due to heavy reliance of the state on the mining industry.

Additionally, Kyrgyzstan has 200 mineral reserves that are identified or in the status of active exploration. The country’s known record of existing reserves of gold and rare-earth metals have been outlined as potentially a significant contributor to the “GDP of the country and tax revenues to the state budget” in the Kyrgyz government’s strategy on the development of the mining sector. Kyrgyz state strategy for the development of the mining industry till 2052 highlights the significance of the gold mining sector as the main driver for the country’s long term sustainable development.

Undeniably, the gold mining industry presents many opportunities in terms of economic growth, job creation, and social benefits. Domestic experts believe the mining sector could create tens of thousands of direct and indirect jobs, increase revenues to the state and local budgets, and prepare the ground for the diversification of the country’s economy in the long term. Despite these positive prospects, there are also risks associated with the projected progress in the industry. Primarily, these risks arise from the country’s unsatisfactory record on economic and political reforms in the last 25 years.

Political instability remains among the top risks for Kyrgyzstan, despite minor improvements since the last overthrow of the government in 2010, which was followed by a massive outbreak of the inter-ethnic violence in the southern provinces of the country. Twice, in 2005 and 2010, regimes were toppled by popular uprisings as a result of nepotism, rampant corruption, widespread poverty, and constant in-fighting between political factions.

The unstable political environment worries local public and foreign investors alike for many reasons but the most primary concern comes from distrust in the country’s justice system. The International Law Development Law Organization, an intergovernmental group in Rome, has stated that the “Kyrgyz judiciary is not favorably viewed by the public and, at the same time, the public is not well-informed about the functions and duties of the courts.” The World Bank’s survey results also highlighted a low level of trust within the domestic business community in the justice system of Kyrgyzstan; firms avoid settling commercial disputes via the country’s courts.

Given high levels of corruption and recurrent political instability, Kyrgyzstan has been drawn to international arbitration to settle investment disputes with foreign investors. Foreign investors and companies prefer to settle commercial disputes via institutions for international arbitration, such as ICSID or UNCITRAL. However, UNCTAD investment policy review warns that “while the existing framework can be interpreted as a mean to ease the effect of political instability, it may also expose the country to increased risks of litigation by investors.” Indeed, there were 11 international investment disputes against Kyrgyzstan submitted by investors in 2014. Out of those 11, eight pending international investor–state disputes involved claims of up to $925 million — more than the annual FDI inflow to Kyrgyzstan in any given year.

For a country that is still in political transition, where corrupt governance, weak legislative basis, and dysfunctional justice system are key challenges, Kyrgyzstan has adopted a reckless and inadequate approach to the process of considering and signing investment agreements, concession contracts, and BITs. These problems have yet to be addressed by the local authorities and by the public nationwide.

In coauthored report with the Transnational Institute titled “Kyrgyz Republic’s experience with investment treaties and arbitration cases,” my colleagues and I outlined a set of recommendations to the Kyrgyz government regarding these concerns. We conclude:

Because of these risks, the Kyrgyz state might consider terminating and revising its international investment agreements. Most bilateral investment agreements contain a window of opportunity for the signatory parties to express their intent to terminate and/or renegotiate. The Kyrgyz Republic would be advised to check its network of bilateral investment agreements for their termination dates and to notify partners of their wish to future-proof these agreements by limiting the grounds for international arbitration and including binding and enforceable responsibilities for investors.

Ryskeldi Satke is a contributing writer with research institutions and news organizations in Central Asia, Turkey and the United States.