The dust has somewhat settled over the Kashagan issue after the visit of Italian Prime Minister Romano Prodi to Astana. No categorical statements were made, and the negotiations between the Kazakh government and the consortium have continued in a calmer environment. However, it seems like, linked to Kashagan, a new intrigue can be expected in the new future – the debates around the Bill “On Subsurface and Subsurface Use.”

The Kazakhstan Foreign Investors’ Council Association, the Kazakhstan Petroleum Association, the International Tax and Investment Centre, the American Chamber of Commerce in Kazakhstan, and the European Business Association of Kazakhstan have written a letter to the President of Kazakhstan requesting him to veto the Bill “On Subsurface and Subsurface Use.”

The thing is, three weeks ago, the Kazakh legislators of both chambers of the Parliament reviewed and unanimously adopted, in a record time, a number of amendments to the subsurface law. In essence, the amendments grant to the government a unilateral right to modify or cancel energy contracts to “protect the national interests ... and economic security of Kazakhstan.”

An interesting fact: when the proposed amendments were still discussed within the walls of the Parliament, foreign companies kept silent and did not react to the development in any way. They refused to comment on the bill when asked to do so by journalists. Most likely, without a sound legal homework, none of the investors ventured to speak their mind.

The very first reaction to the legislative initiatives of Kazakhstan was heard from the Duke of Yorkshire at the KIOGE-2007 international conference in Almaty. “For Kazakhstan to achieve its goals, it should remain attractive for foreign investments. I urge the government of Kazakhstan to seriously think about how these amendments may affect the investment image of the country,” he said.

The Italian premier agreed with him: “Not only Italian but also international mass media as well as the business circles are concerned about this new legislation. I have asked (Kazakh President) Nursultan Nazarbayev to pay special attention to this.”

Gregory J. Vojack, the head of the international law company Bracewell & Giuliani LLP said: “If this amendment is approved by the Senate and signed by the President, it will have very serious and extensive consequences.”

A bit later, though, Vojack toned down his evaluation indicating that the amendments did not contain a compensation clause, which would have been necessary in the case of nationalisation. “The absence of this clause gives hope that, in the Kashagan case, the government of Kazakhstan does not aim at nationalising the project, as was the case with the Russian Sakhalin II,” he added.

According to some Kazakhstan bankers, apart from these public negative evaluations, the reaction to the amendments affected the investment rating of the country. On October 8, the international agency Standard & Poor's (S&P) reduced the credit ratings of Kazakhstan.

Regarding the above-mentioned letter, the content is based on two concepts. First, the authors make it clear that rather than for the declared protection of the national interests, the bill creates conditions for bureaucratic raids. Second, the government-promoted document is at odds with the other legal acts of Kazakhstan, for example, the Constitution. As a result, the enactment of such law will reduce the investment flow into the country and will increase the political risks of the projects in Kazakhstan.

The investors base their request to veto the bill on the country’s main law, the Constitution. For example, according to article 26.3 of the Constitution "nobody can be deprived of their property other than at the decision of a court,” and according to article 6.1 of the Constitution, "the Republic of Kazakhstan recognises and protects private property."

On the whole, the right of the government to a unilateral and extrajudicial termination of a contract without compensation is against the constitutional guarantees, the authors of the letter conclude.

The amendments also contradict the Law “On Investments” and the Law “On Subsurface.” While these laws guarantee legislative stability for the contracts, the amendments provide for a retrospective effect. That is, the right of the state to unilaterally terminate may extend to an indefinitely wide range of contracts, which would be a considerable deviation from the principles of stability and invariability of contracts declared by Kazakhstan.

Leaving out the legal intricacies listed in the letter, it’s worth quoting the closing phrase: “We are extremely concerned that the bill violates the earlier established guarantees of stability of contracts, the guarantees of dispute resolution in court or international arbitration, the constitutional guarantees of protection of property, and the guarantee of compensation in the case of expropriation. We are convinced that these amendments should be regarded as worsening the investment climate in Kazakhstan.”

Note that the letter was sent to the Kazakh president only after the bill had been approved by the two chambers and forwarded to the head of the state for signing.

Two weeks have elapsed since the day the letter was sent. No word has been received so far from Ak-Orda that the bill has been signed. It is possible that the head of the state will veto this bill like he vetoed the Mass Media bill. It is equally possible that the bill will be signed. Some experts believe that in the latter scenario, the country will show teeth and determination in decision-making, and the investors will have to accept such decisions. There is a third possibility, though, that Nazarbayev will return the bill for a follow-up revision to the parliament.

Partly, this question has been answered by the investors themselves in their speeches. “The new legislation was adopted to show to the foreign investors that they should fulfil their obligations if the investors want the state to do the same and to honour all conditions of the contracts,” Vojack told New Europe during a break between the KIOGE – 2007 meetings.

“For this reason, the enactment of the new law may not necessarily result in higher political and economic risks for the foreign investors carrying out business in Kazakhstan. However, it is of vital importance that the investors themselves do their best to show to the government that they fulfil their contractual obligations,” he added.