Kyrgyz Republic Mining Policy Note
                                             May 2022


Key Messages
Mining, particularly gold mining, plays a crucial role in the economy of the Kyrgyz Republic .
The sector accounts for almost 13 per cent of GDP and over 60 per cent of exports. The country
has a favourable geology which is also well documented. The Kyrgyz Republic had an
important mining industry during Soviet times and after a decline in the 1990s and early
2000s, the number of mines has been increasing.
The post-soviet mining business model emphasizes the leading role of the state. The state
prioritizes well known mineral deposits and not areas where private companies could be
willing to put capital at risk for exploration. Recently, the emphasis on state influence and
state-owned enterprises has strengthened considerably through measures such as the
introduction of mandatory 30 per cent state ownership of precious metal mines and a
requirement that all forms of precious metals must be sold to state authorities. It can be
argued that the increasing role of the state has reached a point where it is one of the major
reasons for the reluctance of foreign investors to consider ventures in the Kyrgyz Republic.
The resiliency of the Kyrgyz economy to shocks emanating from international minerals
markets must be strengthened. The country’s economy remains dependent on export
revenues from mining and there is little sign of diversification. Since the Kyrgyz Republic is a
landlocked country with a small population and important gaps in infrastructure, it has few
obvious diversification alternatives. Very little has been done to counteract the dependence
on mining exports, which means that the economy remains vulnerable to market price
fluctuations as well as to any disturbances affecting production. This makes it all the more
important to ensure that the mining sector contributes to the maximum of its potential to
the development of the national economy, including through the building of linkages with
other economic activities.
The Kyrgyz Republic needs to attract international investment in the mining sector. The
stock of well documented commercially viable deposits that can be brought into production
rapidly is depleting. As a result, the prospects of maintaining production volumes in the
industry over the long term are uncertain. Intensified greenfield exploration could alleviate
the situation but this would require attracting international investors since neither skills nor
sources of risk capital are available in the country in sufficient quantity. However, there is little
sign of international investors taking an interest in exploration in the Kyrgyz Republic. A long
dispute with a Canadian investor over the country’s largest mine, Kumtor, contributed to the
country’s negative image among investors. The dispute was finally settled in 2022. The Kyrgyz
Republic now needs to create an environment where international companies are willing and
anxious to commit resources to exploration and development of mineral deposits.
The legal and regulatory framework, including licensing, taxation and the role of the state
in mining, needs to be reviewed. License allocation rules do not provide effective incentives
and are too focused on short term revenue generation. Tax legislation is contradictory and
economically inefficient. Environmental regulation is implemented in an opaque and
inconsistent manner. The situation has been made worse by frequent changes at the top of
the administration and contradictory policy statements.
Transparency should be improved as part of overall governance reforms. Several recent
reports note that transparency regarding the legislative process, courts, and mandatory
disclosures by government officials has deteriorated significantly. It is urgent to reverse this
trend and reinforce rules based and transparent governance. This is particularly important
for the mining sector, which is too often associated with government corruption. There is
evidence that market participants have low trust in the courts and the legal enforcement
system and that courts are widely perceived as not independent. Similarly, low scores on
several measures of governance indicate low performance regarding the respect of the rule
of law.
Inclusiveness and participation must be strengthened. There has been conflict, sometimes
violent, around mining projects in the Kyrgyz Republic and their impact on local
communities. Ways must be found to ensure that communities feel that they are receiving
their fair share of benefits from mining and that they are not burdened with excessive social
and environmental costs.


Key Sector Challenges

Licensing allocation rules should be reformed. The present licensing rules are insufficiently
attractive to generate the necessary investment in exploration and assign too low a priority
to greenfield exploration. They leave too much scope for discretionary decision making and
favour state owned companies in a way that will deter investment in exploration by
international companies. Investors need adequate assurance that explorers will be able to
mine any deposits found. Work on a new Subsoil Law had been initiated but appears to have
stopped. This work should be restarted and aim to create a regulatory environment that can
attract exploration by international companies.

Mining taxation needs to be made more consistent and efficient. The gold income tax,
while a reasonable option for a government with limited experience in taxing large
international mining companies, has several features that are unnecessary and act as
disincentives on investment. These include the higher rate of tax on exports of gold
containing concentrates, which makes exploitation of complex ores difficult or impossible,
and the imposition of the gold tax on top of the royalty, which complicates implementation
and leads to unrealistically high tax rates when gold prices are high. Tax stabilization
agreements are little used (only one is in effect at present), but should receive more
attention, particularly in view of the Kyrgyz Republic’s history of frequent changes in tax
legislation. “Non-tax� charges are applied in an inconsistent and unpredictable manner and
have stifled exploration.

The role of the state must be clarified and efforts be made to ensure that decision making
power is not unduly concentrated. The state enterprises are mainly successors to the Soviet-
era entities which performed exploration works, lab tests, etc. After the collapse of the Soviet
Union, these entities became independent. Most of them have the rights to obtain subsoil use
rights and/or act as a service provider in the mining sector; however, due to lack of
professional management and employees, modern equipment and proper financing, they are
often not competitive with private companies providing similar services. Moreover, there has
been a perception that rights to work on the deposits should be allocated by the State and
that there is no need to promote active exploration by private companies. This has impacted
legislation in two important ways:
   •   Mineral rights are seen as government assets that the government can dispose of
       and charge for, rather than private property rights
   •   An important role for state owned companies in the exploitation of deposits is seen
       as a default position, rather than as something that needs to be justified on its own
       merits
More generally, Kyrgyz legislation related to SOEs is fragmented and regulated by numerous
legal instruments, sometimes conflicting with each other. Kyrgyz SOEs operate under different
legal forms, reflecting the legislative history and ongoing evolution from a planned to a market
economy.

Transparency, inclusiveness and participation must be strengthened. The Kyrgyz
experience of conflict, sometimes violent, around mining projects is an obstacle both to
investment and to more widely distributed benefits from mining. Mining projects experience
difficulties in gaining local acceptance. A number of reforms have been introduced with a
view to increasing the share of revenues from mining accruing to local communities and
investing in local development. The implementation of these reforms is, however, facing
constraints due to skills gaps as well as more general problems of governance. It is necessary
to strengthen positive socioeconomic local impacts and build credibility with local
communities.



Proposed Reform Agenda
Prepare a clear statement of policy direction for the mining sector. The confidence of
investors, local communities affected by mining and the general public can only be reclaimed
if a clear and coherently argued strategy for the mining sector is drawn up in consultation with
all stakeholders and fixed in law. Such a strategy should:
   1) Define clear roles for the state and the private sector
   2) Confirm the private property nature of mining rights
   3) Confirm that private investment in exploration and mine development is necessary for
      the development of the sector
   4) Confirm the role of the state as regulator and arbiter
   5) Provide a transparent and consistent regulatory framework
   6) Eliminate contradictions between different pieces of regulation, discretionary and
      arbitrary decision making and duplication of responsibilities among government
      authorities
   7) Provide robust mechanisms for local communities’ participation in decision making
Make mining in the Kyrgyz Republic attractive to foreign investors. Foreign investment in
exploration and mine development is necessary to maintain and increase the contribution of
mining to the Kyrgyz economy. Making investment in the Kyrgyz Republic more attractive
involves reforms in five thematic areas:
   1) Making licensing and geological information more accessible by
        a. Digitizing all information that is not already digitized
            b. Providing access to all non-confidential information on line free of charge
   2)   Reforming licensing allocation rules and procedures by
            a. Introducing on line licensing applications
            b. Only using auctions and competitions for assets that are well documented from
                a geological viewpoint and making the route prospecting license – exploration
                license – development license the default procedure
            c. Making licenses valid for all minerals found in the license area or excluding
                areas with existing licenses from new ones
            d. Eliminating license allocation to state companies by decision of the Cabinet of
                Ministers
   3)   Restructuring taxes and non-tax fees by
            a. Abolishing the bonus payment except as an element of bids for a deposit that
                is auctioned.
            b. Charging the same tax on gold exports irrespective of the form in which the
                metal is exported
            c. Abolishing the recently extended state monopoly on precious metal purchases
            d. Streamlining and lowering royalties
            e. Lowering license retention fees but retaining the escalating fee structure
            f. Strengthening transfer pricing and thin capitalization rules
            g. Streamlining power and water fees and eliminating pricing that discriminates
                between industries
   4)   Clarifying the role and extent of state ownership by
            a. Clarifying that the state share is always paid for
            b. Formulating a clear strategy for state owned mining companies
            c. Drawing up rules for state ownership and the relationship between the state
                as a shareholder and mining companies and strengthen the role of the State
                Property Fund
   5)   Providing assurance of stability by
            a. Defining clearly the conditions for tax stabilization agreements and setting out
                clear dispute resolution mechanisms
            b. Providing clear guarantees on international arbitration options in the new
                Investment Law


Strengthen positive local impacts and build credibility with local communitie s. Conflicts
between local communities and mining companies have hindered projects in the Kyrgyz
Republic and act as constraints on the benefits that can accrue to communities by
undermining confidence. A more productive dialogue would produce better outcomes.
Reforms include the following:
   1) A more inclusive permitting process where local communities are provided the means
      to influence solutions proposed in EIAs
   2) The introduction of mandatory Social Impact Statements as part of the EIA
   3) The merger of the EIA and rehabilitation procedures in one piece of legislation with
      responsibility clearly allocated to one administrative unit
   4) The development of a methodology for estimating rehabilitation costs and
      mechanisms to ensure regular monitoring and review
   5) As part of the SIA, require companies to prepare plans for training of local people and
      for interaction with local businesses
   6) Avoid quantitative targets for local content – they are a blunt instrument and can be
      easily circumvented


Improve the resilience of the Kyrgyz economy. In order to enable the Kyrgyz economy to
better withstand shocks emanating from international commodity markets or domestic supply
disruptions, we recommend that
   1) The Kyrgyz Republic introduces a fiscal rule of the type that is used in other countries
      in similar situations, for instance, by establishing a limit on the fiscal deficit over the
      business cycle
   2) The Government reviews the possibility of setting up a sovereign wealth fund by
      allocating larger than projected government revenues from mining to a fund consisting
      entirely of foreign assets and managed by independent trustees
   3) A joint Government/industry programme of economic diversification around mining is
      launched, with a view to building capacity and competitiveness in all the industries
      servicing mining