Identifier
Created
Classification
Origin
05ALMATY3449
2005-09-27 11:29:00
CONFIDENTIAL
US Office Almaty
Cable title:  

KAZAKHSTAN: PARTIES INITIAL KCTS IGA DRAFT

Tags:  ENRG EPET AJ KZ ECONOMIC 
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C O N F I D E N T I A L ALMATY 003449 

SIPDIS


DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 09/25/2015
TAGS: ENRG EPET AJ KZ ECONOMIC
SUBJECT: KAZAKHSTAN: PARTIES INITIAL KCTS IGA DRAFT

REF: A. ALMATY 2833

B. BAKU 1434

C. BAKU 1224

Classified By: POEC chief Deborah Mennuti, reasons 1.4(B) and (D)

C O N F I D E N T I A L ALMATY 003449

SIPDIS


DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 09/25/2015
TAGS: ENRG EPET AJ KZ ECONOMIC
SUBJECT: KAZAKHSTAN: PARTIES INITIAL KCTS IGA DRAFT

REF: A. ALMATY 2833

B. BAKU 1434

C. BAKU 1224

Classified By: POEC chief Deborah Mennuti, reasons 1.4(B) and (D)


1. (C) Summary: Kazakhstani and Azeri negotiators approved
and initialed a draft of the Kazakhstan Caspian
Transportation System (KCTS) Inter-governmental Agreement
(IGA) in Almaty on September 24. The delegations agreed upon
a single text, though the GOK delegation insisted on
highlighting a few passages -- including a key one on
ratification -- as being "subject to the approval of the
governments." The Azeri delegation, in turn, linked eventual
GOA signature of the IGA to promised GOK steps to correct
recent flawed legislation which, as passed, appears to
question the primacy of international treaties over national
legislation (Ref A). After a difficult first day of
negotiations, the parties advanced quickly toward agreement
following the Azeris' surprising embrace of the GOK's
proposed language on taxation. The IGA language grants
project investors apparent tax stability (promising that any
new tax will preserve "the balance of economic interests")
while subjecting the investors to national tax legislation,
except as otherwise stated in the future Host Government
Agreements (HGAs). Lead investor negotiator Fabrice
Mosneron-Dupin told Econoff that, while agreed-upon position
on taxes would render HGA negotiations long and difficult,
the investors had chosen not to "go to the mat" on the issue,
preferring to use their leverage to clarify
recently-discovered ambiguous language in the definition of
the scope of the Trans-Caspian system. End Summary.

Kazakhstanis Concede Recent Legislation Flawed
-------------- -


2. (C) During a September 22 "pre-negotiation" meeting with
investor representatives, GOK Delegation Head Kairgeldy
Kabyldin and Ministry of Foreign Affairs (MFA) representative
Erkin Akhinznanov acknowledged that the August 2005
Kazakhstani Law on International Treaties contained a
"technical error." This law, which as passed appeared to
subordinate international treaties to domestic legislation,
had provoked a storm of pre-negotiation protest from SOCAR
(Ref B) and project investors. The next day, during

negotiations, Akhinznanov confirmed that the Kazakhstani
parliament would pass an amendment rectifying the mistake,
and promised the Azeri negotiating team (lead by SOCAR
president Natik Aliev and, as a vocal second, Gia Chanturia)
a formal, written response from the MFA and the
Constitutional Council.


3. (C) While both the Azeris and the investors seemed to
accept the GOK's good-faith explanation of the offending
legislation, the Azeri delegation at first insisted that the
Kazakhstani parliament would have to amend the law before the
GOA would sign the IGA. When Akhinznanov replied that the
parliament was unlikely to do so before "the first of the
year," Michael Townsend (BP president in Azerbaijan, and a
member of the Azeri team) suggested that the Azeri position
would depend on the adequacy of the formal, written GOK
response to SOCAR's letter. Later in the negotiations the
Azeris proposed an additional sub-article (6.3.2) to the IGA
binding governments to "take all necessary measures to ensure
that there shall be no national legislation that could have
the effect of amending, suspending, terminating, and/or
otherwise frustrating this treaty and its implementation."
(Note: This clause is one among those "subject to approval
by the governments." While the GOK unwaveringly acknowledged
that the law was flawed, at times -- particularly when the
negotiations were tense -- GOK negotiators asserted that,
since the flawed law was clearly unconstitutional, both
amendment and the proposed 6.3.2 were superfluous. End Note.)


Breakthrough on Taxation
--------------


4. (C) The parties repeatedly deferred discussion of taxation
until September 24, clearly anticipating a difficult
negotiation. In fact, the Azeris quickly agreed to the GOK's
proposed text, which subjects the investors to national (tax)
legislation, except for what is specifically exempted in the
(future) HGAs. (Note: In May, the parties initialed an IGA

embodying the opposite approach (Ref C): except as provided
for in the HGA, parties would be exempt from taxes. End
Note.) In explaining the Azeris' assent to the GOK position,
Aliev suggested that "it is up to each government" to decide
what concessions to make to the oil companies; thus, the
proper place to address the issue was in the HGAs. Kabyldin
argued that the investors' approach would "never make it past
the Ministry of Finance;" on cue, the attending MOF
representative agreed, underscoring his Ministry's view that
a global exemption from taxes was inappropriate for an IGA
which would potentially cover many future projects, all
detailed in separate HGAs. Better, he said, to negotiate
specific project concessions in an HGA.


5. (C) In response, Dupin argued that the GOK approach was
more complicated than the investor's version, and would lead
to drawn-out HGA negotiations. "We're not experts in
Kazakhstani tax law," he protested, noting that, under the
GOK approach, lawyers for the investors would have to study
"more than 100 Kazakhstani taxes" and their potential impact
on the project. In the corridor, however, Dupin was less
strident, telling Econoff that "we still can get what we need
during the HGA negotiations." Conoco-Phillips'
representative Hakim Janah (strictly protect) was less
sanguine, protesting during the negotiations and privately
telling Econoff that he was frustrated with "Dupin and the
other TOTAL representatives" for having "conceded too easily."


6. (C) The parties scarcely discussed the specific issue of
tax stability. The investors accepted the GOK's basic
language: "..stability of the Tax Regime implies, inter alia,
the non-application of new Taxes, with the exception of cases
where such Taxes are a replacement of previously existing
ones, whilst preserving the balance of economic interests."
When Econoff asked Janah whether the last phrase was
sufficiently well-defined to avoid future disputes, Janah
assured him that the term was "widely used and accepted in
the industry" and thus was not vulnerable to manipulation.


Ambiguity in Definition of Trans-Caspian System
-------------- --


7. (C) Dupin told Poloff that his primary goal during the
negotiations was to clarify certain "ambiguities" which the
investors' lawyers had discovered after the May negotiations
in the text defining the "Trans-Caspian System." In English,
at least (both the GOK and the GOA insisted that the problem
did not exist in the Russian version),the draft May IGA
inadvertently required future GOK assent to fundamental
aspects of project infrastructure which were, in fact, being
agreed upon in principle upon signature of the IGA (with
project details to follow in the HGA). At one point during
this debate Aliev remarked that the investors' "insistence on
a purely linguistic point gives me suspicions," but in the
end compromise language was found.

Ratification: Much Ado About "Temporary"
--------------


8. (C) Perhaps the most contentious issue during the
negotiations was how to define the ratification process. All
sides professed to support the same process: the IGA would
come into effect upon signature, but not prevail over
national legislation (i.e., operate as a treaty) until
ratified. The investors and Azeris, however, were troubled
in general by the effect of the flawed legislation
(paragraphs 2-3 above),and specifically by GOK inclusion of
a clause (in English) which rendered initial application of
the Treaty "temporary," without seeming to specify an end to
the "temporary" status. The Kazakhstani side, on the other
hand, argued that they had taken the questioned phrase
"straight from the Vienna Convention." Only after a
breakthrough on the tax issue softened the tenor of the
negotiations did the GOK accept to insert the investors'
alternative text "subject to approval of the governments."


9. (C) Note: Only at the beginning of the negotiations did
Aliev mention the newly-created Azeri "Presidential
Commission" on negotiations (Ref B),commenting that the
commission had been created "not just for negotiations," but
to "resolve all questions related to the transport of
Kazakhstani oil," particularly those "in the implementation
stage, such as permits and the allocation of land."


10. (C) Comment: The GOK tactic of bracketing several IGA
phrases as "subject to approval by Governments of Kazakhstan
and Azerbaijan" is, in once sense, a truism, but likely also
represents Kabyldin and company's recognition that they may
have been negotiating beyond their instructions or
competency, especially in accepting Article 6.3.2. as penance
for the flawed GOK legislation. We don't expect signature
anytime soon, as the Azeris demanded that the GOK produce at
least a formal explanation of the flawed legislation, if not
an amendment. However, the GOK did get what it seemed to
want most out of this negotiation -- no blanket exemption on
taxes for project investors -- and thus may be in a mood to
compromise on the issues "subject to government approval."
End Comment.
ORDWAY


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