Foreign investors harassed and fleeced in Kyrgyzstan under new regime

Following the collapse of the Soviet Union, Kyrgyzstan, which quickly embraced progressive economic and political changes, was initially seen as a beacon of democracy and reform in post-Soviet Central Asia. However, the initial drive for civilized standards got very quickly bogged down in clan politics, and the country became a clan-captured State, where democratic institutions and property protection exist only in form, but not in substance.

Kyrgyzstan has very few exploitable natural resources, and its economy is one of the weakest in the region. Apart from about 20 tons of gold exported annually by foreign mining companies, the country produces an extremely limited value to international markets. The pillars of its economy are (in descending order): the servicing of contraband transit of Chinese consumer goods and Afghan heroin to the neighbouring countries, the export of migrant labour (mainly into Russia) and the spending of grants and loans the government receives from various countries and institutions, the dominant lender being, of course, China. Around 10% of budget revenue is derived from royalties and dividends paid by Centerra Gold Inc., a TSX-listed Canadian miner exploiting a regionally important gold mine, Kumtor.

Clan Capture of the State

Since the first years of independence, ruling clans have been exploiting Kyrgyzstan in a classic case study of ‘state capture’, using public office for their own enrichment and the suppression of opponents.

Transparency International lists Kyrgyzstan as No 126 out of 180 in its 2019 Corruption Perception Index, however, much of international research misses the point when calling Kyrgyzstan’s political system ‘corrupt’. In reality, it does not suffer from ‘corruption’ of an otherwise democratic and just model; it is a solid system where state exploitation for personal gain is the norm and not an aberration. State offices are routinely bought and sold, as was demonstrated by the Swedish researcher, Johan Engvall in his 2011 thesis and book ‘The State as Investment Market’ (Analytical Framework for Interpreting Politics and Bureaucracy in Kyrgyzstan), Uppsala University, Department of Government.

In recent history, Kyrgyzstan saw three violent changes of power (in 2005, 2010 and 2020) which kept replacing one clan plundering the country with a different one having the same agenda.

In October 2017 President Atambayev, who led the country from 2011, engineered the election of his ally, Sooronbai Zheenbekov, from an influential southern clan, as the new President.

There were hopes that the peaceful transition of power would ensure the continuity of Atambayev’s unaggressive attitude towards foreign investors, but those hopes were quickly blown away by the new ruling clan, the Zheenbekov family.

In what many regarded as a treacherous move, Zheenbekov turned against the former President shortly after winning the elections with the latter’s backing. Having secured partnership against Atambayev with Kyrgyzstan’s main contraband clan, the Matraimovs, who bankrolled Zheenbekov’s election on the instructions of Atambayev, the newly elected President jailed many Atambayev’s government figures including the former President himself and installed his own clan members (along with Matraimovs’ appointees) into key positions.

The friendly or at least neutral attitude to foreign investors was, unfortunately, lost in this transition.

Being dependent on the support of coersive-power agencies (the Police, the Financial Police, the Financial Intelligence, the Tax Service and the National Security Service) in his fight against political opponents throughout his presidency, cut short by a recent coup on October 5th, Zheenbekov had de-facto allowed those coersive-power agencies to uncontrollably prey on business, including foreign investors, as a payoff for their loyalty. As a result, they engaged, with impunity, in extortion and raidering against anyone with lucrative assets.

Since Zheenbekov’s ascent to power, the new ruling clan had so far raidered the control over a large national internet service provider, several construction companies, mining prospects etc. Numerous businesses, including foreign-owned ones, were subject to extortion and asset takeover.

While Zheenbekov publicly declared his support for the independent judiciary, it is common knowledge that direct instructions to judges are routinely passed through the Courts Department (an administrative body formally subordinate to the Supreme Court but de-facto being under full control of the President’s Office) and by the President’s Office itself which has a dedicated officer to ‘oversee’ courts and law enforcement bodies.

The recent coup, which ousted the Jeenbekovs and propelled a Mob-supported convicted kidnapper, Sadyr Japarov, to be acting president and prime minister, changed things only for the worse. Raidering and extortion of businesses, including foreign-owned ones, is now being practiced in force, albeit for the benefit of the new powers-that-be. Running virtually uncontrolled, these practices are now endemic, as is complete disregard for formal law and institutions, at all levels, including the judicial system.

Property Theft Under the Cover of Tax

The tax system, although very liberal and investor-friendly on paper (Profit tax is just 10%, and many rebates are available), is systemically abused by the tax collectors to extort arbitrary amounts of tax from businesses with large income in order to plug holes in Kyrgyzstan’s ailing budget.

In a typical scheme, after a spurious tax assessment is made (very often, based on turnover, with no regard to deductibles), the matter is passed to the Financial Police for coersive action, to subdue any resistance. Corporate principals are then subject to pre-trial arrest, until they agree to pay the arbitrary tax their company was slapped with. Kyrgyz courts have a strict order from the President’s Office (to which many judges informally attest) to never rule in favour of taxpayers, even in the most egregious cases of abuse by tax authorities.

Jeenbekov himself publicly endorsed this scheme, saying at the meeting of the Committee of Industry and Business Development on 24 June 2019, “If there is a violation discovered, and the tax was then paid by the business, then stop probing them”, effectively proving that criminal probes are opened on spurious grounds simply to pressure businesses into propping up the budget.

The current tax minister, Kabyl Abdaliev, said to be a relative of Almambet Saliev, who was the President’s Office deputy head responsible for the oversight of the courts and the coersive-power bodies under Jeenbekov, still heads the tax ministry and practices the same pressure tactics as under his former boss.

The chief of the investigative department in the Financial Police, Eldiyar Aiylchiev, is a relative of Jeenbekov. We could not confirm this at the time of going to press, but he is still believed to be occupying this post within the agency. The chairman of the Tax Police appointed just recently by Sadyr Japarov, the new acting president, is said to be Japarov’s good friend.

With such tight control exercised by the ruling clan, lawful resolution of tax disputes is incredibly challenging if not impossible.

The CEO of KAZ Minerals Bozymchak, a Kyrgyz subsidiary of Kazakhmys, a previously LSE-listed international gold miner, was jailed in 2018 following his company’s refusal to pay a groundless tax charge. He was released after the tax amount was transferred.

Beeline, a Kyrgyz subsidiary owned by Veon (a NASDAQ-traded telecommunications company) is currently in arbitration against Kyrgyzstan to compensate the frivolous tax charge which the company had to pay to stay in business. Several more tax-based arbitrations are pending.

To give more beef to the extortionist efforts of the Tax Service, in July 2019 Kyrgyzstan’s Ministry of Economy introduced a bill which would allow tax authorities to indefinitely put company directors, accountants and even shareholders on a travel ban list (denying their right to leave Kyrgyzstan) if the company has any amount of unpaid tax, whether disputed or not.

Cholpon Jakypova, a Kyrgyz human rights activist and local provider of legal aid, stated in her open letter to President Zheenbekov that “Often people are illegally barred from leaving the country, their property is arrested, even of those who are simply witnesses in a criminal case. Of special concern are cases when money and securities are arrested which belong to witnesses, corporate executives and third-party legal entities; that all bears evident traits of corruption, raidering and open pressure on business”. The letter received no attention from the President’s Office.

Foreign Business Not Immune

While during pre-Jeenbekov administrations good faith foreign investors were largely immune from extortion and inter-clan fights for asset redistribution, both Jeenbekov and the current rulers of the country have completely abandoned this self-limitation. Foreign-owned businesses are now routinely pressured by the coercive-power agencies and are subjected to arbitrary tax assessment.

This has led to the exodus of much foreign capital from the country during the past three years. Amidst the rampage of extortion and blatant disregard for civilized standards of investor protection, many investors are leaving the country, unable to rely neither on the judicial system, nor the political leaders, to defend them.

It is bizarre that this started happening while President Zheenbekov was making the fight against corruption and the support of investment his key notes in almost any speech, addressing both domestic and international audiences. The current administration continues on the same path. Kyrgyzstan’s minister of foreign affairs, Ruslan Kazakbaev publicly declared that “the October events bring no risks for the foreign investors” only one day after a London Stock Exchange-listed mining company, Chaarat Gold, was subjected to a spurious criminal charge of allegedly underpaying for the conversion of a part of its prospect from agricultural land 6 years ago, prompting the UK Embassy in Bishkek to issue a stern statement in its defence.

No Treaty Protection for Foreign Investment

Since the Kyrgyz Republic has virtually no foreign assets that can be seized to compensate for damages, it enjoys a dubious privilege of being able to neglect any arbitration award to pay compensation to foreign investors.

Although party to the 1958 New York Convention on mutual recognition and enforcement of arbitral awards and an array of bilateral investment protection treaties, Kyrgyzstan routinely ignores the awards issued against it by international arbitration.

A year ago, when the international arbitration attended by the Kyrgyz side ordered Kyrgyzstan to pay 18 million USD as compensation for the confiscation of mining interests to Stans Energy Corp., a TSX-listed Canadian miner, the head of the Government department responsible for representing Kyrgyzstan in courts and arbitration, Mr. Ayaz Baetov, publicly declared that the country will not honour the award.

A similar comment was made by him with regards to the 25 million dollars arbitration award which Entes Industrial Plants, Construction and Erection Contracting Co. Inc., a Turkish contractor of the Kyrgyz Ministry of Transport is now trying to enforce through US courts (“The Ministry of Transport does not have assets in the US. Perhaps, Kyrgyzstan has real estate there, but why would the Ministry buy it? It appears that the Turkish company must wait till our Ministry of Transport buys something and then sells it. So if the court now […] approves this, in practice we are the winners”).

In the Stans Energy arbitration, the country’s lawyers even claimed that because of a self-caused mismatch between the official texts of Kyrgyzstan’s Law on Investment in Russian and in Kyrgyz, this law limits the right of foreign investors to arbitrate (both languages are used officially, but the legal drafting is mainly done in Russian with subsequent translation into the local language to fit the constitutional requirement). The claim was eventually rejected by the arbitration panel and the High Court of Justice of England and Wales.

To reiterate the point that Kyrgyzstan is not going to pay under unfavorable arbitration awards, a criminal probe was opened in October 2019 against ex-Prime Minister Joomart Otorbayev for approving (in 2014) a payment which Kyrgyzstan owed under the arbitral award to another aggrieved investor, Sistem Mühendislik, of Turkey. Following that, it is doubtful that any Kyrgyz bureaucrat will ever consider honoring arbitral awards in favour of foreign investors.

The Mob Connection

Organized crime has always played an important role in Kyrgyzstan’s economy and politics. Its influence over the daily business, social and political life is so prevalent that the leader of Kyrgyzstan’s underworld, a US-sanctioned gangster, Kamchibek Kolbaev, bearing the highest underworld title of “thief-in-law”, is widely regarded as the country’s ‘shadow president’ and perhaps the wealthiest person in Kyrgyzstan.

The leaders of the country preceding Jeenbekov did interact with organized crime and occasionally used it to advance their interests, but always maintained a healthy political distance from Mob leaders.

The weak presidency of Jeenbekov changed that trend, as he had to rely on organized crime as well as the wealthy and powerful contraband clan, the Matraimovs, for his support against his self-created political opponents – the previous President and his allies whom he treacherously imprisoned shortly after taking office. During the three years of Jeenbekov’s rule, the Mob came out of the shadows to influence political appointments, asset redistribution and to put coordinated pressure on businesses. The country’s coersive power agencies, long believed to be associated with the Mob at all levels, in many instances evolved to be the instruments both of the Mob and of the contraband mafia, which have always worked in partnership.

As was recently demonstrated in research by Bishkek-based investigative journalists Ali Toktakunov and Bolot Temirov, the Matraimov trafficking clan has consolidated control over key positions in the State Customs Service, with over 40 (!) relatives of the family occupying positions there at all levels.

Bakir Tairov, the ex-chief of the Financial Police (a coersive-power agency which is key in safeguarding the contraband business within Kyrgyzstan’s borders) was demonstrated to have business ties (via a company called AKA Petroleum) with the Matraimov brothers. Until Radio Liberty and OCCRP publicly revealed the dealings of the Matraimov’s family in 2018, which resulted in a loud but fruitless public investigation, one of the brothers – Islam Matraimov occupied the position of the head of the internal investigations department in the Financial Police.

The chairman of the Financial Intelligence Unit of Kyrgyzstan, Gulamjan Anarbaev who still heads this agency despite the power change this October, is a relative of the Matraimov clan. His sister is married to Ruslan Matraimov, one of the brothers running the trafficking empire. Unsurprisingly, his son, Semetei Anarbaev, recently joined the ranks of the Customs Service. Anarbaev’s position is key for the contraband clan as he provides cover for the laundering of almost 3 billion dollars annually as contraband sells for cash in Kyrgyzstan and said cash is later paid into China, Turkey, Hong Kong and elsewhere under bogus import contracts through Kyrgyzstan’s banks.

At the height of confrontation with ex-President Atambaev which culminated in the storming of Atambaev’s private residence and his capture by force in August 2019, the Jeenbekov clan appointed Pamir Asanov, one of Matraimov’s close relatives, as deputy Minister of Interior.

Hardly a week passed after Sadyr Japarov, the new acting president and prime minister of Kyrgyzstan, was freed from prison by the mobs on the night of 5 October 2020, as he handed the Minister of Interior post to Ulan Niyazbekov, an obscure police colonel who used to run the internal procurement department in the Ministry of Interior 8 years ago (which resulted in him being investigated for embezzlement) and never saw any operative or investigatory work. The reason? It is widely believed that his candidature was suggested by the boss of the underworld, Kamchibek Kolbaev.

Kamchibek Kolbaev was reported to have been directly negotiating with President Jeenbekov on the night of 5 October as the mobs were storming the Parliament building and the prisons, for him to concede to the Mob-approved candidate, Sadyr Japarov.

Sadyr Japarov orchestrated the arrest of Kolbaev about a month later, but all the circumstances of this event lead to believe that this was a pre-agreed spectacle, more having to do with ensuring the physical security of Kolbaev from potential assassins than establishing law and order. A video was later released of Kolbaev being given a royal reception in the prison camp, his underlings feasting in long rows at the expense of their boss. Japarov later released over a thousand of inmates in a hastily announced amnesty, the lists of the to-be-pardoned believed to have been drawn up by Kolbaev.

It is evident that Sadyr Japarov, who wants to succeed in his bid for Presidency in the January 10, 2021 elections needs to rely on the two main informal power networks across the country – Kolbaev’s Mob and the Matraimov’s network – to ensure that he can record enough votes in his favour. Against this background we believe that the criminal infiltration of the State under Japarov will only increase.

For any investor this means more arbitrary takeovers and extortion, aggravated by the inability to appeal to any power institution for help.

A Toxic Investment Climate

Kyrgyzstan has never been an easy country for direct foreign investment, but the Jeenbekov clan and the current interim rulers have made its investment climate prohibitively toxic for foreign capital.

Given that there are very few lucrative investment opportunities in this Central Asian country, one would assume that its political leaders should court any willing investor with diligence. Instead, contrary to all the empty declarations of investment support made by the Kyrgyz governments, in practice the country is a deadly trap for any foreign capital which was careless enough to get invested there.

In fact, over almost 30 years of the country’s existence, only a handful of foreign businesses can claim that their investment in Kyrgyzstan was a success. At the same time, international investors who lost their money and were subject to brutal mistreatment in Kyrgyzstan go by the hundreds.

Until Kyrgyzstan conclusively submits to international standards of investor protection and proves with concrete deeds that its inter-clan politics have no impact on the foreign companies operating there, the calls to invest there should be categorically ignored. Failure to heed to this warning may result not only in complete loss of investment, but also in personal harm to anybody who comes to Kyrgyzstan to oversee it.