Investment Climate Deteriorates Amid Retroactive Laws and a Weak Bureaucracy

Economic growth is impossible without investment, and for growth to be sustained and strong, investment must come primarily from the private sector, both foreign and domestic. Investment is always about the future, and investors assess projects not only in terms of returns but also in terms of risks. If an entrepreneur cannot minimize those risks, even a high profit margin will not be enough of an incentive to invest.

What investors cannot influence is the investment environment, which is shaped by a multitude of factors. The quality of the investment environment correlates directly with the quality of the institutional environment: developed institutions and protection of entrepreneurs' rights are key conditions for attracting investment. In Kazakhstan, however, we see the opposite picture: last year foreign direct investment hit a record low, and the repatriation of previously invested funds exceeded new inflows, resulting in a negative net capital inflow.

It might seem that many reforms aimed at improving the business environment are under way, yet in practice we see the investment climate worsening. The reason is simple: discriminatory laws have begun to apply retroactively, limitation periods can be revived at the state's discretion, and previously granted incentives can be revised after the fact, which deals a serious blow to business.

Lawyers have a clear maxim: "The law is harsh, but it is the law," meaning that even an unjust law is better than instability in law enforcement. In Kazakhstan, the problem is that weak, poorly thought-out regulations are adopted and then have to be corrected later. As a result, some companies make windfall profits while others become hostages to the changes. The striking examples include the unprecedented profits of banks following the ban on paying interest on current accounts and the restrictions on foreign currency deposits, the surge in construction companies' revenues thanks to the withdrawal of pension savings, and the tax loopholes for large enterprises that give them comfortable conditions for earning excess profits. None of this was initiated by business. These are mistakes made by the state itself, which is unable to foresee the consequences of its decisions.

The main reason for such situations is the weakness of the bureaucratic apparatus. In Kazakhstan, civil servants do not act as a filter and do not assess the risks of the laws being adopted. I have spoken personally with government officials who admitted that even when they understand the potential consequences of decisions, they will not argue with their superiors, for fear of reprisals. As a result, there is no real debate at the decision-making level, and legislative initiatives are adopted without analysis.

It is important to understand that the words of politicians and senior officials have an enormous influence on the investment climate. If the state first creates tax incentives and opportunities for business and then publicly criticizes companies for using them, it sends investors a clear signal: conditions can change at any moment. Even if the incentives were originally intended only for certain categories of business, but this was not restricted legally, then under the law anyone could use them. When the state begins to apply the principle of "restoring justice" retroactively, it undermines the foundations of the investment climate far more than the short-term effect of additional tax assessments can offset.

Moreover, Kazakhstan remains a country with "chosen" companies that have special connections. Under selective law enforcement, there is no certainty that these companies will also come under pressure, which only deepens the negative impact on the investment environment.

That is why laws must not have retroactive effect. If regulations were adopted with errors, they should be corrected, but not by trying to "restore justice" at the expense of predictability. Without institutional stability, respect for the rule of law and a professional civil service, the investment environment will remain weak, and Kazakhstan will remain a territory of heightened risk for business.