When you consider investing in Kyrgyzstan you should correctly set your level of standards which this country can be expected to correspond to. One should not forget that Kyrgyzstan is a developing economy. Consequently, it is not prudent to expect the investor protection and investor safety standards here to be at par with those in Canada, Germany etc.
The standard applicable to Kyrgyzstan is the one of investor protection in a non-authoritarian developing economy.
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In brief, our conclusion is that presently there are no prerequisites for a radical regime change in Kyrgyzstan. The chances of this country sliding towards dictatorship or even to authoritarianism are even slimmer. Against this background, a routine redistribution of elements of power among the Kyrgyz elites (which happens all the time) should be of no concern to the investor.
The risks of losing your investment in Kyrgyzstan to a malicious takeover (the Russian term is «raidering») are very low, provided you stay within the legal economy. The country does not have an authoritarian rule, and the power (including the power of law enforcement agencies and judges) is very evenly distributed between various influence groups across a very diverse political spectrum. Thus an efficient counter-balance is always available should any one power figure decide to obtain an undue economic influence over your business.
The risk of losing the investment which you are not actively managing but have delegated entirely to a local partner is over the average level. Such investment may sooner or later be carefully pilfered — without any obvious criminality involved. It «just happened». Or at least the profitability of the investment will be much lower than expected.
This relates specifically to investments in the real economy and not the classic passive investments (securities, bank deposits etc.) — the latter should be quite safe.
For investments with your active personal participation the risk of the local counterparty should be below the average. Again, we mean the average for the developing world.
The «scary stories» of investments lost in Kyrgyzstan which from time to time still crop up in the international media merit a separate comment.
An overwhelming majority of the «scary stories» is about the loss of assets by the businesses that actively partnered with the first two Presidents of the country and extensively relied on their power support.
A classic example is a group of local commercial banks linked to President Bakiev and involved in certain questionable practices in the financial markets during their rule. After the change of government in 2010 three of them were de-facto confiscated from their previous owners. However, although the change of power in 2010 happened in quite a violent manner, not a single financial institution neutral to the previous ruling family was affected.
Kyrgyzstan is now a democratic country and this remark will thus not be too relevant, but it is worth remembering that the more you enhance your profitability through partnership with the State power figure, the more you stand to lose when this figure loses the power grip.
There is nothing unique for Kyrgyzstan in that formula.
A separate theme of «scary stories» is the opposition of the local residents to your business.
This problem is especially acute for mining companies and projects involving the construction of heavy industrial infrastructure near rural settlements (oil refineries, plants etc.)
The Kyrgyz people never knew slavery or similar forms of bondage and thus, certain freedom-loving and even anarchic tendencies are quite articulated in the Kyrgyz national character. If you multiply that with inaction of the State authorities, you get a bomb.
After the Bakiev regime collapsed in April 2010 the new Government was politicaly feeble and needed to draw on popular support in the provinces at any price. In many cases this resulted in its inaction in response to even the most egregious excesses on the part of the local hooligans (disarmed the police, blocked the road, destroyed the equipment etc.).
Now this situation is very steadily being put to norm. The opposition of the locals still presents a problem in some regions, but this phenomenon is on the decline.
The situation is really getting better month by month. The destructive opposition of the villagers still presents a problem in some regions, but the Government now has fully understood that without curbing this phenomenon, it can one day lose all the investors. The President and the top officials now speak about this problem publicly, not fearing to lose electoral support. The law enforcement departments on the ground have come out of the lethargic state and started to take the investors’ side in conflicts. The situation now is drastically different from the one in 2010.
Our advice is — do not fear. Hire a good community relations advisor; if hooliganism erupts, investigate who is to benefit and influence them accordingly (within the legal boundaries, of course). You will be surprised to learn that in the majority of such cases the instigators of calamity are simple local cattle owners who are pissed off at the mining company depriving them of cheap labour by raising the salary standard for the villagers.
The investment risks in Kyrgyzstan are quite at par with a reasonable risk level for the countries having a democratic government model and a developing economy. If you locate a project with good profitability, the risks are absolutely justified.