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The Guide to Mining Arbitrations - First Edition

Mining Arbitration in Central Asia

Introduction

Central Asia is a mineral-rich region, which has been confronted with an increasing number of investment arbitrations related to the mining sector over the past two decades.

The Central Asian region is comprised of five republics of the former Soviet Union, namely Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. The total area of this region is over 4 million square kilometres and the total population is approximately 71.5 million. The combined GDP of the five countries exceeded US$250 billion in 2018, with Kazakhstan’s GDP alone representing over 50 per cent of this amount.

The Central Asian republics are among the world’s largest producers of uranium, chromite, titanium sponge, magnesium and gold, and hold some of the world’s largest deposits of uranium and silver.

The development of minerals extraction in those countries originated in the Soviet era and continued after independence, with Kazakhstan attracting the higher number of mining foreign investments. There has been a growing appreciation in the region of the benefits that mining production might create for its economy. Several Central Asian countries have recently decided to undertake significant reforms in mineral resource governance to attract foreign investment, including through the adoption of new, modernised mining legislation.

According to publicly available information, three out of the five Central Asian republics have faced in recent years investment arbitration claims related to the mining sector, namely Kazakhstan, Uzbekistan and Kyrgyzstan. Those arbitrations mainly arose out of alleged government interference with mining rights, such as the revocation of licences or the termination of contracts; the refusal to grant approvals, licences or permits; or the repeal of tax benefits. While many of those disputes were settled, some of them have raised key issues, including issues of state succession, stabilisation or alleged corruption.

In this chapter, we examine the mining activities, legislation and arbitration cases of each of the five Central Asian republics.

Kazakhstan

Mining activities

Kazakhstan has attracted a significant amount of foreign investment in the oil and gas, mining, telecommunications and construction sectors.

The extractive sector alone has attracted over 75 per cent of Kazakhstan’s total inward foreign investment. While most of those investments were made in the hydrocarbon sector, investments in the mining and quarrying sectors still accounted for 19 per cent of the inward foreign investment.[2]

As regards mining and quarrying activities, Kazakhstan is the world’s largest uranium producer with over 40 per cent of global uranium production,[3] the second-largest producer of chromite (13 per cent), the fourth-largest producer of titanium sponge (6 per cent) and magnesium metal (3 per cent), as well as the fifth-largest producer of rhenium (5 per cent).[4] Other significant minerals produced include aluminium, copper, iron, manganese, ore, precious metals, slag and ash, and zinc.[5]

The main producers of non-fuel minerals in Kazakhstan includes the state-owned companies Tau-Ken Samruk (copper, gold, iron ore), Kazatomprom (uranium and rare metals) and the partly state-owned company Eurasian Resources Group (ferroalloys, iron ore, aluminium, copper, cobalt, coal).[6] Other important producers include AcerlorMittal (iron ore, coal) and three Kazakh companies: Kazakhmys (copper), Kaz Minerals (copper) and Kazzinc (zinc and lead).[7]

Mining legislation

The Code on subsoil and subsoil use (the SSU Code)[8] was adopted on 27 December 2017 and came into force on 29 June 2018, replacing the Law on subsoil and subsoil use of 24 June 2010.

The SSU Code establishes a distinct legal regime for ‘solid minerals’,[9] uranium and hydrocarbons.[10] With regard to solid minerals, the new Code reflects Kazakhstan’s efforts towards aligning its mining policy framework with international models, and introduces a number of general changes designed to create a more streamlined and predictable legal environment for foreign investors. In that respect, as noted by the OECD, ‘[a] number of jurisdictions including Australia, Finland, Germany, and the UK, have acknowledged the improvements made to the new legal and regulatory framework of Kazakhstan’s mining sector.’[11]

While mining rights under the 2010 subsoil law were granted under contracts following a competitive application process, mining rights (except for uranium) under the SSU Code are granted under licences, which are issued on a first come, first served basis.[12]

The SSU Code contains provisions outlining the relevance of environmental and water quality assessments as part of the licensing process,[13] as well as Kazakhstan’s commitment to transparency reporting in accordance with the international standards of the Extractive Industries Transparency Initiative.[14]

The SSU Code generally refers to the principle of stability of subsoil use conditions.[15]

Under the SSU Code, licences are governed by Kazakh law and disputes in connection with mining licences are submitted to Kazakh courts, notwithstanding the application of an international treaty (e.g., a bilateral investment treaty) ratified by Kazakhstan providing for the settlement of disputes before other forums, such as an international arbitral tribunal.

Taxation of mining activities remains handled separately as part of the Tax Code, which was substantially amended in January 2018. In particular, the Tax Code no longer requires subsoil users to pay excess profit tax, reimburse historical costs or pay a commercial discovery bonus.[16]

Arbitration

Kazakhstan is a party to:

  • 47 bilateral investment treaties (BITs), 42 of which are in force;[17]
  • the 1994 Energy Charter Treaty (ECT),[18] as well as several multilateral investment agreements such as the 1997 Moscow Convention on the Protection of Investor Rights (the Moscow Convention),[19] the 2008 Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community (the Eurasian Investment Agreement),[20] the 1981 Agreement on Promotion, Protection and Guarantee of Investments among the Member States of the Organization of the Islamic Conference (the OIC Investment Agreement),[21] or the 2004 US–Central Asia TIFA;[22]
  • the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention); and
  • the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).

Kazakhstan has also enacted an investment law containing protections similar to those available to foreign investors in modern investment protection treaties.[23] Under the Kazakh investment law:

  • Investments can only be nationalised or requisitioned in exceptional circumstances, in which case compensation must be paid in full.
  • Investors’ rights and interests are fully protected.
  • The stability of contracts concluded between investors and Kazakhstan is guaranteed.
  • Foreign investors have an express right to compensation in case of losses resulting, inter alia, from the adoption of unlawful acts by Kazakh officials.
  • Investment disputes can be resolved through negotiations or in accordance with the dispute resolution mechanisms agreed upon between the parties. If disputes cannot be resolved through those means, they shall be resolved in accordance with international treaties and laws of the Republic of Kazakhstan by Kazakh courts or by an international arbitral tribunal.[24]

Kazakhstan has faced an increasing number of investment arbitration claims in the past two decades. There are currently three pending investment arbitrations against Kazakhstan involving mining companies.

Alhambra Resources Ltd and Alhambra Coöperatief UA v. Kazakhstan[25]

This arbitration arose out of claims based on rights held by the claimants’ local subsidiary, Joint Venture Saga Creek Gold Company LLP, under two mining licences related to the Uzoby gold belt in Northern Kazakhstan. On 5 April 2016, the claimants initiated an ICSID arbitration against Kazakhstan based on the Netherlands–Kazakhstan BIT, alleging that various actions of the government, including the assessment of taxes and the refusal to grant mining and financing approvals have resulted in the bankruptcy of their wholly owned subsidiary Saga Creek in 2015. A hearing on the merits was held in February 2019.[26] The proceedings remain pending.

World Wide Minerals Ltd v. Kazakhstan[27]

World Wide Minerals Ltd (WWM), a Canadian company, entered into several agreements with the government of Kazakhstan for the reconstruction and management of the Kazakh uranium facilities in 1996 and 1997. In 2013, WWM initiated an UNCITRAL arbitration against Kazakhstan based on the 1989 Canadian–USSR BIT, concluded two years before Kazakhstan became independent. The Canadian company alleges that the government has failed to observe its obligations under a contract for the operation of one of Kazakhstan’s largest uranium-processing facilities. It also claims that the government’s alleged failure to grant an export licence to market Kazakh uranium internationally would have led it to suspend its operations at its Kazakh facility and resulted in the bankruptcy, confiscation and forced sale of its local assets.[28] In October 2015, in an unpublished decision on jurisdiction, the tribunal upheld its jurisdiction over the company’s claims, holding that Kazakhstan was bound by the 1989 Canada–USSR BIT.[29] This case is known to be the first one in which a state other than Russia has been held to be a legal successor to the international investment treaty obligations of the USSR.[30] The proceedings remain pending and no further public information has been released to date.

Gold Pool LLP v. the Republic of Kazakhstan[31]

Gold Pool, a Canadian junior mining company, initiated a UNCITRAL arbitration against Kazakhstan also pursuant to the 1989 Canadian-USSR BIT.[32] The company alleged that its rights under a management contract to operate gold mines in Kazakhstan were wrongfully terminated after it had given notice of its intention to exercise purchase rights to the mines. The proceedings remain pending.

Uzbekistan

Mining activities

Uzbekistan is among the world’s largest producers of gold and uranium, ranked as the eleventh- and seventh-largest producer respectively.[33] Uzbekistan also produces copper, silver, coal, phosphate, molybdenum, potassium, tungsten, lead, zinc and other minerals.

Most of the subsoil deposits are being developed by two major state-owned mining companies, Navoi Mining Metallurgical Combine (NMMC) and Almalyk Mining Metallurgical Combine (AMMC), or by joint ventures with these companies.

Mining legislation

The Uzbek mining industry is mainly governed by Law No. 444-II on Subsoil (new version) dated 13 December 2002, which provides the fundamental legal framework for the exploration and development of all subsoil resources, including minerals and oil and gas.[34]

Under the Uzbek subsoil law, subsoil-use rights are granted on the basis of subsoil-use licences[35] awarded to subsoil users through tenders or direct negotiations.[36] The law also provides that mining rights may be suspended, restricted or prematurely terminated in specific circumstances specified by the subsoil law (e.g., failure to commence use of subsoil plot within one year from the date of subsoil plot allotment, repetitive failure to make subsoil use payments, breach of main terms and conditions of a licence or threats to the environment).[37]

On 24 May 2017, the President of the Republic of Uzbekistan adopted the Resolution on Measures for Expediting Attraction of Foreign Investments for Geological Studies and Development of Strategically Important Types of Hard Minerals No. PP-3000 (Regulation PP-3000). Regulation PP-3000 provides investors with simplified procedures for discussing potential projects with the State Committee on Geology and accessing geological data, subsoil deposits and prospective areas.[38]

More recently, in April 2018, the government announced the adoption of a new state policy aiming at simplifying licensing procedures and administrative approvals.

With respect to royalty and taxes, Uzbekistan’s Tax Code sets forth a special tax regime applicable to subsoil users, including mining companies, which imposes a sub-soil use tax as well as subscription and commercial discovery bonuses.[39] The mining industry is further subject to a number of other laws and regulations, including the Land Code, the Labour Code and the Environment Protection Law.[40]

Arbitration

Uzbekistan is a party to 49 BITs, out of which 45 are currently in force.[41] Uzbekistan is also a party to the ECT, the OIC Investment Agreement, the US-Central Asia TIFA, the ICSID Convention and the New York Convention.[42]

Additionally, Uzbekistan’s Law on Guarantees and Measures for Protection of Foreign Investors’ Rights dated 30 April 1998 (the Uzbek Foreign Investment Law) contains provisions similar to those contained in modern investment protection treaties.[43] Under the Uzbek Foreign Investment Law:

  • foreign investments cannot be subject to nationalisation,[44] nor can they be subject to requisition except in the event of natural disasters, accidents, epidemics or epizootics,[45] in which case compensation shall be paid;[46]
  • foreign investments are protected from any subsequent changes in the Uzbek laws that may worsen investment conditions, for a period of 10 years from the date of the investment;[47]
  • discrimination is proscribed;[48]
  • foreign investors have an express right to compensation for losses resulting from the adoption of adversarial normative acts or other unlawful interferences in their activities in Uzbekistan;[49] and
  • disputes arising out of foreign investment are subject to negotiation, failing which they may be settled either by an economic court of the Republic of Uzbekistan or by arbitration ‘in accordance with the rules and procedures of international agreements (conventions) on settlement of investment disputes, to which the Republic of Uzbekistan has been joined’.[50]

Uzbekistan has faced a number of investor–state arbitration cases,[51] three of which arose out from mining activities, including one based on the Uzbek Foreign Investment Law.

Newmont USA Limited and Newmont (Uzbekistan) Limited v. Republic of Uzbekistan[52]

In 2002, US-based Newmont and its subsidiary Newmont Uzbekistan entered into a joint venture agreement with the State Committee for Geology of Uzbekistan, with a view to processing low-grade gold ore at the Murantau deposit. In 2006, the Uzbek government repealed tax terms guaranteed under the joint venture agreement, and requested that Newmont pay US$48 million in unpaid taxes. Newmont initiated an ICSID arbitration against Uzbekistan in April 2007 under the Uzbek Foreign Investment Law. The parties settled the dispute in June 2007 and the ICSID proceedings were discontinued at their request on 25 July 2007. It was reported that as part of the settlement, Newmont was to receive US$80 million and further agreed to drop a concurrent SCC arbitration.[53]

In 2006, as a reaction to the position adopted by foreign investors, including Newmont, the Uzbek Cabinet of Ministers asked the Constitutional Court to proceed with an official interpretation of Article 10 of the Foreign Investment Law, on the basis of which foreign investors claimed that Uzbekistan had consented to settle its disputes with foreign investors under the ICSID Convention.[54] The Court ruled that Article 10 does not purport to mean that either party has given its written consent for resolving disputes under the ICSID Convention.[55]

Metal-Tech Ltd v. Republic of Uzbekistan[56]

Metal-Tech initiated an ICSID arbitration against Uzbekistan under the Israel–Uzbekistan BIT for the alleged expropriation of 50 per cent of its shares in a joint metal venture.

In 2000, Israeli Metal-Tech entered into a joint venture agreement with two Uzbek state-owned companies, UzKTJM and AGMK, for the creation of Uzmetal Technology, with a view to processing low-grade molybdenum concentrate, supplied by AGMK. Uzmetal’s facilities opened in October 2002, and by 2005, the venture was turning a profit. In 2008, Uzmetal was declared bankrupt by Uzbek courts after a series of actions were taken by Uzbek authorities, including the initiation of criminal proceedings against Uzmetal’s management for alleged abuse of authority and the suspension of Uzmetal’s exclusive right to purchase raw materials. In January 2010, Metal-Tech initiated the ICSID arbitration.

In an award dated 4 October 2013, the tribunal unanimously rejected Metal-Tech’s claim. The tribunal found that Metal-Tech’s investment was procured by means of illegal payments of approximately US$4 million to three Uzbek nationals, including the brother of the Uzbek Prime Minister. This case was the second case of an ICSID claim being dismissed on grounds of corruption, and the first one on jurisdiction.

Oxus Gold v. Republic of Uzbekistan[57]

The dispute arose out of UK company Oxus Gold’s mining operations in Uzbekistan, consisting of two projects: the Amantaytau Goldfields project in the Kyzylkum desert; and the Khandiza base metals project in the Surkhandarya region. Oxus Gold alleges that the Uzbek government prevented Oxus Gold’s subsidiary from completing the development of the Amantaytau site, including through the revocation of various tax exemptions, the refusal of licences as well as employee coercion; and refused administrative approval for Oxus Gold’s Khandiza project and illegally transferred Oxus Gold’s exploitation rights at Khandiza to a state-owned company.

In August 2011, Oxus Gold initiated an UNCITRAL arbitration against Uzbekistan, alleging contract breaches and violations of the expropriation, fair and equitable treatment and full protection and security provisions of the UK–Uzbekistan BIT, claiming damages of approximately US$400 million.

The tribunal upheld jurisdiction over Oxus Gold’s claims in early 2012. However, in an award dated 21 December 2015, the tribunal dismissed most of Oxus Gold’s claims on the merits, save for a finding that Uzbekistan’s modifications, in 2006 and 2009, of the applicable taxation regime constituted a violation of the fair and equitable standard under the UK–Uzbekistan BIT. The tribunal awarded Oxus Gold damages in excess of US$10 million plus interest. The tribunal further found that it lacked jurisdiction over Uzbekistan’s counterclaims.

Oxus Gold filed an application for the partial annulment of the award before the Paris Court of Appeal. A hearing is scheduled for March 2019.[58]

It is worth noting that to pursue its claim, Oxus Gold had entered into a funding agreement with Guernsey-registered Gretton Limited, an affiliate of third-party funder Calunius Capital. In 2012, Gretton was assigned all of the proceeds of the Oxus Gold arbitration, including the right to enforce the award and to collect from Uzbekistan all amounts owed thereunder. On 27 July 2018, Gretton applied to a US court to enforce the award against Uzbekistan in its capacity as Oxus Gold’s assignee.[59] On 7 February 2009, the US court decided to stay the enforcement proceedings in the US pending the outcome of the annulment proceedings before French courts.[60]

Kyrgyzstan

Mining activities

Since the end of the Soviet Union, the Kyrgyz oil and gas and mining sectors have attracted a significant amount of foreign investments.[61]

Mining is a major contributor to the Kyrgyz economy. In 2014, the mining industry represented 8.4 per cent of Kyrgyz GDP and 53.9 per cent of its industrial output.[62]

Mining in Kyrgyzstan is largely focused on coal and gold. There are also deposits of other mineral resources, such as silver, copper, iron, mercury, fluorite, tin, tungsten, bismuth, lead, zinc, stibium, arsenic, molybdenum and rare earth minerals.[63]

The most important mining project is the Kumtor gold mine, managed by a subsidiary of the Canadian company Centerra Gold Inc. The state gold company, Kyrgyzaltyn JSC, holds around 33 per cent of Centerra’s shares.[64]

This project is the biggest contributor to the Kyrgyz economy and currently accounts for a large part of the country’s GDP. In 2017, this project alone contributed to 9.7 per cent to GDP.[65] However, the Kumtor gold mine is expected to stop production in 2026, after having provided a steady stream of revenue for the last 20 years.[66]

In addition to the Kumtor gold mine, there are eight large- and medium-scale gold mines operating in Kyrgyzstan, involving foreign companies headquartered in Kazakhstan, China, Russia, Turkey and the British Virgin Islands.[67]

Mining legislation

The Kyrgyz mining sector is currently governed by a variety of laws and rules. The most important legal instruments include the 2012 Law on Subsoil,[68] the 1999 Environment and the Environmental Review laws, the 2008 Tax Code, and the 2001 Land Code.[69]

The 2012 Law on Subsoil and its implementing regulations are the primary sources that regulate the licensing system for mining in Kyrgyzstan. Under these instruments, licences may be issued on the basis of a tender process (i.e., if the significance or size of deposits or licence areas is considered to be of national importance or through auctions and direct negotiations; and foreign companies are under the obligation to establish a local wholly owned subsidiary to which the licence is issued.[70]

Since 2012, the government of Kyrgyzstan has undertaken significant reforms in mineral resource governance, mainly with regard to licensing, taxation and revenue sharing to capture greater benefits for the country and mining-affected communities. As part of this process, the law on subsoil is currently being revised and updated.

Arbitration

Kyrgyzstan is a party to 34 BITs (of which, 23 are in force), the ECT, the Moscow Convention, the Eurasian and OIC Investment Agreements, and the New York Convention.[71] While it has signed the ICSID Convention, Kyrgyzstan has never completed the formalities to ratify it.

Kyrgyzstan has enacted an investment law, which provides foreign investors protections similar to those available in modern investment treaties.[72] Under this law:

  • Foreign investments cannot be subject to expropriation, except if such expropriation is permitted by Kyrgyz law and done for a reason of public utility, on a non-discriminatory basis, in accordance with due process of law and accompanied by the payment of a compensation equivalent to the fair market value of the expropriated investment.
  • Discrimination and public interference with investors’ activity, rights and legal interests are proscribed.
  • Investment disputes shall be resolved in accordance with any applicable procedure agreed upon between the investor and the state. Otherwise, the dispute shall be resolved through consultation and by Kyrgyz courts, unless one of the parties ‘requests to consider the dispute in accordance with one of the following procedures: a. by applying to [ICSID]; or b. by applying to arbitrage or an international temporary arbitral tribunal [constituted in accordance with the UNCITRAL arbitration rules].’[73]

The Kyrgyz Republic currently faces a number of investment claims amounting to an estimated amount of US$925 million,[74] most of which arise out of the mining sector.[75]

Stans Energy Corp and Kutisay Mining LLC v. Kyrgyzstan[76]

In this case, Kutisay Mining LLC, a Kyrgyz company indirectly owned by Canadian company Stans Energy Corp, held a licence for rare earth, bismuth, molybdenum and silver at the Kutisay II deposit. In 2015, the claimants initiated an UNCITRAL arbitration pursuant to the Moscow Convention, under the auspices of the Permanent Court of Arbitration, alleging that their investment had been indirectly expropriated through a series of measures that resulted in the impossibility of carrying out activities on the Kutisay II deposit. The proceedings remain pending.

Centerra Gold v. Kyrgyzstan I

Centerra brought a first UNCITRAL arbitration against Kyrgyzstan in 2006, under the auspices of the Permanent Court of Arbitration and pursuant to the Kyrgyz Law on Investments and an investment agreement concluded in 2003 between Kyrgyzstan, Centerra and Centerra’s subsidiaries. The dispute arose in relation to Centerra’s investment in the Kumtor gold mine, which Centerra owns and operates through two subsidiaries, Kumtor Gold Company (KGC) and Kumtor Operating Company (KOC). While there is little public information on this case, Centerra alleges in its financial reports that the dispute arose out of a domestic court decision ordering KGC to pay US$1.2 million of taxes on land and out of a proposed Kyrgyz law that would have challenged the legality of the investment agreement.[77] In 2009, the parties reached a settlement agreement and concluded a new investment agreement.[78]

Centerra Gold v. Kyrgyzstan II

In 2016, Centerra initiated an UNCITRAL arbitration against Kyrgyzstan pursuant to the 2009 investment agreement between Centerra and Kyrgyzstan to challenge several environmental claims brought by Kyrgyz state agencies against KOC before the Bishkek courts. In one of those cases, the Bishkek Inter-District Court had ruled against KOC, condemning it to pay over US$98 million. Centerra also alleged that Kyrgyzstan had withheld environmental and operating permits necessary for the mine’s operations.[79] In 2017, the parties reached an agreement on part of Centerra’s claims.[80] In mid-2018, it was reported that the parties were still trying to reach a global settlement of the dispute.[81]

Oxus Gold v. Kyrgyzstan

In 2006, Oxus Gold initiated an UNCITRAL arbitration under the auspices of the LCIA, pursuant to the 1994 UK–Kyrgyzstan BIT. The dispute arose out of rights held by Oxus Gold, a UK company, under a mining license for the development of a gold deposit in Kyrgyzstan known as the Jerooy gold project. Oxus Gold claimed damages in excess of US$600 million, alleging that the government had cancelled the project’s mining licence and provided support to the occupation of the premises owned by Talas Gold Mining Company, Oxus Gold’s joint venture company at Jerooy. The proceedings were discontinued in 2008 following the conclusion of a settlement agreement between the parties.

Consolidated Exploration Holdings Ltd and others v. Kyrgyzstan[82]

In 2013, Consolidated Exploration, a company incorporated in the Seychelles, and Kazakh and Danish individuals initiated an arbitration against Kyrgyzstan under the ICSID additional facility rules pursuant to the Kazakhstan–Kyrgyz BIT, the Moscow Convention and the Kyrgyz investment law. The dispute arose out of claimants’ investment consisting of a majority shareholding (60 per cent) in Jerooyaltin, a Kyrgyz company that had entered into a joint venture with a state-owned company to develop the Jerooy gold deposit. The claimants claimed US$500 million in damages, alleging that Kyrgyzstan had hindered the joint venture by, inter alia, revoking Jeroolyaltyn’s licence to develop the gold deposit in 2010 and ultimately terminating the joint venture agreement altogether in 2011. The tribunal rendered a consent award on 1 September 2015, recording the parties’ settlement agreement.

Tajikistan

Tajikistan is a mineral-rich country with more than 600 deposits of over 70 minerals, many of which remain undeveloped to date.[83] In particular, it has deposits of lead, zinc, mercury, antimony, rock salt and silver that are estimated to be the biggest of the Central Asian countries.[84] It has one of the largest silver deposits in the world, the Bolshoi Konemansur deposit.[85] In 2016, the mining sector’s share of Tajikistan’s GDP was 5.5 per cent.[86] Between 2007 and 2015, more than US$700 million has been invested in the mining sector, with a Chinese mining company making the largest investment of over US$100 million to develop lead and zinc deposits.[87] Chinese, French, Iranian, Russian, Swiss and UK companies are the main investors in the Tajik mining sector.[88]

The exploration and production of minerals in Tajikistan are primarily regulated by the 1994 Subsoil Law.[89] Such law sets the basic legal framework governing the exploration, development and production of subsoil resources, provides for state control, as well as for the granting and termination of mining rights. Under the 1994 Subsoil Law, mining rights can be granted under licences, which are awarded through a bidding process or direct negotiations. Mining activities may also be conducted under concession agreements or production-sharing agreements. In practice, mining rights are primarily granted under licences in Tajikistan.[90] Finally, taxation of mining activities is mainly governed by the Tajik Tax Code and subsoil users are required to pay subscription and commercial discovery bonuses as well as royalties.

Tajikistan is a party to 36 BITs, out of which 23 are in force (including with China, France, Iran and Switzerland),[91] the ECT, the Moscow Convention, the Eurasian and OIC Investment Agreements, the US-Central Asia TIFA and the New York Convention. It is not a party to the ICSID Convention. It has enacted a foreign investment law containing protections similar to those available to foreign investors in modern investment protection treaties.[92] Based on publicly available information, Tajikistan has been a party to two investment arbitrations, which are unrelated to the mining sector.[93]

Turkmenistan

While Turkmenistan is rich in sulphur, iodine, salt, potash and bromine, the Turkmen mining sector remains underdeveloped with limited foreign investments. The exploration and production of minerals in Turkmenistan is primarily regulated by the 2014 Subsoil Law.[94]

Turkmenistan is a party to 27 BITs, of which, 19 are in force,[95] the ECT, the OIC Investment Agreement, the US-Central Asia TIFA and the ICSID Convention. It is not a party to the New York Convention. It has enacted a foreign investment law containing protections similar to those available to foreign investors in modern investment protection treaties.[96] Turkmenistan has been a party to 11 ICSID arbitrations, none of which related to the mining sector.[97]

Conclusion

Central Asia is a mineral-rich region, with Kazakhstan being one of the world-leading producers of several mining commodities. The mining sector in the five Central Asian republics is principally governed by laws on subsoil, which were either recently revised or are currently being revised.

Kazakhstan, Uzbekistan and Kyrgyzstan have faced several investment arbitration claims arising out of the mining sector in recent years, a number of which were settled. Little information is available about them in English.

The majority of those disputes were initiated on the basis of BITs and the following were of particular interest:

  • Metal-Tech v. Uzbekistan as the first ICSID case in which claims were dismissed for lack of jurisdiction on grounds of corruption;
  • World Wide Minerals v. Kazakhstan as the first reported case in which a state other than Russia was held to be the legal successor to the international investment treaty obligations of the USSR;
  • Newmont v. Uzbekistan, which gave rise to the interpretation by the Uzbek Constitutional Court that Article 10 of the Uzbek foreign investment law does not purport to mean that Uzbekistan has given its written consent for resolving disputes under the ICSID Convention; and
  • Oxus Gold v. Uzbekistan, which resulted in a third-party funder seeking to enforce an UNCITRAL award over assets of Uzbekistan in the United States.

In light of the increasing number of mining foreign investments in Central Asia, it cannot be excluded that Central Asian republics will keep facing investment arbitrations related to the mining sector in the coming years. The significant reforms in mineral resource governance and regulations undertaken in the region should create a more streamlined and predictable legal environment for both foreign investors and state authorities and contribute to reduce the occurrence of mining disputes in the mid-term.


Notes

[1] Sabrina Aïnouz and Jérôme Lehucher are partners, and Victor Datry is a senior associate, at DWF LLP.

[2] OECD, Investment Policy Reviews: Kazakhstan 2017, OECD Publishing, Paris, available at http://dx.doi.org/
10.1787/9789264269606-en, p. 13.

[3] OECD, Investment Policy Reviews: Kazakhstan 2017, OECD Publishing, Paris, available at http://dx.doi.org/
10.1787/9789264269606-en.

[4] OECD, Investment Policy Reviews: Kazakhstan 2017, OECD Publishing, Paris, available at http://dx.doi.org/
10.1787/9789264269606-en.

[5] World’s Top Exports (n.d.), Kazakhstan’s Top 10 Exports, www.worldstopexports.com/kazakhstans-top-10-exports/. Kazakhstan’s most valuable mineral exports were iron and steel (worth US$4.02 billion – i.e., 8.7 per cent of Kazakhstan’s overall exports), copper (US$2.5 billion – i.e., 5.2 per cent), ores, slag and ash (US$2.1 million – i.e., 4.3 per cent, including US$1.3 billion of natural uranium), zinc (US$837.7 million – i.e., 1.7 per cent), gems and precious metals (US$595.4 million – i.e., 1.2 per cent) and aluminium (US$533.4 million – i.e., 1.1 per cent). World’s Top Exports (n.d.), Kazakhstan’s Top 10 Exports, www.worldstopexports.com/kazakhstans-top-10-exports/.

[6] The ownership of Eurasian Resources Group is divided as follows: 40 per cent is held by the State Property and Privatisation Committee of the Ministry of Finance of the Republic of Kazakhstan, 60 per cent of the remaining shares are divided between three founders and members of the board. See OECD 2018, Reform of the Mining Sector in Kazakhstan: Investment, Sustainability, Competitiveness, p. 13.

[7] See OECD 2018, Reform of the Mining Sector in Kazakhstan: Investment, Sustainability, Competitiveness, p. 13.

[8] See English unofficial translation of the SSU Code available at http://adilet.zan.kz/eng/docs/K1700000125.

[9] ‘Solid minerals’ are defined in the SSU Code as: ‘Natural mineral formations, organic substances and their mixtures in solid form in the subsoil or on earth surface. SSU Code, Article 12.

[10] Subsoil use rights with regard to uranium deposits are granted to the national uranium company. The SSU Code, however, provides that such rights can be subsequently transferred to legal entities in which the national uranium company has more than 50 per cent of the shares. SSU Code, Article 160. As to rights in relation to the exploration and exploitation of hydrocarbons, they remain granted through a contracting process.

[11] OECD 2018, Enhancing Competitiveness in the Mining Sector in Kazakhstan, p. 14.

[12] The licensing model of the SSU Code was directly inspired from the licensing model of Western Australia. Western Australia is one of the highest-ranked mining jurisdictions for attracting foreign investment. See OECD 2018, Enhancing Competitiveness in the Mining Sector in Kazakhstan, p. 16. According to the OECD, ‘a significant development has been the decision to move away from the tendering process, which is more common for hydrocarbon extraction. This type of licensing practice is judged to be better suited for solid minerals, and in particular, in unexplored areas where there is a higher risk of exploration not yielding commercially exploitable mineral deposits.’ OECD 2018, Enhancing Competitiveness in the Mining Sector in Kazakhstan, p. 17.

[13] See, e.g., SSU Code, Articles 2(2) and 52.

[14] SSU Code, Article 76(3).

[15] SSU Code, Article 4(6). The SSU Code, however, does not contain indication as to how the stability of rights granted under the new licences will be assessed. As to its transitional applicability, the SSU Code lays down the principle of its application to subsoil rights created after its entry into force, subject to specific exceptions. SSU Code, Articles 277 and 278.

[16] See Table 2 Mining taxation provisions in Kazakhstan’s Tax Code of December 2008 and January 2018, OECD 2018, Enhancing Competitiveness in the Mining Sector in Kazakhstan, p. 21.

[17] See UNCTAD list of Kazakhstan’s BITs, available at https://investmentpolicyhub.unctad.org/IIA/CountryBits/107.

[18] See https://energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/.

[19] See https://investmentpolicyhub.unctad.org/IIA/mostRecent/treaty/3408.

[20] See https://investmentpolicyhub.unctad.org/IIA/mostRecent/treaty/3252.

[21] See https://investmentpolicyhub.unctad.org/IIA/mostRecent/treaty/3092; https://investmentpolicyhub.unctad.org/IIA/CountryGroupingDetails/45#iiaInnerMenu.

[22] See https://investmentpolicyhub.unctad.org/IIA/mostRecent/treaty/3346. Kazakhstan and the other four Central Asian republics are also parties to the Agreement on Promotion and Protection of Investment among Member States of the Economic Cooperation Organization, which was signed in 2005 but has yet to enter into force. See https://investmentpolicyhub.unctad.org/IIA/mostRecent/treaty/3217;
https://investmentpolicyhub.unctad.org/IIA/CountryGroupingDetails/25#iiaInnerMenu.

[23] Law No. 373-II of the Republic of Kazakhstan on Investments dated 8 January 2003 (with amendments and additions as of 7 November 2014); see UNCTAD’s website, investment policy hub, available at
https://investmentpolicyhub.unctad.org/InvestmentLaws/laws/98. Article 2.3) of such law provides that the provisions of the law shall apply to the extent that they are not inconsistent with the provisions of other laws governing the implementation of the investment.

[24] Law No. 373-II of the Republic of Kazakhstan on Investments dated 8 January 2003, Article 9.

[25] Alhambra Resources Ltd and Alhambra Coöperatief UA v. Republic of Kazakhstan, ICSID Case No. ARB/16/12.

[26] Alhambra Resources Ltd and Alhambra Coöperatief UA v. Republic of Kazakhstan, ICSID Case No. ARB/16/12, case details available at https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/16/12.

[27] World Wide Minerals Ltd v. Kazakhstan, UNCITRAL. See available case details on UNCTAD’s investment policy hub, available at https://investmentpolicyhub.unctad.org/ISDS/Details/514.

[28] See GAR, Miner uses Soviet treaty to revive Kazakh claim, available at https://globalarbitrationreview.com/article/1032892/miner-uses-soviet-treaty-to-revive-kazakh-claim.

[29] See GAR, USSR Treaty binds Kazakhstan, tribunal holds https://globalarbitrationreview.com/article/1035099/ussr-treaty-binds-kazakhstan-tribunal-holds.

[30] See GAR, USSR Treaty binds Kazakhstan, tribunal holds https://globalarbitrationreview.com/article/1035099/ussr-treaty-binds-kazakhstan-tribunal-holds.

[31] Gold Pool JV Limited v. the Republic of Kazakhstan, PCA Case No. 2016-23, https://pca-cpa.org/en/cases/148/.

[32] See available case details on UNCTAD’s investment policy hub, available at https://investmentpolicyhub.unctad.org/ISDS/Details/736. It is noted that the company initiated in 1997 a contract-based arbitration against Kazakhstan under the auspices of the Permanent Court of Arbitration but the proceedings were discontinued due to funding issues.

[34] Law No. 444-II of the Republic of Uzbekistan on Subsoil of 13 December 2002 (new version); unofficial English translation available at www.eisourcebook.org/cms/Uzbekistan%20Subsoil%20Act.pdf. Mining activities may also be conducted under production sharing agreements (PSAs) within the framework of the Law on Production Sharing Agreements dated 7 January 2001 (the PSA Law) and under concession agreements within the framework of the Law on Concessions dated 30 August 1995. However, as of July 2018, no concession agreements had been entered into for mining projects in Uzbekistan.

[35] Subsoil Law, Article 26.

[36] Subsoil Law, Article 27.

[37] Subsoil Law, Article 34.

[38] Further to Regulation PP-3000, the Cabinet of Ministers of the Republic of Uzbekistan passed Resolution No. 328 dated 31 May 2017 On the Establishment of Selection Criteria and the Lists of Prospective Areas and Deposits of Strategically Important Hard Minerals Where Foreign Investments Are Attracted for Their Geological Studies and Industrial Development. Regulation No. 328 has approved lists of 29 subsoil deposits and 111 prospective areas where the government plans to attract foreign investment (mainly small and medium-sized subsoil deposits and prospective areas of various minerals, including gold, silver, copper, uranium, tungsten and rare metals).

[39] The Tax Code also provides for a special tax regime applicable to foreign companies conducting activities under PSAs (including, e.g., exemption from payment of all types of taxes and mandatory duties with regard to exploration activities, exemption from payment of VAT and property tax and exemption from customs duties that would otherwise be levied upon imported goods and works for the purpose of the PSA and upon export of products belonging to a foreign investor in accordance with the PSA).

[40] Uzbekistan is also a party to several international treaties relevant to the mining industry, including the Treaty on Cooperation in Study, Exploration and Use of Mineral Resources of 27 March 1997.

[41] See UNCTAD list of Uzbekistan’s BITs, available at https://investmentpolicyhub.unctad.org/IIA/CountryBits/226.

[42] Uzbekistan is not a party to the Eurasian Investment Agreement and the Moscow Convention.

[43] UNCTAD Compendium of Investments Laws, Uzbekistan, Law of The Republic of Uzbekistan on Guarantees and Measures of Protection of Foreign Investors’ Rights (1998), Unofficial translation available at https://investmentpolicyhub.unctad.org/InvestmentLaws/laws/29.

[44] Uzbek Foreign Investment Law, Article 5(1).

[45] Uzbek Foreign Investment Law, Article 5(2).

[46] Uzbek Foreign Investment Law, Article 5(3).

[47] Uzbek Foreign Investment Law, Article 3(4). By contrast to the Law on Protection of Foreign Investors’ Rights, the PSA Law provides similar stability provisions for the entire period of validity of the PSA, without the 10-year limitation. This rule does not apply to the changes made in the laws with respect to standards for safety of works, preservation of mineral resources, environmental protection and health.

[48] Uzbek Foreign Investment Law, Article 3(2).

[49] Uzbek Foreign Investment Law, Article 11.

[50] Uzbek Foreign Investment Law, Article 10.

[51] Uzbekistan has been a party to eight ICSID cases: https://icsid.worldbank.org/en/Pages/cases/AdvancedSearch.aspx#; See also UNCTAD data at https://investmentpolicyhub.unctad.org/ISDS/CountryCases/226?partyRole=2.

[52] Newmont USA Limited and Newmont (Uzbekistan) Limited v. Republic of Uzbekistan, ICSID Case No. ARB/06/20.

[53] Henry Burnett and Louis-Alexis Bret, Arbitration of International Mining Disputes (Oxford University Press 2017), p. 328.

[54] Uzbek Foreign Investment Law, Article 10.

[55] See https://globalarbitrationnews.com/wp-content/uploads/2017/06/Uzbekistan.pdf, pp. 501-502.

[56] Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award dated 4 October 2013.

[57] Oxus Gold plc v. Republic of Uzbekistan, UNCITRAL, Award dated 17 December 2015.

[58] As of 30 July 2018, there were also ongoing proceedings against Oxus in the High Court of London, in which Uzbekistan was reportedly claiming USD 10.8 million allegedly owed to it under an award made in Uzbekistan. See https://globalarbitrationreview.com/article/1172413/funder-seeks-to-enforce-
against-uzbekistan.

[59] See https://globalarbitrationreview.com/article/1172413/funder-seeks-to-enforce-against-uzbekistan. In addition to the US action, Gretton has also obtained attachment over business property in Switzerland registered in the name of the Republic of Uzbekistan. However, a local Swiss court issued a judgment in February 2017 denying enforcement of the award. The judgment was upheld on appeal by Gretton in October 2017. Gretton has lodged a further appeal with the Federal Supreme Court (GAR, 30 July 2018).

[60] Gretton Ltd v. Republic of Uzbekistan, US District Court for the District of Columbia, Case No. 18-cv-01755-JEB, Memorandum Opinion dated 6 February 2019, available at www.italaw.com/cases/781; see also https://globalarbitrationreview.com/article/1180149/uzbekistan-wins-stay-of-funder%E2%80%99s-enforcement-bid.

[61] See EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents.

[62] EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents, p. 3.

[63] EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents, p. 4.

[64] See EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents.

[65] See EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents.

[66] Natural Resource Governance Institute, Improving Resource Governance in the Kyrgyz Republic: 12 Priority Issues for the Mining Sector, March 2017, p. 4, available at https://resourcegovernance.org/sites/default/files/documents/nrgi_discussion_paper.pdf.

[67] EITI 2018, available at https://eiti.org/kyrgyz-republic#eiti-reports-and-other-key-documents.

[68] Law No. 160 of the Kyrgyz Republic on Subsoil of 9 August 2012.

[69] Natural Resource Governance Institute, Improving Resource Governance in the Kyrgyz Republic: 12 Priority Issues for the Mining Sector, March 2017, p. 6, available at https://resourcegovernance.org/sites/default/files/documents/nrgi_discussion_paper.pdf.

[70] Natural Resource Governance Institute, Improving Resource Governance in the Kyrgyz Republic: 12 Priority Issues for the Mining Sector, March 2017, p. 6, available at https://resourcegovernance.org/sites/default/files/documents/nrgi_discussion_paper.pdf.

[71] See UNCTAD website, list of Kyrgyztan’s BITs, at https://investmentpolicyhub.unctad.org/IIA/CountryBits/113; see also the list of members of the Energy Charter Treaty, available at https://energycharter.org/who-we-are/members-observers/.

[72] See The Law of the Kyrgyz Republic ‘On Investments in the Kyrgyz Republic’ dated 27 March 2003 (with amendments as of 13 February 2015), unofficial English translation available at https://investmentpolicyhub.unctad.org/InvestmentLaws/laws/111.

[73] Law of the Kyrgyz Republic ‘On Investments in the Kyrgyz Republic’ dated 27 March 2003, Articles 4-7, 18.

[74] R. Knottnerus, R. Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Transnational Institute, July 2017, p. 9.

[75] id., p. 3.

[76] Stans Energy Corp and Kutisay Mining LLC v. Kyrgyz Republic, UNCITRAL, PCA Case No. 2015- 32. This arbitration was initiated following the setting aside by the Moscow Commercial Court of an award rendered by the Moscow Chamber of Commerce and Industry, pursuant to which Stans Energy Corp had been awarded US$117.8 million in relation to the same dispute.

[77] See R. Knottnerus, R. Satke, Kyrgyz Republic’s experience with investment treaties and arbitration cases, Transnational Institute, July 2017, p. 11.

[79] See GAR, Kyrgyzstan faces claim over environmental lawsuits, available at https://globalarbitrationreview.com/article/1036368/kyrgyzstan-faces-claim-over-environmental-lawsuits.

[81] See Future of Centerra mine uncertain as Kyrgyz Gov’t revising settlement deal, Mining’s website (June 2018), available at http://www.mining.com/future-centerra-mine-uncertain-kyrgyz-govt-revising-settlement-deal/.

[82] Consolidated Exploration Holdings Ltd and others v. Kyrgyzstan, ICSID Case No. ARB (AF)/13/1.

[83] See 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, pp. 7, 49.

[84] See 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, p. 7.

[85] See 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, p. 62.

[86] See Tajikistan Country Commercial Guide, Mining Equipment and Services available at www.export.gov/article?id=Tajikistan-Mining (last updated 15 February 2019); see also 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, p. 70.

[87] See Tajikistan Country Commercial Guide, Mining Equipment and Services available at www.export.gov/article?id=Tajikistan-Mining (last updated 15 February 2019); see also 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, pp. 80-81.

[88] See Tajikistan Country Commercial Guide, Mining Equipment and Services available at www.export.gov/article?id=Tajikistan-Mining (last updated 15 February 2019); see also 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, pp. 80-81.

[89] Law No. 983 of the Republic of Tajikistan on Subsoil dated 20 July 1994 (with amendments as of 2013), available at http://cis-legislation.com/document.fwx?rgn=2136; see also 2015-2016 2nd National Report on Implementation of the EITI in the Republic of Tajikistan, available at https://eiti.org/tajikistan, pp. 11-12.

[90] Law of the Republic of Tajikistan on Production Sharing Agreements of 5 March 2007; Law of the Republic of Tajikistan on Concessions of 26 December 2011.

[91] See UNCTAD list of Tajikistan BITs, available at https://investmentpolicyhub.unctad.org/IIA/CountryBits/206#iiaInnerMenu.

[92] Law of the Republic of Tajikistan on Investments dated 2007, available at https://investmentpolicyhub.unctad.org/InvestmentLaws/laws/62. For example, the law provides for some kind of stabilisation entitling foreign investors performing long-term investments, in case of legislative or normative changes worsening the conditions of their investment activity, to choose the most favourable conditions that will apply to them for 10 years starting on the date of the legislative or normative change.

[93] Alois Schönberger v. Republic of Tajikistan, ICSID Case No. ARB(AF)/19/1; Mohammad Ammar Al-Bahloul v. Republic of Tajikistan, SCC Case No. V(064/2008).

[94] Law No. 160/V of Turkmenistan on Subsoil dated 2014, available at www.minjust.gov.tm/tm/php/home.php (in Russian only).

[95] See UNCTAD list of Turkmenistan BITs, available at https://investmentpolicyhub.unctad.org/IIA/CountryBits/215#iiaInnerMenu.

[96] Law No. 184-III of Turkmenistan on Foreign Investments dated 3 March 2008, available at http://cis-legislation.com/document.fwx?rgn=24318.

[97] Dirk Herzig v. Turkmenistan, ICSID Case No. ARB/18/35; SECE Inşaat v. Turkmenistan, ICSID Case No. ARB/18/34; Public Joint Stock Company Mobile TeleSystems v. Turkmenistan, ICSID Case No. ARB(AF)/18/4; Lotus Holding v. Turkmenistan, ICSID Case No. ARB/17/30; Görkem Inşaat Sanayi v. Turkmenistan, ICSID Case No. ARB/16/30; Muhammet Çap & Sehil v. Turkmenistan, ICSID Case No. ARB/12/6; Mobile TeleSystems OJSC v. Turkmenistan, ICSID Case No. ARB(AF)/11/4; Garanti Koza v. Turkmenistan, ICSID Case No. ARB/11/20; Içkale Inşaat v. Turkmenistan, ICSID Case No. ARB(AF)/10/24; Kiliç Inşaat v. Turkmenistan, ICSID Case No. ARB/10/1; Adem Dogan v. Turkmenistan, ICSID Case No. ARB/09/9.