THE AUTHORS:
Natalia Alenkina, Associate Professor at the American University of Central Asia, Ph.D.
Yulia Levashova, Associate Professor at Nyenrode University and Director of the Dispute Prevention Program at the Asia Pacific FDI Network
Introduction
The recently signed Bilateral Investment Treaty (BIT) between Kyrgyzstan and Kazakhstan, concluded in Astana on April 19, 2024, reflects a modern approach to promoting and protecting capital investments. This new treaty will replace the 1997 agreement, which had governed the most prominent investment disputes between the two countries, including Consolidated Exploration v. Kyrgyzstan, OKKB v. Kyrgyzstan, Stans Energy v. Kyrgyzstan (I), BTA Bank v. Kyrgyzstan, andQazaqGaz v. Kyrgyz Republic.
The necessity for an update stems from a shift away from first-generation BITs, aligning with national interests, enhancing the attraction of direct foreign investment, and integrating sustainable development goals. Given the absence of a model BIT in both countries, this treaty serves as a pilot project where new approaches are introduced, drawing on third-generation BITs and recent reforms in investment law.
Let us dwell on those key innovations in this BIT that underscore its importance and set it apart from previous agreements.
The Key Provisions: Finding a Balance
In contrast to the previous agreement, the new BIT attempts to balance the rights of states and investors by inserting comprehensive provisions detailing states’ obligations, as well as emphasizing the state’s right to regulate in the preamble, general exception clause (Article 19) and national security clause (Article 20).
The Scope: Narrower Definition of Investor
The new BIT includes novel features in the definition of investors. To prevent ‘treaty-shopping’ through mailbox companies, the BIT mandates that a legal entity, established on the territory of one of the contracting parties, must demonstrate ‘factual economic activity’ in order to qualify as an investor (Article 1(2)). Furthermore, there is a specific requirement for Kyrgyz investors, that stipulates that a Kyrgyz national possessing other nationalities may only qualify as a Kyrgyz investor under the treaty. The goal of this specification is to limit the BIT coverage only to intended investors.
Investment Protection Standards
In contrast to the previous treaty, this BIT includes detailed provisions regulating Fair and Equitable Treatment (FET) and the regime of expropriation. The drafters clearly attempted to restrict protection under both provisions only to a host state’s serious misconduct, aiming to limit potential expansive interpretation by tribunals. The FET is narrowed to the obligation not to deny justice in criminal and administrative proceedings and to act in accordance with due process (Article 3). Like several recent International Investment Agreements (IIAs), this BIT specifies that a host state’s failure to respect investor expectations, even if it results in loss or damage, does not necessarily violate the FET provision. Considering that a breach of investor’s legitimate expectations often translates to the breach of the FET standard (See, Yulia Levashova, The Right of States to Regulate in International Investment Law), the goal of this formulation is to limit the application of this broad concept.
The expropriation clause includes a definition of indirect expropriation, as well as an integrated partial proportionality test, which should be considered when assessing expropriatory measures (Article 5). A prominent exception to an expropriation clause are taxation policies outlined in a separate clause (Article 21). Both Kazakhstan (Alhambra v. Kazakhstan) and Kyrgyzstan (VIP Kyrgyzstan and Menacrest v. Kyrgyzstan) have previously faced investment arbitration proceedings regarding taxation measures, which might explain the inclusion of the latter exception.
Dispute Resolution: Reset 3.0
The dispute resolution framework in the new BIT has been significantly reformed, incorporating more detailed procedures that reflect the lessons learned from previous arbitrations.
Prevention of Disputes
The parties continue to prioritize non-judicial dispute resolution methods, focusing on negotiation supported by consultation. However, despite statements of commitment to mediation, this mechanism is notably absent from the Agreement. In 2022, Kazakhstan became the first Central Asian country to ratify the Singapore Convention on Mediation, while Kyrgyzstan is still preparing for this step. The lack of mediation in BIT may stem from Kazakhstan’s reservation excluding disputes involving state bodies from the Convention’s scope, a reservation Kyrgyzstan has chosen not to adopt.
Choice of Forum, Arbitrators, and Seat of Arbitration
National courts top the list of forums for resolving investment disputes, though ICSID and UNCITRAL arbitration retain their positions. The BIT allows parties the flexibility to select other courts as well. Unlike in the past, where UNCITRAL was the default forum, no single institution now has a clear advantage. Parties must mutually agree on the forum in writing, adhere to the three-year limitation period for initiating proceedings, and formally notify the respondent of their intent to proceed to arbitration.
Investment disputes will be heard by a tribunal of three arbitrators, none of whom may be nationals or permanent residents of the parties to the BIT. Previously, only in the case of QazaqGaz v. Kyrgyz Republic was a Kazakh national appointed as an arbitrator, emphasizing the regional context. In all other cases, foreign nationals were chosen. The parties have now decided to eliminate the possibility of appointing even side arbitrators from the region.
In the absence of an agreement between the parties, the seat of arbitration will default to the territory of any state that is a party to the New York Convention.
Third-Party Funding
The BIT introduces mandatory disclosure of third-party funding at the time of filing a claim or entering into a funding agreement. This aims to prevent conflicts of interest and increase transparency – an issue that has long been relevant to both countries.
Given the ongoing work of the UNCITRAL WGIII, it may be worth considering the inclusion of provisions allowing arbitral tribunals to restrict third-party funding where such funding influences the arbitral process. Additionally, measures should be introduced to address cases of refusal to disclose funding, which could be factored into the allocation of costs by the tribunal.
Conclusion
The new BIT between Kyrgyzstan and Kazakhstan marks a significant transition in the field of investment protection. Next to traditional protection and promotion of investments, the focus is on increased transparency and balancing the rights of states and investors through clarification of the state’s obligations and ISDS procedures. This forward-looking treaty-drafting approach makes this agreement distinctive not only within Central Asia but also in the broader international context.
ABOUT THE AUTHORS
Natalia Alenkina is an Associate Professor at the American University of Central Asia, Ph.D.
Ms.Alenkina is a member of the Scientific Advisory Board of the Supreme Court of the Kyrgyz Republic. The Kyrgyz Ministry of Justice accredits her as a legal and human rights expert. Natalia is a member of the Arbitration and ADR ICC Commission and an Ambassador of the Vienna International Arbitral Centre (VIAC) in Kyrgyzstan. Natalia Alenkina took part in developing the Civil Procedure Code and the Law on Mediation in Kyrgyzstan. Now she helps the Ministry of Justice of Kyrgyzstan to implement the Singapore Convention on Mediation (2019).
Dr. Yulia Levashova is an Associate Professor at Nyenrode University in the Netherlands and a Director of the Dispute Prevention Program at the Asia Pacific FDI Network. Yulia is also an independent practitioner who serves as an arbitrator and provides legal consultancy to the Dutch government and international organizations, e.g., UNECE and UNCTAD. Yulia is a member of the Chartered Institute of Arbitrators (Ciarb) and an observer of the UNCITRAL WGIII.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
