There are two mutually exclusive processes in Kyrgyzstan — announced privatization of state-owned enterprises and an attempt to nationalize Kumtor. What are the risks? What could the republic get and what could it lose? All this in an interview with Stanislav Pritchin, Senior Research Fellow at the Center for Post-Soviet Studies of the Institute of World Economy and International Relations of the Russian Academy of Sciences.
— What is the reason for initiatives of the Kyrgyzstan’s authorities on privatization of state-owned enterprises and possible nationalization of Kumtor mine, where foreign investors work?
— The latest privatization and nationalization initiatives are an attempt by the Kyrgyz authorities to replenish the budget and create a competitive environment for denationalization. But the way they do it leaves little chance for implementation of these initiatives.
The experience of Uzbekistan and Kazakhstan, which tried to attract investors through privatization of state assets, showed that this is not always effective. On the one hand, privatization seems a very simple solution. Moreover, private management is more efficient, as it is aimed at making a profit. It is, seemingly, a perfect picture.
Everything is different in practice. Given the existing taxation system, businesses may consider tax deductions as unwanted costs and try to circumvent them. The state risks to lose those taxes that were deducted in the framework of state activities. This is the first point.
As a rule, investors are not interested in enterprises that the state is trying to hand over into private hands.
Stanislav Pritchin
There is no order in reporting in most of these projects; some operations remain non-transparent, and so on. Such conditions are unacceptable for external investors. This is not so critical, but still risky for domestic investors. There are several reasons.
First, there are not so many independent businessmen who have spare money and who understand the internal laws of the game. Secondly, such investments remain controversial in terms of prospects.
The economic situation in Kyrgyzstan is difficult, and one cannot count on the market growth. It is hardly worth considering that the company will be able to increase profits by purchasing an object. Therefore, Bishkek’s privatization initiative is likely to fail.
— What should the process look like in the ideal case?
Ideally, privatization is preceded by a multi-year plan. Companies prepare reports, conduct audits, analyze their work experience. Consultants study the market, choose the right time to form a proposal. This is a spot and long-term work even if the state guarantees protection of property rights, which, unfortunately, is not the case in Kyrgyzstan, not to mention the investment attractiveness of the country as a whole.
In the case of Kyrgyzstan, there is no need to count on a huge number of investors and successful sale of enterprises that will bring huge amounts of money to the budget.
Stanislav Pritchin
The privatization decision, which looks like a magic wand to the Kyrgyz authorities, will not work.
— What will happen in the worst case?
Enterprises that are already doing well within state-owned status will be lost. Unattractive assets will remain unsold.
— How do you assess the idea of nationalization of Kumtor mine?
— There are two mutually exclusive processes in Kyrgyzstan now. The announced privatization should indicate that the state has a strategy to attract investors. But in parallel, the process of nationalization of the Kumtor mine is underway. From the point of view of the image and investment climate, this destroys the whole situation.
Whatever the reasons, there is always an opportunity to negotiate out of court, without changing the status of the enterprise and external management.
If nationalization of Kumtor happens, it will be a serious blow to the investment climate in Kyrgyzstan.
Stanislav Pritchin
— Are Russian and Chinese investors working at mines in Kyrgyzstan protected from such risks?
— The Russian Jerooy project in Talas region is protected only by the fact that the Russian President Vladimir Putin was present at its opening online. We see periodic outbreaks of conflict around Chinese projects. It is difficult to say how the nationalization of Kumtor, if it happens, will affect other foreign investors.
