Kazakhstan’s Recent Arbitration Enforcement Precedent: A Loophole Allowing Debtors to Hide Assets?
Author: Sukhrob Issakhanov, Senior Associate
1. Why Kazakhstan Is Important for Foreign Business
Since gaining independence in 1991 and following the collapse of the Soviet Union, Kazakhstan has consistently looked outward foreign investors and strengthen its economy. The oil and gas sector remains one of the most attractive areas for many investors, especially for the major players from Europe and the United States. Although the economy has grown rapidly since 1991, Kazakhstan continues to pursue an investor- friendly course, as there are still many areas as agriculture, technology, financial services and others to be improved with the involvement of foreign investments1.
Foreign business generally has the same opportunities to do the business activities, establish local companies and invite foreign employees. Foreign-owned companies registered under the laws of Kazakhstan are considered local entities.
Kazakhstan has signed 54 Bilateral Investment Treaties (although some are not yet in force or terminated). In addition, Kazakhstan has signed Treaties with Investment Provisions and Investment Related Instruments2, as well as other bilateral and multilateral agreements aimed to protect investors. These instruments were adopted to ensure a stable and predictable investment environment for those entering the Kazakh market.
2. Foreign Business Needs a Strong Arbitration-Friendly Climate in Kazakhstan
An investor-friendly environment attracts not only those entering Kazakhstan’s public sector but also companies operating in private commercial market. Working for over 10 years in international law firm with its main office in Almaty, we have served a lot of international clients coming to Kazakhstan directly or engaging in contractual relations with Kazakhstani companies without having any physical presence in the country.
Our recent practice shows that foreign business increasingly prefer arbitration as their mechanism for dispute resolution rather than litigating disputes in Kazakh local courts. It is widely recognized that the Kazakh government interferes in judicial matters. Freedom House’s Nations in Transit gives Kazakhstan 1.25 points out of seven for the judicial independence3. The same law score is given for corruption.
The President of Kazakhstan, Kassym-Jomart Tokayev, has acknowledged the problem with judicial independence. The problem was partially solved by establishing an independent judicial system within the Astana International Financial Center (AIFC), which operates independently from the national judicial system and is based on the principles, laws and precedents of English Law4.
The AIFC has its own court and arbitration center. Their judgments, orders and arbitral awards are recognized within the AIFC and, under Kazakh law, are enforceable in Kazakhstan on the same terms as local judicial acts.
As a result, many foreign businesses now choose AIFC as the forum for dispute resolution to avoid the local court system. However, not all companies have shifted to the AIFC, and many still prefer resolving disputes in arbitrations seated outside Kazakhstan.
3. General Overview of Recognition and Enforcement of Arbitral Awards in Kazakhstan
International arbitration awards are not enforceable per se and must be recognized in the jurisdiction where enforcement is sought. Kazakhstan enforces and recognizes foreign arbitral awards. The process is regulated by the Civil Procedural Code (CPC), the Law on Arbitration dated 8 April 2016, the New York Convention on the Recognition and Enforcement of Arbitral Awards of 10 June 1958 and the European Convention on International Commercial Arbitration of 21 April 1961.
Kazakhstani courts generally recognize and enforce arbitral awards if they establish that they have jurisdiction to consider the motion for enforcement. Under Kazakh law, judges are not allowed to revisit the merits of the dispute and may refuse recognition and enforcement only on the grounds explicitly provided by national legislation and international treaties. These grounds include:
- the arbitration agreement was invalid;
- the dispute is not arbitrable under Kazakh law;
- the award was issued on matters not falling within the terms of the submission to arbitration;
- the party was under some incapacity;
- the losing party was not given proper notice of the appointment of arbitrators or of arbitration proceedings or was otherwise unable to present its case;
- there is another judicial act or arbitration award between the same parties involving the same subject matter and legal grounds;
- the composition of the arbitral tribunal was not in accordance with the agreement of the parties or with the law of the country where the arbitration took place;
- the award is not yet binding;
- enforcement of the award would be contrary to Kazakhstan public policy5.
If none of those grounds apply, the court must grant a motion. A Kazakh judge issues a ruling within 15 working days from the date the motion is filed.
4. Recent Precedent Will Allow Losing Party to Hide Property in Kazakhstan
As mentioned above, Kazakh judge must consider a motion on recognition and enforcement of an arbitral award if the court has jurisdiction. Under Article 503 (1) of CPC, the contracting party may file a motion for recognition and enforcement of arbitral award:
(a) at the place where the award was issued;
(b) at the place where the losing party is registered or where its executive body is located;
(c) if (a) and (b) is unknown, at the place where losing party has property6.
The vast majority of cases in courts on recognition and enforcement of international arbitral awards involve entities registered under Kazakh law, which allows Kazakh courts to establish jurisdiction under Article 503(1)(b).
However, the literal interpretation of Article 503(1) of CPC creates a significant loophole: debtors who have no place of registration or executive body in Kazakhstan may shield their assets located in Kazakhstan from enforcement. An example is shown in the case below. Author discloses that he acted in the matter discussed below.
In 2019, a Russian railroad construction company (“RC-Creditor”) obtained an arbitration award against a Turkish construction company (“TC-Debtor”) in the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation. The arbitral award came into force.
The TC-Debtor has two branches Kazakhstan (Atyrau and Astana). At the end of 2023, RC-Creditor filed a motion to Astana Commercial Court seeking recognition and enforcement of the arbitral award. RC-Creditor argued that the court has jurisdiction under Article 503(1)(b) and 503(1)(c) because: (i) the debtor’s branches were registered in Kazakhstan; and (ii) TC-Debtor owned assets in Kazakhstan (two Kazakh companies in which it held 100% of the shares).
In 2024, Astana Commercial Court refused to consider the motion for lack of jurisdiction. The court held that branches do not establish “registration” under Article 503 (1)(b) because the foreign company itself must be created and registered under Kazakh law. A branch is only a structural subdivision of the foreign entity, not a legal entity. Also, court held that branch is not an “executive body”, even if its head exercises certain managerial functions. The debtor provided that its executive officers are located in Turkey. Finally, the court emphasized that the “property rule” under Article 503(1)(c) did not apply because RC-Creditor knew the debtor’s place of registration. According to the court, this excluded the possibility of applying the subparagraph (c).
The appellate court (the final instance) upheld the refusal and confirmed the lack of jurisdiction.
To sum up, the courts essentially held that if a company is registered outside Kazakhstan and its management body is located abroad, then its arbitral award cannot be recognized and enforced in Kazakhstan, even if the debtor has branches or substantial assets in the country.
That precedent unfortunately creates a real opportunity for bad-faith debtors to shield assets within Kazakhstan. It most cases, award creditors know the place of debtor’s registration, which means that Kazakh courts may be unable enforce arbitral awards against non-Kazakh entities despite their significant and active business operations in Kazakhstan.
4.1. Was the Rejection Legal After All?
The literal interpretation of Article 503(1) of CPC might make the court’s order appear lawful. But in reality, it is not.
Firstly, a purely literal interpretation should not be applied here as it narrows and essentially undermines the legislature’s clear intention to allow arbitral awards to be enforced in Kazakhstan. We firmly believe that when Article 503(1) refers to the “place of registration/location of the executive body,” the provision concerns territorial jurisdiction within Kazakhstan, not a rule for choosing between Kazakh and foreign courts.
In other words, if the winning party does not know where the losing party is located in Kazakhstan, or if the debtor has corporate presence in the country, Kazakh court should move to Article 501(1)(c), because subparagraphs (a) and (b) simply do not apply. The CPC itself makes clear that it governs civil proceedings within Kazakhstan territory. The CPC does not regulate foreign courts or foreign registration.
Moreover, the Astana Commercial Code’s interpretation leads to an absurd conclusion: if creditor doesn’t know at all where the debtor is registered (or where management body is) – the creditor may rely on assets in Kazakhstan and file a motion. But if the creditor does know that debtor is registered in Turkey, then suddenly creditor loses jurisdiction in Kazakhstan. This logic is fundamentally inconsistent and contradicts the purpose of Article 503 of CPC.
The existence of a branch and/or property should be enough for Kazakh courts to establish jurisdiction over a foreign debtor for purposes of enforcing an arbitral award. In the United States, for example, the presence of a branch in the state and/or property would almost certainly give a federal court personal jurisdiction over the defendant (assuming subject-matter jurisdiction exists under the FAA and the New York Convention). The same practical approach should apply in Kazakhstan.
Secondly, the New York Convention of 1958 and explicit language of the Kazakh Law on Arbitration require Kazakhstan to recognize and enforce foreign arbitral awards in the same manner as local arbitration awards. Under Article III of the Convention, Kazakhstan must enforce foreign arbitral awards “in accordance with the rules of procedure of the territory” where enforcement is sought. While these procedural rules may determine which Kazakh court is competent, they cannot be interpreted in a way that makes enforcement impossible solely because the creditor knows the debtor’s foreign registered office, especially when a debtor has assets in Kazakhstan. Such interpretation effectively adds a new refusal ground that is not listed in Article V of the New York Convention, which makes it impermissible and international law and contradicts Kazakh’s obligations.
5. What Should Kazakh Legislation or the Supreme Court Do Now?
Unfortunately, arbitration-related practice in Kazakhstan is still very limited, and it is hardly possible to find other judicial acts addressing the application of Article 503(1) in a manner similar to that precedent.
Neither the Kazakh legislature nor Supreme Court has been proactive in correcting courts’ misinterpretations of the law the issue touches sensitive political, economic or social matters. Since almost all motions for recognition and enforcement of arbitral awards involve Kazakh local entities, neither the legislature nor the Supreme Court concerned with the misapplication of Article 503(1) of CPC in cases involving foreign companies.
However, it would be extremely helpful for lower courts if either legislature or the Supreme Court, in a Normative Decree (which in practice becomes binding for judges), clarified that Article 503(1) regulates only the territorial jurisdiction of Kazakh courts. Such clarification would eliminate the ambiguity that currently allows debtors to avoid enforcement based on an overly literal reading of the provision. Without clarification, similar cases may continue to arise, discouraging foreign investors from engaging in Kazakhstan or routing their commercial operations through local subsidiaries.
Hopefully, Kazakh judges will refrain from supporting the precedent described above and will not allow bad-faith losing party to shield assets located in Kazakhstan from enforcement.
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[1] Arif Durranui, Gabe Kirchheimer, Why invest in Kazakhstan? https://sponsored.bloomberg.com/article/aifc/why-invest-in-kazakhstan.
[2] Investment Policy Hub, International Investment Agreement Navigator. https://investmentpolicy.unctad.org/international-investment-agreements/countries/107/kazakhstan
[3] Anonymous authors, Freedom House – Nations in Transit 2024, Kazakhstan. https://freedomhouse.org/country/kazakhstan/nations-transit/2024.
[4] Why AIFC? https://aifc.kz/why-aifc/
[5] 255(1) CPC. Available online with unofficial translation: https://adilet.zan.kz/eng/docs/K1500000377.
[6] 503 (1) CPC. Available online with unofficial translation: https://adilet.zan.kz/eng/docs/K1500000377.