BACKGROUND: Discontent among Kazakhstan\'s leadership over foreign direct investment goes back to the early 1990s. According to Astana, the administration of President George H.W. Bush made acceptance of Chevron\'s bid for the Tengiz project a condition for U.S. support for international and bilateral economic assistance. Then, in the early post-Soviet environment where workers and the public were accustomed to depending on large industrial concerns for social benefits, and where there were no domestic stocks of large capital for non-oil-sector development, Chevron refused to spend more than three per cent of total investment on social infrastructure. This nearly led Nazarbayev to cancel the deal and open bidding on the project to other western oil companies. Finally, before the Caspian Pipeline Consortium was restructured in the mid-1990s enabling the pipeline to be built and enter into operation, Chevron was asked to finance the lion\'s share of the cost but offered only a minority share in the result. As a result, Chevron slashed its planned investment in Tengiz for 1994 by 90 per cent. That \"misunderstanding\" was eventually rectified, but in recent months the scenario has been replayed. Late last year, the flagship venture Tengizchevroil took the unusual step of holding its board meeting in Almaty and voting to suspend the next stage (planned at $3 billion) in the project\'s development. A number of explanations filtered out over subsequent weeks to explain the decision, although all the explanations turned on the issue of the level of Tengizchevroil\'s taxes. (The company is the largest single contributor to Kazakhstan\'s state budget.) At first it appeared that Kazakhstan merely wished to bring its bookkeeping procedures into line with international practice, and that this meant Tengizchevroil would become liable for higher levels of taxation than had theretofore been the case. A more disturbing explanation later emerged, that KazMunaiGaz, the Kazakhstani partner in Tengizchevroil, had put forward a bureaucratic stategem that amounted to making ChevronTexaco to pay its portion of the cost. The most plausible reason remains that Tengizchevroil wanted to decrease its taxes by reinvesting profits rather than by taking loans, and that Astana used KazMunaiGaz as a vehicle for blocking such a strategy. Tengizchevroil subsequently came under other pressure. In December, a Kazakhstani court upheld an environmental fine against the company for storing in the open immense blocks of sulfur extracted from the lifted oil. Rightly or wrongly, company officials saw this as coordinated pressure for renegotiation of the planned investment. In the end, an understanding was reached in January, and the proposed investment plan was reinstated, although the terms remain somewhat unclear. It was in this atmosphere that Nazarbayev signed the new foreign investment law, guaranteeing that existing contracts would not be revised but withholding this guarantee from future investment agreements. IMPLICATIONS: The significance of this new law on foreign direct investment is two-fold. First, there is its direct effect upon present ventures and its possible effects upon future ventures. Second, there is its broader political significance and implications for the post-Nazarbayev succession. The new law is clearly less advantageous than the old one for foreign investors. It finally resolves several years of uncertainty over what the revision would contain, but it leaves a number of matters up in the air. In particular, the conditions under which international arbitration would be allowed are unclear. This is a detail that Western contract negotiators have frequently overlooked in the past. Automatic access to international arbitration tribunals is in fact natural only under national legal systems built upon common law. Not all are. Moreover, it is unclear even whether all existing contracts and agreements would be grandfathered in. According to one report, only \"contracts [already agreed] with the state investment agency\" are guaranteed. Continuing general pressure for increased use of local human resources and local contracting is unlikely to abate. The new law creates conditions where Kazakhstani economic interests can \"corner\" a foreign venture, leaving it no ultimate recourse against combined economic and legal coercion. One recent well-publicized example is the Canadian firm Hurricane Hydrocarbons, which came under strong pressure in 2001 to cede control of its operations in Kazakhstan to a group giving every appearance of having strong ties to a close relative of the president. This attempt was defeated, but the newly signed law on foreign direct investment institutionalizes the uncertainty of the business environment under which established foreign and joint ventures have operated up until now. Precisely for the reason exemplified by the Hurricane Hydrocarbons experience, the significance of the new foreign investment law for the post-Nazarbayev succession is that it confirms a preponderance of influence within the elite itself on the side of what Kazakhstani commentators call \"The Family\"-i.e., Nazarbayev\'s relatives-as against any even marginally reform-oriented or liberal movement. That preponderance of influence made felt at the end of 2001, when, in response to Nazarbayev\'s removal from office of the outspoken prefect of the Pavlodar region, Galymzhan Zhakiyanov, several important cabinet ministers resigned to form a technocratic reform group they called Democratic Choice. They did not challenge Nazarbayev personally but only opposed the dominance by the president\'s family over the main levers of political and particularly economic power. The main leaders of the group, including Zhakiyanov, are now in jail. CONCLUSION: On the economic front, risks and uncertainties under the new foreign investment regime do not bode well for attracting significant Western capital to the country outside the energy sector. Within the energy sector, those projects now under way-Tengiz, Karachaganak, and Kashagan-can continue, but exploration by Western companies in the future will tend to decline. This will not halt energy exploration or production in the country, but smaller energy projects will proliferate involving other foreign investors. Russia and other Central Eurasian countries will be most interested to pursue this strategy, since they can provide the markets for the energy produced, obviating high transport costs that make the projects uneconomical for the world market. On the political front, the new law creates no conditions that would be conducive to any sort of political pluralization or deconcentration of power either before or after Nazarbayev leaves office. AUTHOR BIO: Dr. Robert M. Cutler is Research Fellow, Institute of European and Russian Studies, Carleton University, Canada.