GOK ANNOUNCES PURCHASE OF ALMATY POWER CONSOLIDATED

UNCLAS ALMATY 002407

SIPDIS


SENSITIVE BUT UNCLASSIFIED

DEPT FOR EUR/CACEN MUDGE; EB/EWH LUFTMAN

E.O. 12958: N/A
TAGS: ECON ENRG EFIN KZ ECONOMIC
SUBJECT: GOK ANNOUNCES PURCHASE OF ALMATY POWER CONSOLIDATED
(APK)



1. (SBU) Summary: On June 27, Prime Minister Akhmetov
announced last-minute plans for the GOK to purchase Almaty
Power Consolidated (APK) after a disputed bankruptcy
auction, scheduled for the same day, was cancelled for
unspecified reasons. A leading opposition figure, later
joined by deputies and the pro-presidential ASAR party,
warned of asset stripping, and called on authorities to
delay the sale. New York-based Access Industries, which
intended to participate in the APK auction, charged that a
leading bank short-circuited its bid by refusing to initial
an already agreed upon loan guarantee. End Summary.

GOK SAVES THE DAY?


2. (SBU) Prime Minster Daniyal Akhmetov announced on June 27
that the GOK would purchase debt-ridden Almaty Power
Consolidated (APK) and related assets after a foreclosure
auction, scheduled on the same day, fell through for
unspecified reasons. Creditor Halyk Bank sought to recover
outstanding loans made to Almaty City Authorities (Akimat),
the owner of APK. Halyk set a starting price of 8 billion
tenge, around $60 million, for assets that include two
hydroelectric stations, three combined power/heating plants,
Almaty's electric distribution system, and two of Almaty's
major, if unrenovated hotels, the "Almaty" and the
"Kazakhstan." The Akimat reportedly collateralized the
hotels against loans to APK. Timur Kulibayev, presidential
son-in-law and vice-president of state oil producer
KazMunaiGas (KMG),is reported to have a controlling
interest in Halyk Bank. Aleksandr Pavlov, the present boss
of OTAN, the President's political party, is Halyk's
chairman.


3. (U) Akhmetov justified the purchase by the need to
prepare APK for the upcoming heating season. [Note: Access
told us that the district heating system was not included in
the auction, and that the city intended to continue to run
it. End Note] Akhmetov's announcement contradicts a June
23rd statement by Almaty mayor and former head of the
Presidential Administration Imangali Tasmagambetov. He said
the city would not intervene to save APK, burdened under
debts of $150 million and poorly run. Moreover, the Ministry
of Finance had also announced that the GOK could not
intervene since it could not put a financing package
together in time.


4. (U) State-owned KazTransGas, the KMG subsidiary that runs
the natural gas pipeline infrastructure, will buy APK for
the starting price of $60 million. State authorities did
not announce a concrete plan to turn around the ailing
enterprise, though they intend to sell-off the two hotels.

OPPOSITION SMELLS A RAT


5. (SBU) Opposition figure Oraz Zhandosov, a former deputy
prime minister and Central Bank chair, told us that APK and
related assets are worth at least $600 million dollars.
[Note: One Western company we spoke with said that the
Kapchagay hydropower plant alone was worth at least $300
million. Access Industries, however, believed that the
entire package as constituted was not worth much more than
the $60 million starting price, given APK's operating losses
and investment needs, and the fact that the GOK currently
requires all Kapchagay power go to APK at controlled, highly
subsidized prices. End Note] Zhanzdosov charges that
former Almaty Akim Viktor Khrapunov, who was transferred to
Eastern Kazakhstan oblast in December 2004, colluded to
bankrupt APK, and then strip its assets. The pro-
presidential Asar party, along with about half of the
deputies in the lower house of parliament, called on the
government to intervene in the APK auction as well.


6. (SBU) Zhandosov opined that government officials would
collude to limit access to the auction cancelled today by
ensuring that no "unfavored party" had the legally required
line of credit from one of two major banks here, TuranAlem
and Kazkommertzbank. This, he charged, would ensure that an
insider could get the assets for $60 million.

ACCESS INDUSTRIES OUT IN THE COLD


7. (SBU) Access Industries, a U.S. company that is a coal
operator and power producer here, told the Ambassador in a
June 23rd meeting that it would participate in the auction,
and sought advice, given the politically-charged environment
around APK. Company officials pledged not to "flip the
assets," and hoped to use the synergy of their coal supply,


combined with a tariff increase, to turn around APK. They
saw a far less rosy balance sheet than Zhandosov, with APK
debt equaling revenue, run-down facilities, and ridiculously
low tariffs. Ambassador Ordway pledged embassy support
provided that Access acted transparently and in accord with
Western business practices.


8. (SBU) True to Zhandosov's scenario, the Access lead for
the APK auction, Val Vaninov, told us on June 27 that on
Friday, June 24th, officials of Kazkommerzbank refused to
initial an already agreed upon loan guarantee, thus
sabotaging Access' bid. Vaninov, accompanied by Access
officials, camped out for four hours at Kazkommerzbank in a
vain attempt to have bank officials sign the necessary
documents. Access is exploring what legal action, if any,
it can take against Kazkommerzbank.


9. COMMENT: (SBU) This story is far from over, and
considerably more murky than even the now available facts
would indicate. Access Industries and its President, Len
Blavatnik, have a long-term and growing interest in
Kazakhstan. They have just announced their intention to
build a $1 billion petrochemical facility in Atyrau, one of
western Kazakhstan's oil boomtowns. Blavatnik told the
Ambassador in early June that the GOK was leaning hard on
him to take over the APK assets, and at that point he was
not enthusiastic. The Access team that was doing due
diligence had extensive and detailed discussions with the
Almaty Akimat and were under the firm impression that the
Akimat, and Akim Tasmagambetov himself, wanted to see Access
take over the loss-ridden utility and turn it around, just
as Access had done with the utility in Petropavlovsk.


10. (SBU) Although KMG vice president Kulibayev is the
rumored owner of Halyk bank, Grigoriy Marchenko actually
runs the bank. Former Central Bank chairman and former
Deputy Prime Minister, Marchenko is the most highly regarded
figure in Kazakhstan's financial circles and someone with an
impeccable reputation for integrity. Halyk is about to
announce a strategic partnership with a major western bank
that will inject modern information systems and risk
management into Halyk. The deal is set to close very soon.
We suspect that Halyk may have needed to get this $60
million non-performing loan off its books before closing its
upcoming deal. Access was relying on Marchenko's reputation
for financial probity in its decision to participate in the
auction.


11. (SBU) It is not clear at this point whether the
principal motivating factor for the cancellation of the
auction was politics or greed. There definitely was a
political bandwagon that was started by Zhandosov and his
colleagues in the opposition, who were then joined by Asar
and others in the pro-presidential camp. The authorities
may have decided that the political price was simply too
high. The fact that Access was encouraged to participate in
the auction would bolster that explanation, as would
Access's conclusion that the assets are not worth
substantially more than the asking price. On the other
hand, we cannot exclude the possibility that this was all an
elaborate charade designed to divert large amounts of cash
into private pockets. If this is the case, we would expect
to see the two hotels sold off either directly to a
developer, or indirectly via an inside deal. The other
possibility for significant gains would be to change the
licensing terms for the Kapchagay hydroelectric plant and
allow it to sell power at market price -- which would raise
its value dramatically. (The downside would be that this
would require a significant increase in Almaty power
tariffs.)


12. (SBU) We very much doubt that KazTransGaz will be able
to turn around APK. This latter would require (a) reducing
expenditures; (b) major investment in deferred maintenance
and capital upgrades; (c) vigorous collection efforts,
including against politically well-connected industrial
customers; and (d) strong action against any insider power
theft, and (e) regular tariff increases. The alternative is
for KazTransGaz and its parent to continue to pour money
into APK's operations. Access told us that APK is currently
losing $40-$50 million a year. It's hard to see what KMG's
motivations would be to sustain such large losses on a long-
term basis, particularly given investment needs in their
core oil and gas business.


13. (SBU) One possible scenario would be for KazTransGaz to
run the utility until after the presidential election -- and


then try to either sell it or put it under an international
management contract. Whether Access or another reputable
Western company would be willing to take it on at that point
is an open question. In preparing its bid for APK, Access
told us that they would have preferred having an additional
six months or more to do due diligence and more negotiation
on the terms of operation.


14. (U) Minimize considered for Dushanbe.

ORDWAY


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