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Is Kazakhstan Open For Business?

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Now that almost six months since the launch of the Expo 2017 Astana have passed, how successful was Kazakhstan’s $3 billion effort to tell the world that it’s “open for business?” Ahead of the Expo, the government of Kazakhstan certainly did its best to raise expectations and to position itself as a regional powerhouse, keen on diversifying its oil-dependent economy. Indeed, in the more than quarter century since the country gained independence from the USSR, GDP growth has come mainly off the back of Kazakhstan’s vast natural resources. But with the price of oil and gas – which account for around 60% of exports – having plummeted, and with GDP having grown by a mere 1% last year, the government has been making urgent efforts to woo foreign investors. Hence the theme of the fair – “Future Energy” – and the government’s campaign to host the Expo in the first place as part of a nation-branding scheme.

However, the investment climate is problematic.  AES, one of the first foreign companies to invest in the country is all too familiar with the problems. An AES spokesperson explained how Kazakhstan forcibly seized two hydroelectric power plants that AES had acquired in a concession deal 20 years earlier – and paid the firm only $1 in return for the assets.

 AES was among the first and only foreign investors outside the oil sector to invest in Kazakhstan, having entered the market in 1996, when the country was still making only halting progress in the transition from a planned to a market economy. At the time, the electricity sector was still state-owned and on the verge of collapse due to chronic lack of funds.

AES’ first move was to acquire the newly privatized Ekibastuz GRES 1 coal-fired power plant in the Pavlodar region. Encouraged by Kazakhstan's commitment to support foreign private investment, AES later entered into a concession agreement and acquired four coal-fired heat and power plants, together with a 20-year concession for two hydroelectric plants in East Kazakhstan. To ensure the plants were operational during the winter and to upgrade their efficiency, AES invested almost $400 million in the plants included in the concession – even though investment in the sector still posed considerable risks.

As the economy started picking up in 2001 thanks to high oil prices, the government started having second thoughts over its decisions to sell assets to foreign investors such as AES. As a result, it started efforts to re-appropriate the plants and to render the concession agreement null and void.

The only snag was that Kazakhstan had provided a number of guarantees and promises through the concession agreement as well as through existing legislation like the Foreign Investment Law – guarantees which were pivotal in AES’ decision to pursue the investment.

But that didn’t stop Kazakhstan from signaling it wouldn’t extend the concession, nor fulfill its promises – a fact that became increasingly clear as the expiry date of October 1, 2017 approached. In April 2017, AES was officially informed that Astana would require the return of its plants by October 1, without offering any explanation or chance for negotiations. As part of the return process, Kazakhstan was required to pay AES a transfer payment calculated in accordance with a contractual formula, which was designed to ensure that the firm would be compensated for any value it contributed to the plants over the concession period. In July, AES shared its calculation for the payment, which totaled approximately $87 million, along with detailed supporting documentation. The following month, Kazakhstan responded with a one-page estimate of $60 million – with no documentation included.

Following additional back-and-forth, Kazakhstan notified AES that the amount due was only $1 for each plant. Perhaps fittingly for such a bizarre figure, the government did not provide any details for its new calculation.

In its April notification, the government stated that an amount equal to AES’ calculation of the transfer payment would be deposited into escrow, in return for which the firm must transfer the plants, and that arbitration would be necessary to establish the correct payment. AES objected, but the government went ahead nonetheless and reiterated its demand for the “immediate” transfer of the plants. AES complied.

In addition to not paying AES, Kazakhstan set up a flawed escrow agreement that allowed the government to direct the release of funds to any person (including itself) at any time, which prompted AES to apply for a temporary injunction preventing them from doing so. Although AES has been reaching out to local authorities to find a mutually agreeable solution, Kazakhstan has so far refused to engage in settlement discussions, which may force AES to initiate arbitration.

As the spokesperson explained, the affair serves as a warning bell for other investors looking to enter the country. Indeed, other foreign energy firms operating in Kazakhstan have suffered similar fates. These include the US firms CCL Oil, Turkey’s Türkiye Petrolleri Anonim Ortaklığı, and the Dutch firm Liman Caspian Oil B.V.

As they put it, if the government truly wants to diversify its economy and attract business, “It should guarantee a stable regulatory framework and allow investors to repatriate profits and be treated fairly under the contracted agreements.” Indeed, such a strategy would go far towards ensuring the expo delivers on its promises.

 

Portugal

EU leaders meet to adopt Porto Declaration on employment, skills and social protection

Catherine Feore

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The Porto Social Summit aims to give a political impetus to the implementation of the European pillar of social rights and its action plan. Leaders are expected to adopt a Porto Declaration endorsing three EU-level targets in the areas of employment, skills and social protection to be achieved by 2030.

On the 8th, leaders will discuss the implementation of the European Pillar of Social Rights at EU and national level, as established by the EU Strategic Agenda 2019-2024. As the EU recovers from the pandemic, leaders will focus on protecting, creating and improving job quality. They will also discuss how to support young people who have been negatively affected by the COVID-19 crisis. 

The European Pillar of Social Rights Action Plan is made up of 20 principles to guide the construction of a stronger, fairer and more inclusive Europe, filled with opportunities. The initial proposal dates from the Gothenburg summit  in 2017. The Porto Summit aims to turn these principles into action that will lead to concrete results for EU citizens. 

The Action plan provides guidance for the implementation and sets three main targets to be achieved throughout Europe by 2030: an employment rate of at least 78% in the European Union, at least 60% of adults attending training courses every year, and reducing the number of people at risk of social exclusion or poverty by at least 15 million people, including 5 million children. 

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UK

European Commission calls for calm over Jersey fishing dispute

Catherine Feore

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Following the recent rise in tensions over fishing licenses linked to the waters surrounding Jersey, the European Commission has called for calm and for the UK to comply with the EU-UK Trade and Cooperation Agreement. 

Commission spokesperson Vivian Loonela said: “The situation where we are is that on the 13 April, we were notified by the UK authorities that they had granted 41 licences to EU vessels who are fishing in Jersey’s territorial waters, but there were additional conditions set to these licenses (for 17 of the applications). 

“We have seen that the provisions of the EU-UK Trade and Cooperation Agreement (TCA) that we recently agreed have not been respected. According to the agreement, any new specific conditions that limit fishing in UK waters need to comply with the objectives and principles set out in the TCA, but also have to have a clear scientific rationale and those conditions have to be non-discriminatory between the UK and EU vessels,” Loonela added, “Any new conditions have to be notified in advance to the other party, so that there is sufficient time to assess and to react to the proposed measures. We have indicated that until we have received further justifications from the UK authorities, we consider that these new conditions should not apply.”  

Asked whether the French threat to cut off Jersey’s electricity supply was proportional, a further Commission spokesperson, Daniel Ferrie, who deals with all Brexit related questions said that the all parties had to respect the dispute resolution procedures laid down in the TCA agreement.

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Ukraine

Borrell describes 150,000 Russian troops deployed to Ukraine border as ‘highest ever’

Catherine Feore

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At today’s (19 April) Foreign Affairs Council, European Union foreign ministers discussed Russia’s increased military activities in Eastern Ukraine and the illegally annexed Ukrainian region of Crimea with the Ukrainian Foreign Affairs Minister Dmytro Kuleba. EU High Representative Josep Borrell urged Russia to de-escalate and commended the Ukrainian government for its restraint.

Borrell described the build-up of troops as "the highest military deployment of the Russian army at the Ukrainian border ever”, saying that more than 150,000 Russian troops had been deployed, as well as all kinds of materials for warfare as well, including field hospitals. He said that the risk of further escalation was evident. Minister Kuleba briefed the ministers on the higher number of casualties compared to the same time last year and described the situation as, “very worrisome”.

The message from all EU ministers was clear, offering their strong support for Ukraine’s sovereignty and territorial integrity. Both Chancellor Merkel and President Biden have made direct requests to Putin to withdraw this deployment. 

The EPP Group in the European Parliament requests a parliamentary debate in next week’s plenary session on the current Russian military build-up at the Ukrainian border.

“It is Europe’s collective duty to reaffirm our support for Ukraine and we would like to hear from the Presidents of the European Commission and the European Council on how the European Union intends to do it,” said Sandra Kalniete MEP, vice chairwoman of the EPP Group responsible for foreign affairs. “The situation is deteriorating and is a serious and growing threat to European stability and security as well as to Ukrainian sovereignty.”

“The EU and the member states have to start to deliver on their declarations: we must assist Ukraine militarily in terms of strengthening capabilities and also politically. It has to be made clear without any delay by the highest authorities of the European Union. In addition, together with our partners, it is time to grant the NATO Membership Action Plan to Ukraine,” she concluded.

The other focus of the discussion was the further implementation of the EU-Ukraine Association Agreement, and notably the EU's continued engagement with Ukraine to ensure sustained reform efforts, especially on strengthening the rule of law. Ministers will be invited to reflect on how the EU can further enhance its sectoral cooperation in areas like climate policy. The EU will also continue to work with Ukraine in the fight against OVID-19, in particular through assistance with vaccination.

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