International legal aspects of the legal regulation systems for investment activity

Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011

Author: Dautbayeva Dinara, Kazakh-American Free University, Kazakhstan

International law treaties within the law system are paid great attention to. This is explained by the fact that a law treaty regulates most international legal relationships, and the law treaty originates from the times of Spinoza and Grotius, while the national law treaty theory is still being developed, which is connected with the development of a civil society, legal state, and market relations.

At the present moment international law treaties are the main source of investment law. At that most of them are bilateral remuneration and reciprocal investment protection agreements. Only two of the agreements have universal meaning: Convention on the settlement of investment disputes between states and citizens of other countries (Washington, March 18, 1965) and Convention on establishment of a multilateral investment guarantee agency (Seoul, October 11, 1985), which were ratified by the Republic of Kazakhstan. The Washington Convention established the international order of settlement of disputes between the state on the one hand and a citizen and/or a legal entity of another country on the other hand through the establishment of the International Ce nter for the Settlement of Investment Disputes (ICSID). The ISCID mission is to provide structures for the application of arbitration in connection with investment disputes.

The mission of the Multilateral Investment Guarantee Agency (MIGA), established by the Seoul Convention, is to stimulate the investment flows between the MIGA member countries and especially to the developing countries, thus contributing to the activity of the World Bank, International Finance Corporation and other international development financial organizations. For these purposes MIGA provides guarantees, including coinsurance and recurring insurance against non-commercial risks concerning foreign investments on the territory of the developing countries. The non-commercial risks covered by the Seoul Convention include: a) conversion of currency; b) expropriation or similar actions; c) agreement violation; and d) war and civil disturbances. Thus, the Washington and Seoul Conventions only apply to two particular issues: consideration of investment disputes and foreign investors insurance and as a consequence cannot provide comprehensive regulation of international investment relationships.

Within the scope of international legal regulations, regional level regulations are realized in accordance with the following agreements – CIS countries Agreement “On collaboration in the sphere of investment activity” as of December 24, 1993. Among bilateral agreements, which are the most flexible tool of investment activity regulation, it is especially worth mentioning Agreement on reciprocal remuneration and protection of foreign investments. The main aim of these agreements is in providing equally favorable conditions for capital investments, establishing the possibility for unimpeded income share exportation and non-commercial risks guarantees.

International legal investment protection is more effective for attracting investments than consolidation of similar guarantees in the national law. But, nevertheless, another component defining foreign investment regulation is a national legal one. However, despite investment law development, unfortunately, there are still multiple gaps and problems remaining. Thus, we cannot help mentioning, that there is still no effective legal foundation for practical application of Investment Law of the Republic of Kazakhstan and international law treaties, ratified by the state. According to Sokolova T.V. “another unsettled issue is establishing the basis of normative legal acts and developing a program for foreign investments insurance by means of legal and political risks decrease guarantees” [1, p. 41].

Gaps of such type, in our opinion, demonstrate to the investors the interest of the state or lack of interest of the state in attracting and protecting investments and the investor. Under present time conditions the norm of state investment attractiveness evaluation and that of investment security is determined by the level of investment law development, the evaluation basic element being existence of legal acts, providing preferences and guarantees, both legal and financial, for investors working in economy priority sectors. We have to state the fact that it is not sufficient to have general declamations since national and foreign investments inflow requires existence of legal, economic and political stability. Besides, absence of integral state policy of foreign investment attraction makes a negative impact, in particular, investment priorities by sector and types are not consolidated by the law, and mechanism of providing guarantees, especially concerning the property right, are not defined [1, p. 241].

Another important factor is law enforcement practice, which, at the present moment, is quite negative towards investment activity, beginning with pseudo bankruptcy and ending with failure to execute court decisions and legal acts.

Analysis of main stages of investment law development also demonstrates that another problematic issue is incorrect interpretation of law and its norms. From this point of view we share that opinion of Abdrassulov Y.B., according to which “the reason for that is the fact that law enforcement is getting more and more complicated due to rapidly developing socio-political and socio-economic relationships in all states”. Emergence, on the one hand, of new states on the map of the world, radical changes in the constitutional system in many other countries, and, on the other hand, an active process of the world and regional integration conditioned the necessity of development of new approaches in interpretation and application of legal norms which should be based on absolutely different criteria of interpretation results truth considering priority of human rights and freedoms, new methods and techniques of legal norms content disclosure. Norms interpreting is one of the traditional problems of legal science, since interpretation of legal norms is a process which takes place in any case when it is necessary to determine the meaning of legal statutes. Law interpretation entails legal consequences not only in the sphere of law enforcement but also in application of rights in general. Moreover, interpretation goes beyond the scope of law enforcement, since interpretation is also important in the process of lawmaking, scientific and scholarly law analysis [2, p. 11].

Elements of improvement of active law of the Republic of Kazakhstan that should be among the basic ones are the following: adaptation and unification of norms of the active law of the Republic of Kazakhstan to factual participation in international investment organizations, increasing the number of bilateral and multilateral agreements on guarantees and reciprocal investment protection, revision of the system and mechanism of state support for national and foreign investors, determination of possible latent risks which emerge during investment projects insurance, detailed regulation of the meaning of investment project business plan, its structural elements, standards, legal peculiarities of its realization as a basic stage of investment designing, reconsideration of investment disputes settlement procedures, adopting by the Republic of Kazakhstan of all international mechanisms of investment disputes solving. Undoubtedly everything listed above is just a part of main elements of providing stability for the Kazakhstan legal system in the sphere of investment activity.

From the legal point of view the main problem of ensuring favorable investment climate is a stability of legal regulation, which assumes legal consolidation of long-term guarantees for the investors bringing their capital into the economy of the country [3, p. 20].

While creation of a favorable investment climate largely depends on the state and is realized through the national legislation, legal guarantees of investment contract observance, dispute settlement, and also expropriation (nationalization and requisition), subrogation are regulated by international treaties ratified by Kazakhstan.

What concerns national legislation, as early as in 1997 domestic scientists stated that investment law of the Republic of Kazakhstan was based on a wrong methodological principle – granting discounts to selected investors of the state agency’s choice (selective support), while recent years legislation in the sphere of market economy and investment activity was built on a reverse principle: granting equal opportunities for all investors, at that this granting of opportunities should be of an automatic character.

Tax privileges should be mentioned separately. The main principle of tax legislation is its universal character. Active law came out against individual tax privileges. Making amendments to Tax Code undermined this principle and led to emergence in the legislation of the republic of Kazakhstan of “contractual taxes” (which are still existent), which resulted inclusion into the contracts of some clauses contradicting the Constitution of the Republic of Kazakhstan and its laws. Earlier Kazakhstan made agreements with foreign investors, part of which came into force prior to adoption of the Constitution in 1995. This resulted in the fact that all changes in Kazakhstan legislation which concerned tax and customs did not apply to investors (mostly in the sphere of subsoil usage), since all references were made to the contracts signed (for example, according to the contracts discounts were granted by the Government, which did not have due competence in providing such discounts). Kazakhstan, in order to guarantee observance of the previously signed contracts, includes into all newly adopted legal normative acts clauses about non-proliferation of legislation norms on previously signed investment contracts. Meanwhile, granting individual tax privileges resulted in some confusion. Such contradiction divided all domestic lawyers into two opposite camps: some of them believe it to be wrong since a contract is a private law, and it is appropriate to reason its relation to a public law [4, p. 5], i.e. with tax and customs legislation of the country, but private law could not and cannot regulate, say, tax relationships. That means in their opinion it is the legal aspect of cooperation with investors that required conceptual examination. Others believe that in this complex situation there is an only possible way out: when the state violates its civil and legal obligations or places on contractual non-state legal relationships participants of demands illegally infringing their interests, the latter should be provided with the opportunity to protect such interests including by means of certain international treaties of the republic.

We believe that private law obligations of the state in investment contracts should be executed by all means. What concerns the terms of the agreement which contradict public law norms (taxation and etc.), the state should take measures to provide observance of law and maximum observance of incurred obligations within the scope of a new Tax Code.

International legal investment regulations are realized in accordance with bilateral and multilateral agreements.

One of the major multilateral international agreements is a Washington Convention on settlement of investment disputes between states and citizens of other countries adopted on March 18, 1965, which lead to establishment of International Center for the Settlement of Investment Disputes (ICSID), and adoption of New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), Energy Charter Treaty (1991), Convention on establishment of multilateral investment guarantee agency (Seoul Convention, 1985). Kazakhstan joined conventions listed above several times (the Republic of Kazakhstan Law as of June 26, 1992 #1433-XII “On membership of the Republic of Kazakhstan in IMF, IBRD, International Finance Corporation, International Development Association, International Investment Guarantee Agency, International Center for the Settlement of Investment Disputes”, the Republic of Kazakhstan Law as of December 6, 2001 #2644 “On membership of the Republic of Kazakhstan in IMF, IBRD, IFC, International Investment Guarantee Agency, International Center for the Settlement of Investment Disputes, EBRD, Asian Development Bank, Islam Development Bank”). Besides, Kazakhstan has signed multilateral international regional agreements – Multilateral international agreement of CIS countries on investment activity cooperation (1993), Multilateral international convention on protection of CIS investor countries rights (1997).

With the adoption of Investment Law of the Republic of Kazakhstan on January 8, 2003 there emerged a problem of investment disputes settlement, the investment dispute settlement procedure was not consolidated in the legislation.

A serious drawback with determining investment dispute in our opinion is exclusion from the definition of the notion of non-contractual disputes between the investor and the state (authorized state agency). According to the prior Law on International Investments such disputes are referred to as investment disputes, at that this regulation is contained in Washington Convention and many other bilateral international agreements, ratified by the Republic of Kazakhstan, which according to art. 4 of the Constitution of the Republic of Kazakhstan have a priority over the norms of Kazakhstan legislation.

Art. 9 of the active Law changes the order of investment disputes settlement, stipulated by art. 27 of the prior investment law. The mentioned article of the prior law, firstly, uses a broader investment dispute notion; secondly, permits all investment disputes to be settled in arbitration bodies; thirdly, provides the investor with a priority in choosing the dispute settlement body. It is also necessary to mention that these rules conformed to Energy Charter Treaty as of December 17, 1994 and many other bilateral international agreements ratified by the Republic of Kazakhstan.

From the international law theory and practice point of view the principle, in accordance to which national investment laws can determine obligatory arbitration procedures without choice, is beneath criticism. Clause 24 of the World Bank Governing Council report, which is the addendum to Convention on investment disputes settlement, runs: “a host State might in its investment promotion legislation offer to submit disputes arising out of certain classes of investments to the jurisdiction of the Centre, and the investor might give his consent by accepting the offer in writing”.

Lack of choice opportunity concerning investment dispute settlement in the Investment Law of the Republic of Kazakhstan does not allow investors appealing to International Center for Investment Disputes Settlement. Thus, it results in a paradoxical situation: Kazakhstan joined to Washington Convention; however the investors have no opportunity to appeal to it, since the Law has no reference to it.

International investors’ rights are protected by means of bilateral international agreements. Signing such international treaties, member countries take an obligation to protect rights of investors of the other state – the other party of the agreement. Foreign investor at the same time receives from home state guarantees of investor’s rights protection on the territory of the other country – member of this international treaty.

Thus, at the present time, problems of regulation of investment activity in Kazakhstan has grown in number, since the state, trying to provide equal investment regime for both foreign and domestic investors, i.e. trying to raise domestic investors to the level of foreign ones, reduces legal guarantees for domestic and foreign investors, which were previously stipulated by the prior laws.

Active investment law created a problem with investment disputes consideration and settlement since it assigned the priority in investment disputes settlement to the court system of the Republic of Kazakhstan. At the same time one of the conditions for creation of a favorable investment climate is international legal investment protection which includes the autonomy of bodies, considering investment disputes, from jurisdiction of the states receiving the investments.


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3. Усенко Е.Т. Принцип недискриминации и принцип наибольшего благоприятствования в международных отношениях. // Внешняя торговля, 1960. - №7. – С. 20.

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Table of contents: The Kazakh-American Free University Academic Journal №2 - 2011

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